Analysts Less Optimistic Than Operators About Japan

Investment analysts are far less optimistic about the prospects for the casino market in Japan than the operators who are pushing hard for a license, warning that returns and gross gambling revenue may fall far short of high expectations.

Speaking on a panel at the ASEAN Gaming Summit, the analysts pointed to the government restrictions placed on the industry, the high operating costs and sizable pledges of initial investment as all being factors that will hold back both the market potential and shareholder returns.

Tokyo is planning to limit the number of licenses initially to three, with the total maximum floor space permitted for a casino at 3% of the total. Locals will be charged an entry fee of 6000 yen (about US$55) and will have restrictions placed on the frequency of visits to the casino.

Praveen Choudhary, managing director of Morgan Stanley Asia, says he expects a market of about US$9 billion, based on two large cities and one smaller, though said this may be an optimistic number.

As well as the high build cost and operational costs, the casinos are unlikely to be able to work with junkets to bring in the VIP business, and although the local pachinko industry generates sky-high revenues, the individual bets placed by Japanese are only about US$20, he said. Taken all together “suddenly the returns are not looking good at all,” he added.

Citigroup Managing Director Anil Daswani said Japan would need to choose at least two big cities to generate a decent level of gross gambling revenue. “If we go the route of smaller cities, Japan is going to be underwhelming,” he said. “We’re benchmarking on MBS, which does US$3 billion in revenues. It will be bigger with more revenue at US$4 billion, but the returns will be nowhere near as attractive as Macau, with an return on invested capital in the teens, with US$1.4 billion in EBITDA in the first year,” he added.

Another key question to be answered will be the level of foreign ownership, with the analysts saying they all expect the resorts will be developed by a consortium involving Japanese companies.

Although Las Vegas Sands is widely seen as a frontrunner, it is not expected to participate if it does not have full control. “I don’t think Sands would do a property when it’s a manager and not the owner,” Bernstein senior research analyst Vitaly Umanski said. “Then what you are going to get in Japan is a very inferior gaming market.” (AGB)