Operator News

Japan – Japan’s pachinko sector braces itself for lower volatility machines

By Phil - 28 November 2018

Despite registering higher than expected volumes in the six months to 30 September 2018, Japan’s pachinko industry remains challenging as new legislation looks to hamper growth.

Union Gaming analyst Grant Govertsen highlighted the recent financial results of the sector’s second biggest operator; Dynam Japan Holdings as the perfect picture of the current sector.

Sales tax on the sector will be increased from eight to 10 per cent in October 2019, but it is legislation to bring in lower volatility pachinko machines that is causing most concern.

Around 420 pachinko halls are believed to have been closed last year. Despite Dynam posting an increase in net profit of 53.6 per cent over the period, reaching $73.27m, gross pay-ins were down by 2.6 per cent and revenues were down 4.7 per cent.

Mr. Govertsen said: “While too early to call a trend, it is possible that the industry has found a temporary bottom. This potential bottom is also evidenced by slightly higher headcounts during peak operating hours for Dynam. With this in mind, we expect the next two fiscal periods to look quite similar to the just-reported 1HFY19, which in turn is cause for us to raise our FY20 estimates.”

“While there are some signs of stabilising revenue within low-cost parlors, the clock is ticking with respect to the new regulations that mandate lower volatility machines, which will necessitate higher volumes of purchases in the out periods that are currently being deferred,” he added. “At the same time, new lower volatility machines are likely to be less attractive to customers. It is for this reason that we continue to forecast a sharp decline in EBITDA in FY21 (a combination of declining revenue and increasing expenses as older high-volatility machines reach their mandated three-year life cycle and must be replaced by lower-volatility machines).

“Ultimately, we also view the headwinds as a discount M&A opportunity for Dynam in the out years as significant numbers of mom and pop parlors are unlikely to survive,” he concluded. “Between now and then we see little M&A activity and a largely stable number of halls in operation.”

Dynam has benefitted from adapting its high playing cost halls to low playing cost halls and standardising their design. It has also focussed on ‘opening new halls in small regional business areas with 30,000 to 50,000 residents’ and ‘reaping the benefits of the economies of scale of multiple-hall development to limit purchasing cost of gaming machines and general prizes.’

The company currently operates 450 pachinko halls with 83 of its 88 new halls opening as low playing cost operations.