Japan has finally delivered the news the casino industry wanted to hear by legalizing casinos.
Japan’s action modestly boosted the stocks of the big casino companies that are expected to be prime candidates for licenses. That was especially true for Las Vegas Sands, often seen as the favorite to win a license based on its integrated resorts in Macau and Singapore.
But it is very early in the process and investors might be premature to begin picking winners.
First, Japan must now enact enabling legislation that will answer crucial questions—how many resorts will be allowed, where will they be located, tax rates, ownership structure?
Answering those questions won’t be easy. Take location. Estimates of Japan being a $30 billion to $40 billion gaming market are usually based on the assumption that several mega resorts would be built in the biggest cities like Tokyo and Osaka.
But the political reality in the Japanese Diet is that representatives from financially struggling smaller cities will want a piece of the pie. In a way, the argument could replicate the debate that occurred in the New York legislature that resulted in the first casinos going to economically depressed upstate rather than to vibrant New York City even though casinos in and near the Big Apple would have generated far more revenues for the state.
In the end, Japanese legislators will probably have to compromise and allow some regional casinos along with metropolitan properties.
Nor will ownership structure be easy. Already, there is speculation that Japan almost certainly will require foreign license applicants to create joint ventures with Japanese entities.
The amount of money a casino must generate to justify an investment of $10 billion, as has been bandied about, can be daunting, even if it is in Tokyo. For example, let’s say a Tokyo casino has 5,000 slots winning $500 a day each and 300 table games each winning $10,000 a day. Those are numbers far bigger than Las Vegas casinos generate, That would total about $2 billion a year in revenue. Assuming 40 percent converts to EBITDA, that’s $800 million, or just an 8 percent return on a $10 billion investment. Of course, a 50 percent owner who also collects management fees would see a return on that scenario over 10 percent. And with such huge revenues, EBITDA margins might be higher.
Taxes. The gaming tax, I suspect, would not be prohibitive. The motivation for legalizing casinos is to generate economic development and the tourism industry. The Japanese understand business and investment. It’s likely any tax will be low enough to help developers justify $10 billion price tags. However, like location, members of the Diet might have to compromise. It might take higher tax rates to win the votes to enact enabling legislation.
Timeline. Casinos are a long way off. It may take a year to pass enabling legislation and a year to establish the regulatory framework and bidding process. That process could take a year. Then planning and construction could take three years. That would put casino openings at 2022, or even 2023.
A factor not in Japan’s control is competition. If South Korea, the Philippines, Cambodia, Vietnam and others develop major integrated resorts in the meantime, how much international visitation can Japanese casinos realistically expect to generate?
Finally, there is the question of who will be selected. Given its track record, Las Vegas Sands would certainly be a favorite. Likewise, Wynn builds exquisite resorts if tourism is the goal, though the company didn’t win a Singapore license when that was the standard for selection. MGM could have an advantage by being seen as a better joint venture partner than entrepreneur-driven LVS or WYNN. And if regional resorts are allowed, Boyd, Caesars or others could be in the mix.
Japan might also want to write some geographic diversity into the selection process, thus opening the door to operators from other countries. Certainly, Genting, Bloomberry and the Macau operators, among others, will compete for licenses.
Given the long timeline and uncertainties, calculating the value of Japan’s legalization to casino stocks is guesswork.
In the end, investing today on what will happen in Japan is a matter for a very long-term investor who is ready to be wrong.
