Bursting Casino Bubble: Singapore Edition

I just wrote about Macau’s deflating casino bubble last night. The proverbial ink has hardly dried when an interesting article surfaced just a few hours back; Yahoo has an article on the Singapore equivalent

The recourse to undercutting and mudslinging…

Singapore's two glitzy casinos are fighting for a shrinking pool of high rolling players as China's corruption crackdown and economic slowdown reduce the number of VIPs at their tables, and the battle is starting to turn ugly.

Gaming mogul Sheldon Adelson, whose Las Vegas Sands runs the Marina Bay Sands resort, has accused rival Genting Singapore's Resorts World Sentosa of relying on overly generous incentives and credit to entice big money players.

Singapore’s major client base has been drying up…

Around half of that VIP business comes from customers from China, which is in the midst of an economic slowdown, while a crackdown on graft now in its second year is making it harder for wealthy Chinese to take money out of the country and discouraging conspicuous consumption.

Visitors from China were down 30 percent to 871,000 in the first half of 2014, according to Singapore's tourism board.

Last month, Las Vegas Sands reported a 34 percent fall in VIP volume business at Marina Bay Sands to $9.1 billion (5.73 billion pounds) in the quarter ending Sept. 30. Genting is expected to report a similar sharp slide in its third quarter results.

Festering consumer credit…

But credit collection is a thorny issue for Singapore casinos, which are already waiting on hundreds of millions of dollars in credit to be repaid by gamblers, the majority of whom are based overseas.

Genting has seen a 61 percent rise in its "trade and other receivables", or money owed by customers, to stand at S$1.2 billion in the quarter ending June 2014 from June 2012, while total revenue has increased by 7 percent in the same period.

In August, Genting Singapore President Tan said the company was prudent in managing its debt collections, citing a S$81 million ($62.5 million) impairment loss it had taken on its trade receivables in the second-quarter versus a S$32 million impairment loss a year-ago.

Las Vegas Sands said in its latest earnings presentation that its "gross casino accounts receivables" for Marina Bay Sands stood at $984 million at the end of September 2014, up 10 percent from September 2012.

So with the drying up of client base, the rivalry between the two Singaporean casino operators have turned acrimonious.

In trying to survive, one firm resorts to the undercutting of the competition, while the other goes to media to scream  “unfair”!

Yet the desperate attempts to garner consumer share with “overly generous incentives” comes with a cost—a surge in bad credit.  Actions have consequences. Aggressiveness  has a price.

The article goes to blame China’s “crackdown on graft” for the plight of Singapore’s casino operators. While this may be partly true, this doesn’t explain the surge in “money owed by customers”.

The article also goes on to look for other excuses to suggest of regional competition, “Another concern is that with new casinos opening in the rest of Asia, VIP players may be looking beyond Singapore to play.”

Again while this may partly be true, but this doesn’t explain why Macau or Singapore casinos being the region’s major leagues have all been enduring top line AND bottom line misfortunes.

The reality is that China’s sputtering economy has been reducing demand for the region's casinos. Political persecution of the opposition (via crackdown on graft) represents only the icing on the cake. Add to this the slowing regional economic growth which should exacerbate demand sluggishness.

On the supply side, zero bound has led to casino operators to overestimate on demand, thus the region's overcapacity which has most likely having been funded by cheap debt.

Now the chicken comes home to roost.

The deflating casino bubble can be seen in their respective stocks…

…Genting PLC

...and Las Vegas Sands owner of Marina Bay Sands

And this signifies the falling revenue-earnings part of the cycle. 

The next phase will be about credit anxieties where bad credit from both the consumer and supply side will become the chief concern.

There will also be a contagion phase.

Again as I wrote in April 2013

At the end of the day, basic economic logic says that all these yield chasing activities (whether the shopping mall, casino, housing and vertical projects) will end badly.