Results improve as cost cutting, debt control kicks in

Singapore’s two gaming operators reported an improvement in Q2 results, helped by cost controls, lower bad debts and higher premium play, though analysts see few catalysts for significant expansion of the market.

In 2007, Singapore granted Las Vegas Sands and Genting Singapore a license for one resort each, with exclusivity until 2017. Those licenses were renewed in 2016 for a further three years, but the government is not expected to allow any new entrants, therefore keeping a lid on the size of the island-state’s gaming market.

Visitation to Singapore has been steady, but the figures have shown less propensity for tourists to spend on gaming activities. In the year to June, arrivals were up 4.5 percent overall, with China arrivals up 5.4 percent. A more detailed report of Q1 statistics released in July highlighted that most of the spending from the 4.3 million visitors was on shopping. Retail spending gained 38 percent, while gaming was flat.

In addition, the Singapore dollar has been strong relative to currencies in its neighbouring source markets, such as Malaysia and Indonesia, creating headwinds for the mass market.

Despite the limitations, the two resorts still generated a healthy US$4.2 billion in gross gambling revenue in 2016 and the most recent figures show an upward trend on most metrics.

Genting’s Resorts World Sentosa was the standout performer in Q2, beating most analysts’ expectations. It has been lagging Marina Bay Sands as it struggled with bad debts from its VIP players, mostly from China. However, efforts to tighten its policies on the provision of credit and a marketing push towards the premium mass sector appear to be paying off.

The group has achieved revenue growth for three sequential quarters. Overall revenue rose 24 percent to S$596.1 million ($438.5 million), helped by a higher rolling win percentage in the premium player business. Adjusted EBITDA soared 152 percent to $292.7 million.

“All major businesses registered stronger EBITDA at the back of improved operating margin as we continue to drive strategy to focus on better margin business and maintain lower impairment of receivables,” it said.

Management now has a target to maintain impairments at the S$15 million level or lower per quarter, although some analysts say this may be ambitious, especially given the fact the company plans to begin extending more credit.

“We think a high-40s margin will be difficult to maintain in the long run,” MorningStar analyst Chelsey Tam wrote in a note. “We think benefits to margins from cost savings have been largely reflected, as quarter-on-quarter margin expansion decelerated to 83 basis points this quarter from 638 basis points in the first quarter. With increased credit extension, we forecast the absolute level of provisions to increase starting second-half 2018, which will pressure margins. We expect margins to decline to 44.3 percent by 2021.”

Genting outperformed Marina Bay Sands in the higher margin mass sector in Q2, but underperformed in VIP. Mass-market share increased from 38 percent in the first quarter to 40 percent in the second.  

The company has been increasing its focus on premium players, boosting attractions targeted at this market, such as a focus on gourmet foods. It held a Street Eats festival in August and in September plans The Great Food Festival that is to feature the largest collection of 16 Michelin-starred and celebrity restaurants.

To squeeze further growth out of its non-gaming segment, the company said it’s preparing a five-year strategic road map “that will significantly enhance our destination appeal in the targeted market segments as well as adopting innovative technology to drive productivity, efficiency and customer experience.”

Morgan Stanley also noted the results had exceeded its expectations.

“EBITDA grew 4 percent QoQ and beat our estimate by 10 percent.. Positive earnings estimate revision on mass market share gain, lower commissions, redemption of perps and Japan optionality could drive the stock higher,” it said.

At Marina Bay Sands revenue rose 17.7 percent to $836 million and adjusted property EBITDA was up 37.8 percent to $492 million.

Morgan Stanley notes that the reported property EBITDA was the second-best since opening in 2010, though was mostly driven by luck as the mass market did not grow.

“In SGD terms, VIP volumes, mass and slot revenue all declined slightly QoQ by 3 percent, 11 percent and 1 percent, respectively,” it said, adding the company has taken cost control measures including cutting back of VIP commissions.

Marina Bay Sands has been looking at options for expansion and has been in preliminary talks with the government to purchase more land for hotel space. The property had 94.3 percent hotel occupancy in Q2, down from 96.4 percent in the same period a year earlier, however for 2016 as a whole occupancy was more than 97 percent. The company has also considered spinning off its retail operations to unlock value.