Casino operator Las Vegas Sands Corp’s (LVS’s) decision to pull out of the race for a Japan casino reflected market uncertainties, delays and regulatory issues, suggested a number of investment analysts and observers in comments to GGRAsia.
Some of the factors included “lower expected returns in Japan relative to other jurisdictions, still-opaque operating rules, and licence-renewal issues,” Jay Defibaugh, an analyst at CLSA Securities Japan Co Ltd, told us. He was referring latterly to questions over licence duration and licence security, given that a capital expenditure of US$10 billion has been widely touted as the likely cost of building a Japan resort.
There were also “company-specific issues,” including “potentially an inability to acquire a majority position in a consortium in Yokohama,” stated the Tokyo-based analyst. “We do not believe, however, that LVS’s departure ends the story for IRs [integrated resorts] in Japan,” he added.
Daniel Cheng, an industry commentator and former senior vice president at casino brand Hard Rock International, told GGRAsia: “Perhaps the one that folded the cards for LVS was the realisation it might have to play second fiddle as well as be a minority shareholder” in an eventual Yokohama scheme.
Mr Cheng had been involved in exploring the Japan market while at Hard Rock. He added in his comments to GGRAsia: “The IR terms were getting atrocious and … the returns don’t warrant the investments touted.”
It has not been clarified publicly so far whether international casino operators will be able to take a majority interest in any casino resort scheme.
The fact that the national government has not yet published its so-called basic policy on casino complexes – or integrated resorts (IRs) as they are known locally – has been a cause of some concern among commentators and reportedly casino firms.
The Japanese government’s basic policy had been due in March, according to commentary from the national authorities earlier this year. Japan first made public a draft version of the national basic policy on IRs in early September.
Basic policy vital
Brendan Bussmann, a partner and director for government affairs at consultancy Global Market Advisors LLC, told us: “One of the challenges that remains… is the release of the fundamental policy that will be key in understanding the full market opportunity.”
Las Vegas Sands, the parent of Macau casino operator Sands China Ltd, and which also operates Marina Bay Sands casino resort in Singapore, had said in August last year it had wanted to focus on Tokyo and Yokohama in its effort to be allowed to build a casino resort in Japan. Tokyo has not so far declared any interest in taking part in the casino process, although GMA said in earlier commentary that it probably would.
Mr Cheng also mentioned some political headwinds in Yokohama including a mayoral election next year, and the possibility of an anti-casino local referendum, which has been called for by some local voters, according to Japanese media reports. The observer also noted that the delays in the Japan process “pushed it [the decision] closer and closer to the Macau rebidding” process, a reference to Macau’s public retender for gaming rights there. “It’ll be difficult to focus on two big tasks simultaneously and to make a choice between the two is obvious,” he added.
Mr Bussmann suggested Las Vegas Sands’ departure from the Japan IR market “states more about the framework issues that remain and the return on a roughly US$10 billion investment,” than it does about the fundamentals of “market potential” there.
The GMA partner further noted: “In order for operators to meet the goals of increasing tourism, investment, and job growth in Japan, they need to understand the framework in which they will operate to develop their business plan while also showing value to their partners and shareholders.”
Michael Zhu, senior vice president of international operations, planning and analysis at consultancy The Innovation Group, told GGRAsia: “What has been [revealed] so far suggests that financial return from the prospective Japan IR market may not be as appealing as that from Singapore or Macau.”
He added: “A greenfield development typically requires a ramp-up period – which means a lot of uncertainties and requires more resources – that would not be applicable to well-established markets such as Singapore and Macau.”
Some commentators pondered whether Las Vegas Sands’ departure has significance for the prospects of the rest of the Japan casino liberalisation process.
A consortium consisting of United States-based casino operator MGM Resorts International and Japanese financial services group Orix Corp was the sole qualified applicant to partner the city and prefecture of Osaka. The authorities in Japan’s Wakayama prefecture announced on May 1 that only two companies had submitted application documents for its request-for-proposal (RFP) process.
Hokkaido decided not to put itself forward for consideration at national government level, but a Chinese corporate suitor there and a Japanese legislator were later mired in allegations of bribery of several Japanese politicians as the Chinese firm allegedly sought to advance its cause there.
After selecting a private-sector partner, eligible local governments will then need to apply – during the first seven months of 2021 – to the national government for the right to have such a project.
Brokerage Sanford C. Bernstein Ltd noted in a memo to investors on Wednesday: “Aside from MGM, the major casino companies still actively pursuing Yokohama are Galaxy [Entertainment Group Ltd], Wynn [Resorts Ltd], Genting [Singapore Ltd] and Melco [Resorts and Entertainment Ltd].”
Sanford Bernstein asserted that “LVS out of Japan” is “not a negative” for the company. “With a solid pipeline in Macau and Singapore, LVS is not short of growth,” said analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu.
Licence length, tax rate
“Several issues likely led to LVS making the decision to discontinue efforts in Japan… including short term of licences, high tax rate, growing constraints on local play, and financing arrangements, among others,” said Sanford Bernstein.
An investor presentation document issued by Las Vegas Sands to support its third-quarter 2019 earnings call mentioned that the group targeted for new investments a “minimum of 20 percent return on total invested capital,” although it didn’t specify over what period of time.
John DeCree, an analyst at Union Gaming Securities LLC told us: “LVS has always been very disciplined with capital allocation.” The expected development costs in Japan had “continued to rise, making it difficult to see a path to the company’s required return under the current regulatory regime,” he stated.
The casino group’s interest in merger and acquisition activity in Asia – mentioned in its first-quarter earnings call – “now seems even more likely to us with LVS dropping out of Japan,” Mr DeCree told us.
Japan’s requirement that any casino operating licences issued in that country be subject to a renewal process every 10 years was the “biggest obstacle to securing bank financing” for schemes that were expected to cost many billions of U.S. dollars each, stated a September memo from Fitch Ratings Inc. It added that the suggested 30 percent tax rate on casino gross gaming revenue (GGR) might also prove an obstacle.
Macau’s tax rate on GGR is effectively 39 percent, but the current six concessions and sub-concessions have a 20-year lifespan, which expires in June 2022.
Sanford Bernstein noted: “One of the key benefits of development in Japan was the potential to utilise very low cost bank debt” from Japanese lenders, “as a way to enhance equity returns”.
The institution added: “One issue the banks are having concerns over is the 10-year licence regime.”
Although Sanford Bernstein noted Las Vegas Sands was “in the middle of a US$5.5-billion development effort in Macau and Singapore,” amid huge disruption to casino business due to the global pandemic, the institution said it did “not believe the liquidity issue or the coronavirus was a key driver in Sands’ decision on Japan, but it likely did not help either.”
If Las Vegas Sands – with its knowledge of the Japan “political landscape”, track record in mixed-use resorts and non-gaming, and team of “exceptionally strong and determined leaders,”… “cannot make a US$10-billion integrated resort work in Japan, then no one can,” industry consultant Niall Murray told GGRAsia.
Mr Murray, a former senior executive in the Macau and Las Vegas markets, and chairman of Murray International Group, added: “If Las Vegas Sands is backing out, the other potential operators better revisit their forecasts and assumptions, review their strategies and action plans and think again before committing to a US$10-billion integrated resort investment in Japan.”
(Updated 7pm, May 13)
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