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Japan: changing markets

By - 29 June 2020

As international operators look to Asia to predict the course of change in their own post-Covid markets, G3 interviews Asia expert, David Bonnet, about current influencing factors.

Could you tell us more about how and under what conditions licences will be granted in Japan?

The Japanese government is in the process of formulating their detailed casino regulations and we expect these to be released some time this year. This should provide a bit more clarity on certain information necessary to proceed with an application for casino licenses that will be made over the next eighteen months.

Applicants should have a clear financing plan as part of their overall business proposal and it would be helpful if a large Japanese company was part of the relevant consortium.

There will initially be three licenses granted for companies/consortiums that have a detailed business and financing plans and have already received pre-approval from local regional governments to proceed on an integrated resort/casino development. The licenses will be respective to individual regions meaning that you won’t be able to have two IR developments in Tokyo.

But you could have one in Tokyo and one in nearby Yokohama so the Japanese government is taking a more diversified geographical approach to the idea for casino gaming rather than adopting a critical mass approach found in Macau with six gaming operators.

Coordination with local governments and their related constituencies are critical components of any successful license application. We also expect the applicants to have very detailed responsible gaming and community support programs as part of their overall business/development plan.

Las Vegas Sands has said that it will no longer pursue a licence for one of three Integrated Resorts in Japan with CEO Sheldon Adelson saying his goals were ‘unreachable.’ What have been some of the main issues with the issuing of licences? Why are operators pulling out of the process?

The size and scale of what the Japanese government requires for an approved IR development makes the planning, design, construction, development, opening and execution of their respective business plans an extremely complicated undertaking. Only certain operators have the capabilities to take on such massive and expensive projects.

So with certain recent operators pulling out, it is just the reality of not wanting to spend the next five years deploying so much money with a limited view of how they ultimately recover that capital. The casinos all have different assessment of how successful their respective business models could be in Japan. It’s purely a risk/reward calculation based on anticipated return on investment.

Twenty years ago, Las Vegas style casino gaming in Asia was an unknown product. The success of Macau and Singapore has helped to spawn a huge industry with jurisdictions such as the Philippines, Cambodia and South Korea amongst others all looking to collect valuable gaming tax revenue.

While we believe the projects in Japan will ultimately produce significant free cash flows, it probably will not compare with the outsized returns the projects in Las Vegas and Singapore generated in the early days of Asian casino gaming.

What will be the key factor in helping companies succeed in their bids?

Significant cooperation with large Japanese companies and financial institutions can help to reduce the red-tape surrounding any type of large Japanese construction project. Also, a focus on the community, responsible gaming programmes, having very strict anti-money laundering programs will all help to improve an applicant’s likelihood of success.

Also, we expect any successful application to incorporate a huge emphasis on technology and advanced Japanese electronics products. So it will be really exciting to see how technology can help to transform casino gaming into a more entertainment friendly product that can be enjoyed by a much wider demographic than what you might currently see in Macau or Singapore.

How do do you think the Japanese IR’s will perform economically once they are built?

They will be enormously successful. The projects will essentially have regional monopolies for casino gaming in Japan and monopolies usually make money.

Will operators be able to to secure the funding they will need for IR development because of rules and regulations such as limits on the casino floor, entry fees and high tax rates? Does this mean that they will not be able to secure loans?

As in any large integrated resort project, construction and development financing is a huge component of the overall puzzle. While the exact financing terms have not necessarily been worked out, I am very positive that any project that is granted a casino license will be easily financeable.

What other financing options do they have available to them to get involved in the Japanese market?

There are many financing alternatives that exist in the market, however, having a clear business and financing plan with be a critical component to the success of any proposal made to the regional and national governments.

Will consortiums be primarily Japanese-led?

I still believe large Japanese real estate companies need to take a leading role in the IR development. They have the business and political connections to help navigate a successful bid for a license. Also, they could be extraordinarily helpful in obtaining much lower cost financing from the Japanese megabanks.

Could you tell us more about the gaming sector in Macau? VIP players are decreasing but more people are visiting casinos. What other other significant recent developments have there been there?

Mass market gaming now represents a majority of the gaming revenue in Macau and we expect this trend to continue. The Macau government has recently tried to deemphasise VIP revenues as a core component of their economy focusing on family friendly entertainment. While the junket business is still an important component of Macau casinos’ revenue segmentation, it is becoming less of a consideration.

What are some of the opportunities in the IR space in Asia? Are there any other markets where we might see a gambling expansion in the near future?

It is a dynamic situation. Macau is in the process of considering its licensing regime after 2022 and there remain undeveloped land parcels in Macau that could entertain new casino projects. Macau will always be the most coveted location for any investor/operator seeking to expand into Asia. The ease of doing business coupled with Macau’s proximity to China makes it the ideal location for casino gaming in Asia.

Having said that, despite all of the newer projects in the region, the current supplydemand fundamentals demonstrate there is a compelling case for continued expansion of casino gaming products in Asia. However, any new project in Asia will need a clear business plan on how it will source Chinese punters to its property.

This could be more complicated with increased scrutiny of money flows out of China by government authorities. That being said, there are also huge opportunities with various countries in Southeast Asia.

Macau has seen a sharp decrease due to COVID19. What has been the impact of coronavirus on the market so far? What measures are being taken in casinos against the virus?

It’s a terrible situation and not one that anyone contemplated. The virus has to be contained before things can get back to normal from a business perspective. Obviously the Macau casinos can’t sustainably operate if they are cut off from the Chinese market.

Could you share with us some of your thoughts on the future of Macau’s gaming industry post COVID19?

We are anticipating that governments will take a phased approach to re-opening Macau borders. First, maybe Guangdong province and then, depending on the success of that — customers from other more distant regions in China will be allowed to travel to Macau.

Business certainly will not return to pre-virus levels. Companies that have smaller operations as opposed to those large big box properties may be better positioned to emerge from the virus on a more successful basis due to the latter’s higher fixed costs bigger operating profile. Also, increased automation will be critical component of any post COVID19 business plan.

So, we expect to see expedited technology put in place that allows for selfcheck in, more room service, reduced interaction with casino gaming staff, etc. I am not saying we are at the stage of robot dealers yet, but we are certainly getting closer.

What about the impact COVID19 has had on other markets in the region?

COVID19 is a black swan for tourism and entertainment related businesses. Any company that requires assembling large groups of people in close proximity as part of their business plan has been affected. Therefore operating sustainably post COVID19 will entail putting in place mitigation procedures that require social distancing thereby limiting the amount of customers and sales that can be generated.

So unless companies double their prices or can figure out a way to move some of their operations online, it will be very difficult to return to pre-COVID19 levels. Perhaps Macau will be less affected than Las Vegas, but certainly every company will experience some level of pain from the COVID19 pandemic.

David Bonnet is Managing Partner at Delta State Holdings Ltd based in Hong Kong where he provides corporate finance consulting services for leading institutional investors in the emerging markets hospitality and gaming space. He has previously worked in senior strategy and finance positions with companies such as Bloomberg LP, Sands China and Galaxy Entertainment amongst others.

He is a frequent commentator on Bloomberg TV and CNBC and has written numerous articles on Asian regional gaming for major worldwide publications including Bloomberg News and Asia Times. David has held positions with Allston Trading at the Chicago Mercantile Exchange; investment banking firms Banc of America Securities, Robertson Stephens in San Francisco and Blackpoint Capital Advisors in Honolulu.

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