Why Japan Could Be the Next Frontier for the Gaming Industry

By Motley Fool Staff Markets Fool.com

Macau has suffered much in the last few years, Singapore and the U.S. are relatively stable, and other regions like the Philippines are still just a drop in the bucket. In a volatile industry, Japan could be the next major growth segment for gaming companies allowed to build resorts there. Here's why the country's new regulation is so important and why companies like Las Vegas Sands (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), and MGM Resorts International (NYSE: MGM) are ready to bet heavily there.

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A full transcript follows the video.

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This podcast was recorded on Jan. 25, 2017.

Vincent Shen: The last topic I wanted to touch on, and this is a huge opportunity, big news for the gaming industry was in December. The Japanese parliament finally passed the law legalizing casinos. Still a lot of work to be done on the regulation side of determining taxes, social programs things like that, but overall, it appears that government leaders will be welcoming some of the major casino operators like the ones we've talked about: Wynn, Las Vegas Sands,MGM. The thing is, seems like they're targeting not smaller operations, but these large integrated resorts, kind of looking to Singapore, for example, as a model.

According to one piece of research I found, it's from Daiwa Research, they estimate that just three casinos in Japan could generate as much as $10 billion in annual net profits in this market. What do you think? What is some of the timing? How are companies viewing this? Because this seems like a huge, huge opportunity.

Seth McNew: Yeah, and we've been covering this for a while about every Congress session there. They've really tried to pass this, and it finally got through. People are really excited about this. It still has to go through some regulatory looks before they're going to figure out licensing, but for the companies that win a license to be there, I really think this is the next frontier for growth for this industry.

Shen: Interestingly enough, I think the casino operators and a lot of other tourists are very excited, but some surveys that I found, actually locally among the Japanese population show quite a bit of actual hesitation about this move. They were like 12% really supported the idea, but the numbers behind this opportunity are undeniable.

McNew: I think some of that hesitation is just people are afraid of having a casino here. That's why the integrated resort model that worked in Singapore could really work so well. The Singapore government had invited these casinos knowing that it's going to be a small casino, but lots of other entertainment options with full resorts of restaurants and theaters and those kinds of things.

Shen: Obviously, the political opposition was worried about issues like gambling addiction, money laundering, influence of organized crime, but those are things that they will be working through as a framework gets built out over the next few years. Keep in mind that from what I could find, no one actually expects these new resorts that will be opening in the country to start operations until at least 2022 or 2023, so quite a ways out. Like you said, the licenses haven't even been figured out yet. How many? Who's it going to go to? I'm not sure how much detail you have around this, but I have to imagine that the various major casino operators are already positioning themselves as much as they can to meet partnerships, to get their foot in the door as soon as the flood gates essentially open.

McNew: I'm sure these licenses will be kind of parsed out with local investors as well, so they'll be some partnerships. I think when you're trying to figure out which companies are going to win licenses, you can just look at what's happened in Singapore. Las Vegas Sands was one of the ones that won there, and its resort there is beautiful. That's kind of become the model of how these integrated resorts can really drive business for a country.

Shen: Yup. The last thing I will touch on is the fact that Japan itself is no stranger to gambling. There's actually a pretty substantial market there already in two forms that I could find. Currently, horse, boat, and bicycle races already take legal bets, so that's already a pretty well-established industry for gaming in the country. From what I could find, the horse races alone managed to bring in about $25 billion in wagers in 2015, so quite significant.

You combine that with the existing, and this is a really interesting world. For any Fools listening, do a little bit more research. Just search pachinko parlors or the history of them. It's very interesting. These Pachinko parlors essentially, like adult arcades I guess operate in a bit of a legal gray area, very ambiguous. You collect tokens, you can exchange it for a physical prize to avoid regulations, but then you can take that physical prize to another location and exchange that for cash. It's just gray area, the best way to describe it but, in terms of the size of that market, pachinko players spent almost $200 billion in 2015 which is actually down from I think its height in the '90s. Clearly, I think with such a large economy and generally very wealthy citizens, I can totally understand why the casino operators are extremely excited about the market that Japan presents.

Seth McNew owns shares of Las Vegas Sands. Vincent Shen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.