IR Operator View of the Risks of the Japanese Market

Genting Singapore, a major Asian IR operator deeply interested in the Japanese market, has been the most tightlipped of all of the bidders about their plans for the country. This changed significantly on Monday, however, with the issuance of an 84-page “Circular to Shareholders” that outlined a number of key points about the company’s objectives.

One section of the circular that many observers might overlook, but is in fact quite fascinating, is the portion where the board of Genting Singapore outlines in considerable detail to the firm’s shareholders all of the risks that it sees in a multi-billion dollar IR investment in Japan.

While these views are coming from only one company, it’s easy to surmise that all of the major international IR operators are examining these same risks. The document provides what is to date a unique look at the emerging Japanese IR industry from this particular vantage point.

The section titled “Risk Factor relating to the Proposed Bid” runs from page 19 to 26, almost eight full pages. There are five major headings and fifteen discrete varieties of risks cited.

The major headings are as follows: Risks relating to Japan IR Project; Legal and Regulatory Risks; Risks relating to Fluctuations in Foreign Currency; Risks relating to Competition; and Risks relating to Japan.

The third category, Risks relating to Fluctuations in Foreign Currency, is self-explanatory—the exchange rate between Japanese Yen and Singapore Dollars will exercise some impact on the company’s financial results.

The final category, “Risks relating to Japan,” can also be guessed: “Japan is vulnerable to natural disasters, such as typhoons and earthquakes, and may experience other natural disasters, man-made disasters, outbreaks of highly infectious diseases, terrorist activity or war may result in decreases in travel to and from, and economic activity in, areas in which ProjectCo operates, and may adversely affect the number of visitors to its IR.”

“Legal and Regulatory Risks” are grouped in the circular under three possibilities: problems arising from compliance with Japanese laws and regulations; problems arising from criminals attempting to use the casinos for money laundering; and problems arising from legal disputes with other parties.

One of the more interesting passages reads: “there can be no assurance that public attitudes in Japan toward gambling will not shift. In the event the public perceives an unfavourable shift towards gambling, a decline in the public acceptance of gambling in Japan may lead to unfavourable regulation and/or the variation of the entry fees payable by visitors who are domiciled in Japan.”

While the matter isn’t spelled out, Genting Singapore does have a sense that political shifts in Japan pose a potential future risk to their IR investments.

There are two “Risks relating to Competition” proposed in the circular. One of them is quite specific to Genting—the possibility that Genting Singapore’s IR development could come into conflict with projects under the control of other entities within the Genting Group, such as Genting Malaysia.

Of broader significance, however, is the perceived risk that, over time, regional monopolies within Japan may be watered down: “If the Group succeeds in the bid for the Japan IR project and operates an IR in Japan, ProjectCo may face competition from two other IRs in Japan. After a period of seven years from approval of the first IR Area, the number of IR Areas may be reviewed and increased. Should the number of IR Areas be increased, this may lead to further increased competition within Japan and could adversely affect ProjectCo’s financial condition, results of operations and cash flows.”

There are no fewer than eight varieties of “Risks relating to Japan IR Project” listed in the document. Namely, these are the risk that significant resources will be invested and no IR project will materialize; the risk that future financing will not be available on favorable terms; the risk that the IR does not prove as financially rewarding as anticipated; risks relating to insurance coverage; risks relating to labor shortages; risks relating to construction delays; risks relating to consortium partners not delivering on their obligations; and risks that an insufficient number of management-quality employees will be available.

On this final risk, they write, “The pool of experienced gaming and other skilled and unskilled personnel in Japan or willing to work in Japan may be limited.”

In spite of all of these potential risks, the “Circular to Shareholders” makes clear that the board believes the upside potential of the Japanese market is well worth taking the chance on.

For the Genting Singapore board, the circular is intended to help inoculate them against future shareholder criticism should something go wrong. For us, it is an interesting peek into the minds of the executives of the international IR operators. (AGB Nippon)