Wednesday, March 22, 2006

Casino Royale In Singapore
and then there were 4...

Thanks to the debilitating requirements set by the Singapore government, the race for the two casino integrated resorts (IR) licenses now comes down to 4 parties. They are, in no order of preference:
a) MGM Mirage / CapitaLand
b) Las Vegas Sands
c) Harrah Entertainment / Keppel Land
d) Genting / Universal Studios / Ong Beng Seng / Star Cruise

The latest estimated cost is roughly RM7.4 billion (US$2 billion) for the slightly more sought after Marina Bay site, and RM5.5 billion (US$1.5 billion) for the Sentosa island site. One of the main considerations will be capitalisation. On this factor, MGM/CapitaLand has the edge as it has a combined cash hoard of US$1.65 billion. However, MGM also has a relatively high gearing itself of 3.8x, and that actually is more important than the cash hoard. You don't want a company to be stretched or strained on cash committments as the IRs are for a very long period - that will play a role in the final decision.

As for Harrah/Keppel Land, though they have only a combined cash hoard of US$1 billion, Harrah's gearing is only 1.9x. The other factor is that Harrah is the world's biggest gaming company too. That cannot hurt. Harrah also has new casino projects coming up in Europe and the Bahamas, while MGM has projects coming up in Detroit and Macau. The Macau factor will not be in MGM/CapitaLand's favour. It will be seen as a hedge bet for MGM to have Singapore as they already have Macau. The Macau casino is a big thing for MGM, and the Singapore authorities certainly do not want an IR that is run as an inferior project to Macau.

Genting has zero gearing, but Star Cruise, which is in the same bid team for the Marina Bay site, is quite highly geared. As for Las Vegas Sands, it now stands alone after the pullout by City Developments. The pullout is not a good sign as City Development is a company with solid reputation in Asia-Pacifc, not just Singapore. Sands has some cash and its gearing is not that high compared to the other two American companies. However Sands' owner is very old (72 actually)... and that certainly will be an important factor if I was in the deciding committee. I want to deal with some one who agreed to the terms of the deal for sometime to come, not having to renew the entire process should he passes on. Strong controlling ownership resting on one person does not bode well for the company's chances no matter how you cut it. Seventy two might not be very very old in corporate circles but it is when you are in a dictator like company. Plus Sands already have a decent exposure in Asia via Macau, a US$265 million casino which opened there in 2004.

Though the cost have spiralled to levels which will make these two IRs to be the world's most expensive casinos, I do think that the balance sheet and income statement will work out eventually. We are talking about prime locations, a kind of very hot and sweaty Monaco, low crime-rate, very high tourism hit rate, expensive (but which big modern city isn't) ... now you give it the entertainment pizzazz ala Las Vegas in a controlled environment, I do think the sums will work out well. Right in the middle of Asian fanatic gamblers, cannot go very wrong. Macau, Genting Highlands, Cambodia or even the Philippines casinos tend to attract a lot of the "grind market". High rollers tend to make their way via junkets for long trips to Australia or Vegas for classier treatment and better service. Now the two IRs should capture this market and more. The few who have pulled out from the bidding process over the past couple of months probably looked too closely to financial projections and cost/returns - it is hard to factor in the above cited positives. A telling example would be Sands' casino in Macau, it cost US$265 million and was opened in 2004. They made back the entire sum in one year. Now the casino, hotel and the land is basically free. So successful was that venture that Sands has ramped up investment by betting US$6 billion on the Cotai strip in Macau which will see a 7 hotel-casino between Macau's two islands, Taipa and Coloane. All the more reason why Sands is likely to fail in getting the IR - plus, it probably wouldn't bother Sands one bit not getting it.

Let's look at the tourism appeal which will also link up the entertainment and architechtural style. MGM looks to have won the battle here but Genting has scored nicely with Universal Studios for the Sentosa site - that has a "family appeal" as compared against a more adult-oriented only entertainment concept.

It looks very likely that Genting will get the Sentosa IR, especially with the Universal Studio link up. A Disney-like atmosphere would be wasted on Marina Bay, but better utilised at Sentosa where a more family oriented environment can be cultivated. Genting is listed in KLSE and Genting International recently listed in Singapore Exchange - allowing Singapore public easy access to participate in the earnings and growth of Genting. The similarity in culture and proximity of Genting to Singapore bodes well for both. Can also stop the flood of Singaporeans migrating to Genting Highlands every weekend. Both MGM and Harrah are more into MICE (meetings, incentives, conventions and exhibitions) concepts as part of their casinos - that will work only for the Marina Bay site. Hence if they don't get the Marina Bay, they might as well forget about bidding for Sentosa site.

That leaves the 3 fighting for the Marina Bay site. If it was an American Idol like competition, Sands is likely to have the lowest vote first thanks to the cricket-score-like age of its controlling owner. Nothing personal.

However, the process is now centered on the Marina Bay project, and the winner will be announced soon. Only then will the evaluation process start for the Sentosa project. Parties not successful in the first project can decide to resubmit for the Sentosa project.

As for the Marina Bay results, its like a toss up between Harrah/Keppel Land and MGM/CapitaLand. The fact that there is a Singapore company involved can only help. Again, pushing Sands further down the track. Though many may favour the MGM/CapitaLand bid winning, I personally think that Harrah /Keppel Land's bid will win (if you notice in my Imaginative Investing picks, Keppel Land is there). The thing is CapitaLand has been more successful abroad, especially in China, and great tie-ups with WalMart there. To the authorities, the company could have its plate full already, they certainly do not want the company to be over burdened or lose its focus - price of being too successful? Maybe.

Keppel Land is steadier. Quietly, Harrah and Keppel Land have signed a pact with SMG, the world's largest marketer and operator of convention centers, to promote the IR as a destination for international conferences. That is a crucial point as the last thing the authorities want to see is a half empty MICE property in Marina Bay. The less successful on the MICE side, the greater will be the chance for failure for the IR because the government has framed the IRs to be viable more on MICE and entertainment rather than gaming, and Singapore is not yet a very strong destination for MICE at the present moment compared to Hong Kong. Now, you will get a huge supply of floor space for MICE coming onto the market , so to me, this is the telling blow that makes or breaks the camel's back. You cannot afford the MICE side to fail or even perform poorly. The stakes and reputation are too high.

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