Japan Is the $40 Billion Opportunity Everyone Wants to Bet On

By Travis Hoium Markets Fool.com

Japan's gaming market is finally opening up to gaming companies, opening the kind of growth opportunity the industry hasn't seen in nearly a decade. But until rules and concessions are ironed out, there are more questions than answers for how gaming in Japan will impact companies or stocks in the industry. But companies are already jockeying for position given what could be a $40 billion opportunity to grow.

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Here's what to watch for in the near term.

Rendering of Marina Bay Sands in Singapore, which has become a model for Japan's gaming rules. Image source: Las Vegas Sands.

Japan's gaming rules are key

Gaming in Japan was technically legalized in December, but the rules underlying who will be able to build a resort and how it will be run are far from complete. The government has set a goal of putting rules in place around how concessions will be awarded and how to prevent gambling addiction, while gaming companies will be interested in things like tax rates and investment requirements.

Las Vegas Sands (NYSE: LVS) has reportedly been involved in consultations about how to set up rules, and some of Japan's leaders have visited Marina Bay Sands in Singapore, which will likely be a model resort. While gaming may be a key feature of the integrated resort, Japan will want to ensure that non-gaming activities and entertainment are a real draw for tourists. So look for both the government and gaming companies to highlight non-gaming as a real draw for any new development. But make no mistake: a resort potentially costing $10 billion will need lots of gambling to be economical.

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Rendering of an MGM resort in Okada, Japan. Image source: MGM Resorts.

The players to watch

Las Vegas Sands is certainly a company to watch in Japan, and Sheldon Adelson said during the company's fourth quarter conference call that it's in pole position for a concession. The company has a deliberate strategy of cozying up to Japan's power players in an effort to win a bid. And Adelson has said he'll spend $10 billion to build a resort in Japan if he has to.

MGM Resorts (NYSE: MGM) has also taken a fairly aggressive approach to Japan, releasing renderings of what its casino might look like in Osaka. And given the company's renewed financial health, it's possible it would be a good bet to win a gaming concession.

Wynn Resorts (NASDAQ: WYNN) and Melco Crown (NASDAQ: MPEL) have been interested in Japan in the past, but have been relatively quiet lately. Steve Wynn has also expressed interest in spending as much as $10 billion in Japan, but his ability to spend that much may be limited: the $4.4 billion Wynn Palace opened recently, the $2.2 billion to $2.4 billion Wynn Boston Harbor is under construction, and the Paradise Park renovation in Las Vegas may cost another $1.5 billion, straining the balance sheet.

Meanwhile, Melco Crown is dealing with disappointing results at Studio City and James Packer selling his shares in the company. It's possible neither Wynn or Melco has the capacity to develop a massive resort right now, putting them at a disadvantage if a Japan resort does cost up to $10 billion.

How big is the opportunity?

No matter who wins the concessions in Macau, the opportunity is massive. Macau's gaming market is the largest in the world at $28.0 billion, more than four times as big as the Las Vegas Strip's $6.4 billion in gaming revenue. CLSA has estimated Japan's gaming market could be worth $40 billion a year. That's a lofty target, but shows just how big the expectations are for Japan.

Investors should start thinking about the Japan gaming market more, because it's starting to look more and more like it's a real growth opportunity. And if there are only a few gaming concessions in what could be a market worth tens of billions of dollars, the opportunity for profits are tremendous. Las Vegas Sands, MGM Resorts, Wynn Resorts, and Melco Crown could have a lot of growth ahead, whoever wins the right to open a casino in Japan.

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Travis Hoium owns shares of Wynn Resorts. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.