When Japanese lawmakers passed the Integrated Resort Promotion Bill in December, U.S. casino operators began to develop their plans to compete for licenses in what could become a very lucrative gaming market.
And because of the potential Japan offers casino operators, some analysts believe it could become the most expensive gambling market in the world.
But how much are Caesars Entertainment Corp., Las Vegas Sands Corp., MGM Resorts International and Wynn Resorts Ltd. willing to spend to enter a sizable and lucrative domestic market with a population of 125 million?
Las Vegas Sands says a new integrated resort in Japan could cost between $6 billion and $10 billion, about three times more than it spent on building its new French-themed Parisian resort in Macau.
“We’re excited by the recent legislative breakthrough in Japan to permit casino gaming within integrated resorts,” Las Vegas Sands Chairman Sheldon Adelson recently told gaming analysts on a conference call.
“The law is being formulated by, I think, the interparty committee that was formed before the first law was passed,” Adelson said. “They have one year to submit an implementation law that will determine the who, what, why, when, where and how of how they are going to establish the integrated resort with the casino bill.”
MGM Resorts says it could also spend $10 billion for a new casino in Japan, quadruple the cost of its MGM Cotai resort that is scheduled to open this year.
Wynn Resorts hasn’t placed a cost on a resort, though CEO Steve Wynn says the opportunity is “thoroughly delicious.”
Wynn Resorts spent more than $4 billion to open the Palace in Macau last August.
“Wynn, Las Vegas Sands and MGM are all well positioned to bid on a gaming license in Japan,” says Alex Bumazhny, senior director, corporate ratings with Fitch Ratings. “All have healthy balance sheets relative to U.S. peers and a track record of developing large-scale resorts.”
Bumazhny gives the nod to Las Vegas Sands, saying they stand out as the “best positioned given their investment-grade balance sheet and broader experience in Asia, including the development of Marina Bay Sands in Singapore.”
Yet, these Las Vegas casino operators are going to face competition from other gaming companies, too, including Genting Group, Hard Rock International and Melco Crown Entertainment, who are also prepared to spend billions of dollars to build integrated resorts in Japan.
Macau casino operator Galaxy Entertainment Group Ltd. has joined with Societe des Bains de Mer, the operator of the Monaco casinos, hoping the partnership will beat their rivals to win a license when Japan opens its gambling market.
Galaxy and SBM will jointly develop and run entertainment businesses including casinos and hotels in Japan and the Asia-Pacific region, the companies said in a statement.
The announcement by Galaxy and SBM came about five months after the Upper House of the Diet (Parliament) in Japan approved the “Bill Promoting Implementation of Specified Integrated Resort Areas,” or the Integrated Resorts (IR) Promotion Bill, paving the way for the future introduction of integrated resorts in the country.
“Galaxy’s success in Asia will certainly be a valuable enhancement to SBM’s portfolio,” says Jean-Luc Biamonti, CEO of SBM.
SBM is majority-owned by the Mediterranean principality, and since 2005, it is 5 percent-owned by Galaxy. The Monaco firm said it hopes the partnership will help it grow in Asia.
Grant Govertsen, a research analyst at Union Gaming in Macau, doesn’t believe this partnership would necessarily impact how Galaxy’s peers view the Japan opportunity, or that it will cause Galaxy’s peers to change their approach.
“Ultimately, a local Japanese partner will prove more meaningful than a foreign partner,” Govertsen says. “That said, I don’t think there is any downside for Galaxy to bring SBM on board.”
With the passage of the integrated resorts bill, Biamonti said both companies look forward to the possibility of collaborative efforts to design, develop and operate an IR in Japan that would offer the best of what both GEG and SBM have to offer.
Rules & Regs
The Japanese legislature is now drafting a second law, due by December, on how to regulate the industry.
Japanese Prime Minister Shinzo Abe is targeting the third quarter as the deadline for the bill’s submission, allowing the government to then promote the benefits of casinos—jobs and economic growth—to a skeptical public.
According to media reports, Abe expects the legislation to include strict regulations as well as measures to deal with concerns about problem gambling and money laundering.
In a recent survey by public broadcaster NHK, only 12 percent of respondents favored removing the ban, with 44 percent opposed and the rest unsure.
So, will lawmakers actually make their December deadline?
“Based on what we’re hearing, the government is very serious about getting the gaming bill across the finish line, so it does, indeed, feel like it will be wrapped up later this year,” Govertsen says.
“That said, we are hopeful that the government will come up with a bill that truly will encourage the scale of development that will result in world-class IR development.”
Govertsen adds that to achieve high levels of investment, lawmakers will need to approve local access to casinos and keep the tax rate reasonable.
Bumazhny believes the promotion bill passed last year was the “highest hurdle.”
“Our sense is that the implementation bill will closely mimic the gaming laws in Singapore, where there are capacity constraints and some restrictions on gambling by locals,” Bumazhny says. “Of course, as in any legislative process, there are uncertainties.”
Analysts believe that Japan will likely pick locations and operators in 2019.
Steve Gallaway, managing partner with Global Market Advisors, says the second law will not start the RFP process, but will “likely identify the structure for local authorities to participate in the process.”
Gallaway expects Osaka, Yokohama and Tokyo as leading contenders for a large facility, with other regional prefectures bidding for smaller regional licenses, such as Sasebo and Hokkaido.
The structure of the market will be determined in the second casino bill, he says.
The first casino resort could potentially be online as early as 2023.
Before the licensing process begins, it’s expected resort operators, including MGM, Wynn or Hard Rock, would have to form consortia with prospective hosts and domestic companies.
Galaxy is also said to be negotiating with national and local governments as well as real estate, construction and transportation companies.
But Galaxy wasn’t expected to insist on a stake over 50 percent in any partnership.
Galaxy declined to detail the size of any investment in Japan, but its net cash of $2.1 billion would allow it to begin a project without waiting for financing.
Just two casinos in major Japanese cities, Tokyo or Osaka, could generate over $10 billion in annual gaming revenue, increasing to $30 billion if 10 further casinos outside metropolitan areas are approved, according to a report by brokerage CLSA.
The reason everyone is willing to spend billions when it comes to Japan is because of the revenue numbers CLSA is projecting.
Other analysts believe companies are willing to spend billions due to a large, comparatively wealthy population that has shown a high proclivity to gamble.
Moreover, the number of licenses issued is likely to be very limited.
“Ultimately, Japan is an attractive market because it is deep in terms of population. It is also a wealthy market, and there is a demonstrated proclivity to gamble,” Govertsen says.
He says the fact that pachinko is a $30 billion market “suggests the opportunity set for IRs is quite meaningful.”
Analysts at Japanese brokerage Nomura believe when all is said and done, there are likely to be just two to three licenses issued.
“I don’t think anyone knows for sure,” Gallaway says. “However, knowing that Japan is using Singapore as a model, bidders can be assured that the government will employ a similar process to maximize the benefits of the integrated resort.”
Osaka appears to top Gallaway’s list of favorite sites.
“Having seen the Osaka site, and knowing that the local prefecture supports its development into an IR, Osaka would appear to have a strong chance of being able to develop an IR and it would be very successful,” he says.
“It wouldn’t have any impact on local neighborhoods. The local government wants it.”
The expected site in Osaka is a vacant lot adjacent to Universal Studios that has access to the airport, and potential to offer direct ferry service to the airport as well.
In the meantime, some companies are willing to spend $6 billion or search for Japanese partners trying to get an edge over casino operators like Sands, MGM and Wynn.
“In my opinion, a company won’t get a license without a local partner,” Gallaway says. “It would be frivolous for a company to put forth a bid without one.”
Gallaway says those partnerships are about creating “local equity and local relationships.”
The most recent market in Asia to legalize casinos was Singapore, which approved the introduction of two casino hotels about a decade ago.
With casino revenue of about $3.5 billion last year, Singapore ranks as the second-biggest market in Asia behind Macau.
Gambling revenue in the Chinese territory of Macau was $28 billion last year.
“Even though hopeful passage through the upper house would still leave the first IR opening date a good five years out, it would be a shot in the arm for sentiment on gaming names, which are already enjoying a tailwind on Macau’s recovery,” Govertsen said in a research report shortly after the first bill was passed.
Uncertainties remain. The first casinos are still about seven years away. Newer industry players like South Korea and the Philippines have built resorts of their own.
China itself is under a cloud, as its double-digit growth slows and authorities in Beijing continue to tighten control over outflows of money from the country.
The vote came as Japan looks for new sources of economic growth.
Tourism is an emerging sector, where the economy has traditionally been geared toward exporting manufactured goods rather than attracting visitors.
More than 20 million foreign tourists visited Japan in 2016, triple the number from a decade ago.
Abe hopes casinos will ignite broader economic growth in Japan and make up for dwindling competitiveness in other industries, some of which like consumer electronics are now dominated by China and South Korea.
“Regardless of the economic stagnation, there is considerable pent-up demand in Japan for casino gaming as evident by the robust $30 billion pachinko industry,” Bumazhny says.
“Where there is little question casinos in Japan will be very profitable, bigger unknowns that will impact the degree of profitability will be how tight the implementation bill will be in terms of capacity and operating constraints, and the ability to tap into the broader Asian region, China in particular.”
Not So Fast
The end of the prohibition on casinos does not mean that anyone could build a Wynn Las Vegas or even a Flamingo in Japan. At first, licenses will be granted to build integrated resorts, which include casinos with hotels, conference centers, entertainment complexes and shopping malls.
Regulations governing the bidding and licensing process, as well as the gaming regulations themselves, will be detailed in a separate law.
Some forms of gambling are already legal in Japan. The country allows betting on horse, bicycle and boat racing and it runs a national lottery.
Pachinko, a derivative of pinball played in parlors nationwide, has a gambling element that is technically illegal but is tolerated by politicians and law enforcement.
“In Japan, there are tens of thousands of these machines,” Gallaway says.
Japan has been debating whether to legalize casinos since at least 1999. A bill similar to the one that passed in December made progress in Parliament three years ago, but was never voted on. Some lawmakers balked at the potential social problems caused by casinos.
Komeito, a Buddhist political party that has been a junior partner in the governing coalition, has been opposed to legalizing gambling.
“There is nothing we’ve seen in Japan that currently deals with problem gambling,” Gallaway says. “Problem gambling is an issue there today, due to the lack of responsible gambling awareness at the pachinko parlors.”
Gallaway notes that international companies have responsible gaming programs, and are well situated to implement them in a new market.
If Japan is looking to model its market on Singapore, Gallaway says they have a very robust problem gambling program because of Las Vegas Sands and Genting Group.
Currently, politicians in Japan are finalizing a bill to address gambling addiction as the country continues to move forward to welcoming its first legal casinos.
The bill by the country’s two ruling parties—the Liberal Democratic Party (LDP) and Komeito—includes rules for capping individual bets and strict rules on advertising.
The parties are even considering restricting admission to integrated resorts. It was not known if the restrictions would be similar to those in Singapore, where local residents have to pay S$100 to enter, or a S$2,000 annual membership fee.
“Entrance fees could significantly impact the revenue potential for IRs,” Gallaway says. “Furthermore, there is no evidence that these do anything to curb problem gambling. In fact, some have argued that entrance fees can increase problem gambling as players may choose to bet more to increase their effective odds, when including the impact of the entrance fee.”
Nippon Ishin no Kai, a right-leaning party with a base of support in Osaka, submitted a problem gambling bill to the upper house of the Diet in February.
In an attempt to address strong public opposition to casinos, the bill identified the need for policies to deal with crime, suicide, poverty, debts and other problems that occur as a result of problem gambling.
It also stipulated the need for the government to establish a basic program to deal with problem gambling that will be subject to revision at least once every five years, according to the Japan Times.
The newspaper also reported that municipalities would have to map out plans for combating problem gambling that also would be reviewed every five years.
Debate over several problem gambling measures is expected to continue during the current Diet session that ends in June.
Since 2014, Abe’s party, the Liberal Democrats, has strengthened its hold on parliament.
It has become less reliant on Komeito, and found a new ally on the casino issue in Nippon Ishin. Nippon Ishin is the nation’s third-largest political party.
As Abe seeks to create a casino industry, an eight-member panel discussing the framework for possible regulations is considering whether to use a permit system that would cover the types of games allowed in the casino and their rule. The panel is also considering casino entrance restrictions and a system of taxes going to national and local governments.
Japan was also expected to create a licensing structure similar to Nevada, with a licensing system that includes background checks into academic and criminal records, debts, relationships and other personal aspects of casino employees.
Everyone involved in the process expects Japan to implement a licensing regime and open its market to gaming, but the question is how many of the world’s largest gaming companies will actually get to take part in the newest casino market.