Last week, our column was pegged on an analysis by Chris Jones of Telsey Advisory Group on the potential casinos in Japan would have for companies fortunate enough to win gaming licenses.
An $8 billion resort in Tokyo and a $6 billion resort in Osaka could generate $5.2 billion and $3.8 billion in revenue respectively, with a Yokohama casino generating $4.7 billion, he said.
Overall, the country could generate $23.8 billion if casinos won about the same percentage of GDP in Japan as they do in America, though $16.5 billion is more likely, Jones said.
Jones also mentioned some counter forces, such as Japan’s declining population, potential for Korea to draw away some of the hoped-for business, and the fact that insular Japan is not as big a tourism draw as much smaller Singapore.
This week, Praveen Choudhary of Morgan Stanley did an analysis and came up with similar numbers and the same caveats, but reached more cautious conclusions.
Indeed, the name of his report described its tone, “Japan: Tempered Enthusiasm.”
In several respects, Choudhary sounded the same cautions that we have raised in this space before, such as the uncertainty of the political process, whether that being in passing legislation or the nature of the regulations and tax structure that would follow.
He gives the odds of passage by the June 20 deadline as better than 50 percent, but cautions that if the bill doesn’t pass, momentum for gaming legislation might be lost.
As with others, Choudhary noted that Japan is expected to model its legislation after Singapore, but he also noted differences.
Japan can be expected to have higher taxes than Singapore because it is more motivated to shore up government revenue. A 20 percent rate is likely, with local taxes on top of that, he says.
There is also the question of how much Japanese will gamble in casinos.
They account for only $258 million in VIP play in Korea and comprise just 1 percent of visitors to Macau, he noted.
Choudhary sees a 20 percent return on investment, but says that if companies spend as much as $10 billion for resorts in Tokyo and Osaka, returns could be just 10 percent.
In terms of stocks, Choudhary favors Hong Kong-listed Macau casino operators, though he likes MGM Resorts among American parent companies.
His favorites are Galaxy, Melco Crown, Sands China and Las Vegas Sands.
Below are the percentage of EBITDA gains Choudhary thinks Tokyo and Osaka casinos could mean to operators.
Company Tokyo Osaka
MGM Resorts 33% 20%
Genting Singapore 31 19
Melco Crown 23 12
Wynn 19 11
Galaxy 11 7
Las Vegas Sands 8 4
Risks in Macau
Meanwhile, Macau casino stocks continue to bounce around. They jump several percent on good news, then drop several percent on any hint of trouble, like a slow down in the Chinese economy.
We’ve addressed this issue several times, recognizing the great potential in Macau, understanding the Chinese market is barely penetrated based on comparisons to other nations, and realizing every operator has a major Cotai development that makes for a great growth story.
However, we also caution that, in the old Wall Street expression, trees do not grow to the sky.
Predictions that Macau will double to a $90 billion market in four years, such as Aaron Fischer of CLSA has just forecast, require a lot to go right.
Meanwhile, except for MGM Resorts, the Macau casino plays all have one quality in common—a very heavy dependence on that one market.
If the bulls prove right, such concentration will richly reward them.
But putting so many eggs in one basket is, by definition, risky.