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Land Of The Rising Sun

Japan 'suddenly' has become the hottest jurisdiction in gaming

Land Of The Rising Sun

Almost out of nowhere, Japan has become the buzz.

After years of on-again, off-again efforts to legalize gaming, a growing number of gaming industry observers believe that, this time, it is going to happen, and maybe very soon.

The political conditions needed to legalize casinos came out of the latest Japanese elections. And now, the selection of Tokyo to host the 2020 Summer Olympics has many thinking that the opportunity to provide casinos to Olympic visitors is the clincher.

And some analysts already are saying the prospect is one of the reasons to own Las Vegas Sands stock, as CEO Sheldon Adelson has long courted Japanese policymakers.

That might be premature.

It is generally agreed that if Japan legalizes casinos, it will adopt a model similar to that of Singapore—a limited number of casinos smack in the middle of a giant metropolitan area, an attractive tax rate, and a selection based on which applicant creates not just a casino, but an iconic international tourism destination.

That is why Las Vegas Sands, Wynn and Genting are so prominently mentioned. They’ve done it in Las Vegas, Macau, Singapore and Malaysia.

Certainly, based on that criterion, they have a leg up over other companies.

But Japan also is thought likely to include a requirement not present in Singapore—a large Japanese ownership, maybe 51 percent.

That could be tough to stomach for a Sheldon Adelson or Steve Wynn, driven entrepreneurs accustomed to running the show.

It could be more Japanese-like to find accomodating partners and to reward their own entrepreneurs.

If joint ventures are the spirit of the day, companies like MGM Resorts might be more appealing.

In addition to the big international casino operators who will come a-calling, investors might want to look at which Japanese companies could benefit.

Some of the bigger companies are obvious. Sega Sammy already is in the process of a casino resort deal in South Korea, so it certainly would want to do one at home.

Kazuo Okada and his Universal Entertainment would be a natural candidate.

Konami might be a big consumer entertainment product manufacturer, but its slots company, Konami Gaming, has given KNM a taste of the casino business and the parent company is in the pachinko business.

And then there are smaller companies that many investors outside Japan would not know.

Billy Ng of Bank of America/Merrill Lynch listed several publicly traded pachinko operators as possibile beneficiaries of Japanese legalization—Glory, Tokyotokeiba, Japan Cash Machine and Daikoku Denki.

We also note that small pachinko operator Kinbasha has listed on Nasdaq and is known to have property in metro Tokyo that it thinks would be just right for a mega-resort.

There already is, we suspect, a great deal of jockeying taking place among all the various Japanese interests as the legislative process works its way.

Certainly, the pachinko companies comprise a powerful lobby that will not want to be omitted. And any of Japan’s industrial giants could decide to jump in.

In that environment, skill and experience working with the Japanese and in their collaborative business culture will be important to any international casino operator that wants to be in Japan.

Ng says Japan could be a $20 billion market, assuming gaming gets the same 0.4 percent of GDP there as it does in the U.S.

And Tokyo is almost beyond belief, a metro GDP of $1.4 trillion.

Those numbers can motivate a lot of collaboration.

MGM: Has Its Time Come?

For a long time, MGM Resorts has been an underperformer among the big international casino operators.

While Las Vegas Sands and Wynn were piling up the profits, MGM was struggling with debt and the real estate collapse and recession that hit its $9 billion CityCenter with a double whammy.

For the past year or two, MGM has been stabilizing and eagerly awaiting the recovery of Las Vegas.

Now, it appears MGM’s time has come. CityCenter condominiums, once an albatross, are now an asset as the last of them sell. Las Vegas is recovering. MGM is building a mega-resort in the Cotai section of Macau. There is optimism that it will win casino licenses in Massachusetts and Maryland. And the company will soon refinance CityCenter debt, providing considerable relief.

These positives are catching the attention of stock analysts who have been issuing some bullish reports on MGM.

Here’s a synopsis of one such report by Wells Fargo analyst Cameron McKnight:

A credible upside case exists for MGM to reach $25 to $27 in the next 12 months, McKnight said.

McKnight cited four catalysts that he said can add $5 to $7 to the stock:

• Margin expansion in a recovering Las Vegas, $2.50.

• Macau growth and adding in greater value for MGM’s Cotai project, $1.75, which he says could prove conservative.

• CityCenter finance restructuring, 80 cents in lower interest expense.

• Winning Maryland and Massachusetts casino licenses, 75 cents each.

On the bottom line, McKnight sees MGM losing 2 cents a share this year and turning 3 cents positive next year.

McKnight’s target is a long way from MGM’s pre-recession high of $91.61 when it had a smaller share base, but it’s also a lot better than its low of $1.81 in March 2009 when casino stocks reached their nadir.

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