When the Sands Macao opened in 2004, Asia’s first Las Vegas-style casino prompted an extraordinary boom for Macau and casino owner Las Vegas Sands (LVS). Thereafter, Singapore’s Prime Minister Lee Hsien Loong reversed decades of ruling party opposition to approve two casino resorts, hoping to emulate Macau’s and LVS‘s success.

Macau and LVS are now both reeling as the world’s economies take a turn for the worse, and some analysts forecast Singapore’s integrated resorts (IRs), the first due to open at the end of this year, may be following in those footsteps. Conceived in prosperity to win a competitive bidding process that attracted the world’s top gaming operators and contracted during a regional construction wave, Singapore’s IRs will be the world’s most expensive casino resorts constructed, costing up to USD 6 billion. The global economic downturn, and falling revenue at Macau’s casinos, now cast dark shadows over those heady plans.

A further shadow was cast by Taiwan’s parliament this week when it voted to legalize gambling on offshore islands, paving the way for an alternative destination for gamblers in the region. AMZ Holdings, a United Kingdom-listed property development company, is poised to build the island’s first casino, and hopes to agree with an international gaming group a joint venture to develop on a site it owns, the Financial Times reported.

Taiwan officials have indicated that two or three gaming licenses will be issued once subsidiary legislation is passed, and two state-owned sites have been set aside for potential development, the report said. The first casino is expected to open its doors for business in 2013.

The Singapore resorts will need to produce annual earnings before interest, taxes, depreciation and amortization (EBITDA) of USD 1 billion, according to a source with knowledge of the industry and specifics of the two projects, who asked not to be named. That’s nearly double the EBITDA at the world’s most successful casino, the source contends.

Prosperous 8

„The number [of visitors needed] for keeping the integrated resorts afloat is 8 million,“ Gillian Koh, senior research fellow at Singapore’s public-private Institute for Policy Studies (IPS) think-tank, says. Last year’s total of 10.1 million tourism-related arrivals means each visitor would need to visit one IR and more than half would need to visit both.

Singapore expects the IRs will boost visitor numbers, but that’s not guaranteed. Last year, despite the successful debut of the Singapore Grand Prix, arrivals fell 2% from 2007, according to the Singapore Tourism Board (STB). The STB has forecast 2009 as a „challenging“ year. The greatest challenge, of course, is the global economy, which began cutting into Singapore’s business and leisure arrivals during the second half of last year.

Singapore conceived casino legalization as part of a plan to boost visitor arrivals to 17 million, double the island state’s 2004 level. The premise behind the IRs was simple: licensing a 15,000 square meter (161,000 square foot) casino at each IR would ensure enormous profits to subsidize world class, non-gaming attractions drawing more visitors.

„Singapore wanted two tourist facilities from the IRs: a MICE [meetings, incentives, conventions, exhibitions] oriented hotel on the bay and a theme park,“ Singapore International Chamber of Commerce executive director Phil Overmyer says. STB offered bidders two IR sites, in Marina Bay near downtown and on Sentosa, an island off Singapore’s south shore, and Singapore got what it wanted in spades.

LVS won the Marina Bay bid by promising Asia’s largest convention center at 120,000 million square meters to leverage its MICE expertise. Under chairman Sheldon Adelson, LVS transformed Las Vegas into a convention destination, and Singapore hopes for similar magic in Marina Bay. Beyond the convention and gaming floors, Marina Bay Sands features include a museum, shopping mall, two Broadway style theaters, and 2,600 hotel rooms. LVS promised in its bid to open the entire complex by the end of 2009.

Even though the three hotel towers are currently barely a third of their planned 53 stories, LVS still says it will open Marina Bay Sands this year, and STB still lists the IR‘s debut as a highlight for 2009. As predicted on this site, (see Singapore, Sands stand by their bets, November 13, 2008), in November, Singapore authorities have granted permission for a phased opening, with the first phase likely to include little more than the gaming floor and some token amenities. The government also approved raising the casino’s table count from 600 to 1,000.

Million bucks an hour

Singapore took those steps in response to LVS‘s brush with insolvency late last year, marking the end of an incredible chapter of wealth creation dating to the Sands Macao opening. LVS chairman Adelson earned USD 1 million an hour for two years, as tallied by The New York Times, after taking LVS public in late 2004.

LVS committed USD 10 billion to expansion on Macau’s Cotai landfill linking its outer islands with the USD 2.3 billion Venetian Macao, an update of its Las Vegas flagship resort, as the centerpiece. Fueled by China loosening travel restrictions and the opening of the Venetian, Macau overtook Las Vegas at the top of the global gaming revenue charts in 2007. When LVS sold its Grand Canal Shoppes mall in Las Vegas for USD 766 million, chief operating officer William Weidner said the company’s motivation was „to take all that money and dump it over in Cotai“.

That’s turned out to be a regrettable turn of phrase. Troubles for LVS began in Las Vegas in the middle of last year, with high gas prices and the deteriorating US economy cutting revenue at its Venetian and Palazzo resorts. Then China tightened travel restrictions and Macau’s gaming revenue growth slowed. In September, revenues began falling year-on-year for the first time since 2004.

Heavily leveraged to support its edifice complex, lower income brought LVS to the brink of violating its loan covenants, threatening to throw the company into technical default. Its share price fell from a high of above USD 160 to below USD 5. Since September, Adelson has put USD 1 billion of his own money back into LVS. Overall, the company has raised more than USD 2.5 billion in new capital and suspended new developments in Macau, opting to complete Marina Bay Sands instead.

„Adelson would be better off to take Marina Bay than what he has in Las Vegas,“ Devin Kimble, managing director of Singapore restaurant and catering group Menu, said. LVS has talked with Kimble about putting a microbrewery in Marina Bay. „I’ve certainly rethought it“ after seeing what’s happened at Venetian Macao, Kimble said.

Some analysts believe LVS and Macau fell prey to particular circumstances that won’t impact Singapore’s casinos. „China did not restrict money and travel out of China,“ IPS researcher Koh notes. That’s true, but Koh and her colleagues are also investigating whether that analysis misses the point. When China limited visits to Macau, the Chinese leadership sent a message that it was unhappy with the exodus of money from the mainland to Macau’s casino tables. Slowing growth at home won’t make China more receptive to money heading even further overseas to Singapore.

Fish story

Genting International won the Sentosa site, promising not one but two theme parks. Its 49-hectare Resorts World at Sentosa includes the only Universal Studios theme park in Southeast Asia and the world’s largest oceanarium. Genting’s Highlands resort near Kuala Lumpur is Malaysia’s only legal casino and popular with tourists from Singapore, so the company may have gone overboard to protect its home turf. According to one insider, when Genting learned that its main rival was proposing a 175,000 fish oceanarium, it upped the ante to 400,000 fish.

The Resorts World complex also includes a maritime museum, a resident performance spectacle, outdoor sound and light shows by the creator of the Fremont Street Experience in Las Vegas, six hotels with 1,800 rooms ranging from hardcore luxury to Hard Rock, and meeting space for up to 35,000. Building world-class destinations carries world-class price tags.

Marina Bay Sands was initially budgeted at USD 3.85 billion, already making it the world’s more expensive casino resort, and Resorts World was budgeted at just over USD 3 billion. Both IRs broke ground during a building boom, locally and across much of Asia. Higher material prices, driven by rising global commodity prices, produced cost overruns. LVS currently estimates Marina Bay Sands‘ completion cost at USD 4.5 billion, and Genting says Resorts World will cost USD 4 billion, including USD 53 million to widen a bridge to improve access to the island. Some analysts contend those budgets reflect phased openings and that the final bill for each completed resort could top USD 6 billion, a challenge to profitably in any economy.

„Marina Bay Sands will be a magnet for tourists and business people to come to the region,“ University of Nevada-Las Vegas Singapore campus dean Andy Nazarechuk says. „Resorts World is going to be more impacted by the global financial situation. Families are trying to watch their budgets, and a big vacation is something you forego in tough times.“

But Singapore Management University president Howard Hunter sees it differently. „The Genting project is so different, it has a good chance of success in the near term,“ Hunter says. „Over 15-20 years, Marina Bay Sands will be all right, too, but the economic climate will not be good for the next two to three years.“

„Bad economic times are always good for gambling,“ contends Aaron Brown, author of The Poker Face of Wall Street. „But depression gamblers want inexpensive, no-frills action close to home. They don’t travel far for fancy casinos. With business conventions and extravagant splurges dead, and capital costs sky-high, it’s going to be tough for Singapore and Macau casinos.“

Taking a global view, Brown says, „Relative to other casinos, Singapore has advantages and disadvantages. Asia has been less affected by the bad times than other parts of the world, and the casinos are still under construction. If financing problems can be overcome, the recession might push costs down and allow the projects to be ready just when things swing up again.

„In the worst case, the projects will collapse, or will bleed money for years, then seem rundown and out-of-date when things recover, the Atlantic City story,“ Brown concludes. „In the best case, the projects will get completed under budget and kick off the recovery, at least an Asian recovery, in high style.“

When LVS opened its Sands Macao casino in 2004, it set a record by recouping its cost in less than a year. Building Sands Macao, then the world’s largest casino, cost USD 265 million. Each Singapore IR will cost at least 15 times as much, and be far more to operate than Sands Macao, which had no facilities beyond the gaming floor and a handful of restaurants. In any economic climate, Singapore’s IRs will be hard-pressed to generate 15 times more profit.