Marina Bay as an icon of growth

Source : The Edge - 8 Mar 2009

THE WATERFRONT VIEW from the higher floors of the office towers around Raffles Place has changed dramatically in recent weeks. A trio of 55-storey connected hotel towers at Marina Bay that will make the base of Singapore’s first casino resort soared past its halfway mark late last month. With just 10 months to go before the downtown resort opens, the developers are racing to complete it on time.

Marina Bay Sands is controlled by former billionaire Sheldon Adelson. Once ranked the world’s second richest man, Adelson now has much of his US$600 million ($927 million) or so net worth tied up in his tottering flagship, Las Vegas Sands, which had a close brush with bankruptcy late last year. Just three months ago, the question was whether the $7.5 billion Singapore project would save or sink Adelson and Sands.

Now, with the local economy set to contract by up to 5% this year and show little growth next year, many in Singapore also wonder whether Marina Bay Sands and its competitor resort across the waters — Resort World at Sentosa — will be a powerful-enough engine to help Singapore swiftly back on a robust growth path.

Last November, Adelson injected US$1.1 billion of his own money as part of a US$2.3 billion rights issue to prevent violation of debt covenants and loan default and remove the “substantial doubt about the company’s ability to continue as a going concern” expressed by its own auditors. But, with revenues from casinos, hotels and convention centres in Macau and Las Vegas plummeting, hefty borrowings and huge outlays to complete ongoing projects, Sands has barely kept afloat since then. Indeed, just last week, Adelson conceded that Sands could still be in danger of violating loan covenants towards year-end unless its cashflow improved.

To stay in the game, Sands plans to sell its two Macau malls to avoid defaulting on loans. A fire-sale of Macau retail space might not fetch anywhere near a decent price. Sands expects to raise up to US$2.5 billion. Analysts say it would be lucky to raise half as much in the current market. It is also drastically cutting costs in Macau and Vegas to squeeze out as much savings as it can to keep afloat.

But Sands’ problem isn’t just reining in expenses; it’s also keeping revenues flowing in as the global economy slows and consumption shrinks. The ongoing recession in the US and enforced corporate austerity is hurting Vegas casinos, hotels and conventions. Moreover, tourist arrivals and gaming revenue in Macau have plunged since visa restrictions were imposed last year, limiting the frequency of travel for Chinese citizens to Macau.

In February, Macau gaming revenue fell 15.5% from a year earlier and analysts expect Macau revenues to fall 20% this year. Moreover, with glitzy new casinos like the “City of Dreams” due to open in June and the battle to attract punters getting fiercer, Sands casinos there are losing market share. Although the governments of Hong Kong and Macau as well as Guangdong province have appealed to Beijing to relax visa restrictions, it is unlikely that visitor floodgates will be thrown open anytime soon.

Sands’ business model in Singapore is to use corporate meetings, conventions and exhibitions to lure guests to its hotels and gaming floor. But in the post-credit-crunch world, the MICE (meetings, incentives, conferences and exhibitions) model looks like it could do with an extreme makeover.

Time was when corporate executives and conventioneers jetted to Las Vegas and Palm Springs or other ritzy venues for meetings and conventions. If serious business discussions were the main course, the dessert was frolicking on the Las Vegas Strip.

Sands’ game plan was to bring some of that lucrative MICE business to Singapore. Now, ostentatious corporate spending is suddenly passé. Block booking of first-class travel and luxury hotels by Wall Street investment banks to wine and dine fat cat clients is frowned upon. The days of big bonuses, casino junkets, golden parachutes and mega perks are over, and all convention hubs — Singapore included — are likely to be hit for several years.

Analyst estimates for Ebitda (earnings before interest, taxes, depreciation and amortisation) at the Marina Bay resort range from US$400 million to US$900 million in the first few years of operation. Adelson and his executives dismiss those estimates as too low because they believe Singapore’s low tax rate will help boost its bottom line. “We will save 25% on average on taxes,” Adelson said last week. He claimed Sands could still generate up to US$1 billion a year in Ebitda through Marina Bay by 2012, its third year of operation.

Gaming consultants are betting Singapore will take a 20% slice of the US$5 billion Asian high-rollers’ market within three years. UBS estimates Singapore’s overall gaming revenues could reach up to US$2 billion annually by 2012. Assuming, Marina Bay has more than half of the pie, that’s just US$1 billion. Take away operating expenses and other upfront costs, it’s hard to see how Marina Bay would make anywhere near the money that Sands needs to stay afloat.

“It is somewhat of a leap of faith to believe in a number quite this high,” notes Brian McGill, an analyst with Philadelphia-based securities firm Janney Montgomery Scott LLC. McGill believes that if Marina Bay resort really has anywhere near the sort of potential that Adelson claims it has, the Singapore project might not only save Sands; it could even serve as a catalyst for the company’s moribund stock. If it does, Sands can play its part to help grow and transform Singapore.