A Japanese casino industry with “two major integrated resorts” could eventually generate gross gaming revenue (GGR) of US$7 billion per year, says brokerage Nomura. “We are bullish on the prospects of the Japan gaming industry (if they were to receive the necessary legislative approval),” said a team of Nomura analysts in a report released on Friday.
The Japanese brokerage said its estimate assumes two large-scale casino resorts are opened, one in Yokohama and another in Osaka (pictured). “Both of these cities are ideal locations for integrated resort development considering their: significant local population (about 9 million); sizeable inbound tourist flow (10 million to 18 million per annum); and strong infrastructure support (with international airports and world-class theme parks within close proximity),” said the analysts.
The Japanese government announced last week plans to hold public hearings in nine cities to discuss the framework for the country’s casino industry. Yokohama – a main major metropolitan area often mentioned by investment analysts as a possible location for casino resorts – was not included in the schedule.
Nomura stated in its report that under its estimate each of the two integrated resorts (IR) could generate property earnings before interest, taxation, depreciation and amortisation (EBITDA) of US$1.6 billion, “making them the most profitable casino resorts globally”.
“We believe a US$7 billion gaming market would allow the two IRs to each generate annual property EBITDA of nearly US$1.6 billion (16 percent return on invested capital), assuming VIP and mass GGR tax rate of 13 percent and 23 percent, respectively (largely in line with that of Singapore),” said the Nomura analysts.
In its estimates, Nomura assumed Japanese nationals would be entitled to gamble domestically pursuant to the payment of a statutory entry levy for casino access, similar to what happens in Singapore.
“Currently, an entry levy of SGD100 [US$73.5] per day or SGD2,000 per year is imposed on the Singapore residents if they were to enter the casino. If the Japanese government were to impose an entry levy that is significantly higher than that, there is a risk that the mass GGR could come in significantly below our estimate as we expect vast majority of the mass revenues to be sourced from the locals,” Nomura noted.
Japanese officials have made frequent mention of Singapore as an important reference point regarding casino regulation.
Legislation making casino gambling legal in Japan came into effect in December last year. After approval of the enabling bill legalising integrated resorts at the conceptual level, a second piece of legislation – the IR Implementation Bill – has now to be passed, detailing the specifics, including how casinos are administered and regulated.
Last week, Japan’s Office of Integrated Resort Regime Promotion – a body made up of professional civil servants advising the government on the IR Implementation Bill – delivered to the Japanese government a report featuring a set of suggestions on how to regulate the country’s casino industry.
Several investment analysts covering the gaming sector have said they expect the IR Implementation Bill to be submitted to the country’s parliament in the 2017 extraordinary session starting in the autumn. Nomura said it believes the bill could be passed in June 2018, “putting the resorts on track for opening in 2023”.
Nomura noted in its Friday report that if the Japanese government were to allow more than two casino resorts in the country, such as in smaller cities, then the market could be significantly larger than US$7 billion.
But the brokerage said it believed that the Japanese government “has slowly steered away” from the development of regional integrated resorts, “as those locations are unlikely to attract sufficient investment that can change the city landscape and hence unable to serve the government’s objective which is to stimulate tourism and local economy”.
The brokerage highlighted in its report the “delicate division” of rights and responsibilities between the central government, local governments and private-sector operators as it relates to the nascent casino industry in Japan.
“The central government will select local governments, which will in turn select private-sector operators through a bidding process, and selected operators then have to undergo strict qualification screening by the central government,” said Nomura.
It added: “The complex relationships between the multiple stakeholders are yet to be confirmed … and what obligations and restrictions will be imposed on private-sector operators, to ensure sound casino operation.”
Representatives of U.S.-based casino operator and hospitality business Hard Rock International Inc highlighted at a Tokyo discussion session in June that the complex process for selecting casino resort projects in Japan was “unprecedented” in the commercial gaming industry sector.
Brokerage Union Gaming Securities Asia Ltd said in a note last month that Japan risked “snatching defeat from the jaws of victory” if it burdened its casino bidding process with too much and too stringent regulation.
In its Friday report, Nomura said an urban integrated resort facility in Japan would require investment of at least JPY500 billion (US$4.5 billion) “to be competitive”.
The brokerage said: “With the Japan IR likely to monopolise the gaming market of that [chosen] city, and with the relatively low gaming penetration in Japan, we believe the developer of the integrated resort will be willing to undertake hefty capex [capital expenditure] on building the resort as we estimate the Japan IR to cost US$10 billion to build.”
According to Nomura, the mass-market segment is likely to take the lead in Japan’s casino industry, with each of the two casino resorts expected to have about 850 mass gaming tables and be able to record an estimated US$1.7 billion in GGR from this segment. The brokerage estimates slot GGR to reach US$1.0 billion per property, “considering the massive pachinko market in Japan which we estimate to be worth [circa] US$40 billion”.
Gaming revenue from VIP operations at each casino resort – assuming 150 gaming tables per property – is expected to reach about US$750 million per year, said Nomura. “As we expect that junkets will likely not be allowed, we have a more modest expectation on VIP GGR generated by the Japan IR,” noted the brokerage.
It added: “We think that Singapore may form the benchmark for its initial limits on credit to ensure transparency over funds. With strengthened restrictions on fund outflows from China, Japan’s casinos will probably rely on overseas VIPs spending JPY5 million to JPY10 million per stay, and we think operators will target a customer base skewed toward premium customers (average annual incomes of around JPY100 million).”
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Lei Wai Nong
Macau Secretary for Economy and Finance