Japanese gaming is getting everyone excited. With a summer vote pending to legalize casino building in the country, casino CEOs are already fighting over bids and locations. Neil Bluhm, the Chicago man who has built a real estate empire with casinos around the U.S. and Canada, is preparing to place his bid on the southern city of Osaka. Las Vegas Sands (NYSE: LVS ) CEO and gaming entrepreneur Sheldon Adelson is putting his bet, a very large bet, on the capital city of Tokyo. Other companies, such as Wynn Resorts (NASDAQ: WYNN ) and Melco Crown (NASDAQ: MPEL ) are preparing their bets as well. So which company will win?
The reason for the excitement over the coming legalization
Japan already has a gambling market that includes underground gambling as well as Pachinko, an arcade-style game that players can indirectly bet on by winning prizes and selling those prizes in neighboring shops, but it currently forbids actual gambling. However, the government will vote this summer on whether to allow casinos to build in the country. Most analysts expect that this measure will pass without any issues.
This legalization will likely mean huge returns for the casinos that win bids to operate there. According to analysts at CLSA, an Asian research group, the casino industry in Japan could be worth as much as $40 billion by 2025, which would make it the second-highest revenue-earning gaming hub in the world behind Macau. This is what's sparking the interest of companies like Las Vegas Sands, Melco Crown, and Wynn Resorts, which have all gained huge profits from Macau in the last few years.
However, profiting from this market could mean choosing the right city. The government is likely to allow bids only in Tokyo, the country's capital, and Osaka, a tourist destination. While each city has its respective advantages, knowing which city each casino is betting on may sway an investing decision.
Morgan Stanley analysts, while bullish on the market as well, have predicted that a casino resort that spends more than $5 billion to set up its operations would be challenged to get more than a 20% return. Thus, the respective prices of the cities may be a factor, which is a pro for Osaka. However, Tokyo not only has a much larger population, it is hosting the 2020 summer Olympics as well. So which city is best?
The battle begins
Las Vegas Sands is an early leader in the bidding for a Japanese casino. Sands CEO Sheldon Adelson said that "We will spend whatever it takes...would I put in $10 billion? Yes." Sands is planning to place a bid for the capital city of Tokyo. In a recent interview, Neil Bluhm, while validating his own decision to place a bid in Osaka, told reporters that Tokyo would be way too expensive to be profitable and called out Adelson for "throwing around his money".
Bluhm, who Forbes estimates is worth $2.6 billion, owns and operates casinos around the U.S. as well as one in Canada. He noted that the bidding, construction process, and overall operations would be much more complicated and costly in Tokyo than they would be in Osaka. In the interview he said that "Sometimes people like to throw big numbers around in order to get picked ... We have been more for Osaka in the $4-$5 billion range."
Sands' Adelson is planning to bet on Tokyo due to its large and affluent population of over 13 million. While Adelson hasn't ruled out a pitch for Osaka, he sees Tokyo as the better bet. Adelson, whose Forbes-estimated worth of $39 billion is 15 times that of Bluhm, has the money to spend on Tokyo. He sees this as a good investment for higher future revenues.
Osaka will be much more cost efficient for casino operators. Additionally, government officials there have been eager to get an early start on talking with casinos and offering the necessary things to get the right companies to build in their city. This is a good sign that operators in Osaka will have easy dealings with the government. However, while Tokyo will be more expensive and so far it doesn't seem to have the same level of local government support that Osaka offers, it does have its own advantages.
Three reasons why Tokyo may be a better bet
For one, Tokyo has a population of over 13 million and a large percentage of them are very affluent. This makes it attractive to a casino company focused on mass-market consumers as Las Vegas Sands and Melco Crown have become with their Macau operations lately, which have greatly benefited their shareholders. Second, while Universal Studios Japan is in Osaka, Tokyo is home to Disney's Disneyland Tokyo and it is not far from SeaWorld Japan. Finally, Tokyo will host the 2020 summer Olympics. If Las Vegas Sands can have a casino in operation by then, Tokyo will be filled with millions of tourists. With the kind of money that Adelson is planning to spend, you can bet that it will be a pretty incredible casino that will be likely to draw in many of these tourists.
The most important player: the government
Bluhm has commented that he has an advantage when it comes to working with local governments. He said that "In reality, they are going to want to totally run the project. They are probably not used to having partnership relationships like we are." However, his casinos are mostly in the U.S. (with one in Canada), while Las Vegas Sands already gets 88% of its revenue from Asia.
Additionally, Las Vegas Sands has a strong track record of pleasing governments, as is evident with its operations in Singapore. One point that has already come up during debates by Japanese legislators is whether or not the industry can be built without the seediness that is stereotypical of the black-market gambling that exists in Japan now. It's likely that the government will be highly involved in the building and regulation of the casinos. Similar concerns were raised by the Singaporean government before it allowed casino companies to operate.
Singapore officials were swayed by casinos that offered the added bonus of family friendly entertainment, such as live theater and theme parks. The same thing that worked in Singapore should help Las Vegas Sands succeed in Japan.
Pleasing the Singaporean government was not easy. Stephen Wynn, CEO of Wynn Resorts, (NASDAQ: WYNN ) criticized Singapore for micromanaging the project to the point of making it unprofitable for the casino operator. The company subsequently retracted its bid. Hopefully for Wynn Resorts and its investors, Wynn will be able to do a better job of working with the Japanese government.
Melco Crown is another company which has a track record of success with Asian gamers and Asian governments. In fact, the company is based out of Hong Kong, which makes it one of the only viable competitors that is actually Asian. The company has also been aggressive in meeting with Japanese officials.
With Macau casinos that show how it will incorporate entertainment into its Japanese casino, Melco Crown is showing that it can bring the non-gaming entertainment that the government will want through an integrated resort. World-renowned live acrobatic and dance shows have made this property a destination for vacationers, even those who are not gambling. An analyst at Barrons notes that "the House of Dancing Water show [the company's flagship acrobatic show] is a well known and respected brand and has given MPEL some brand equity in Japan."
Foolish takeaway: betting on history
For investors looking to make a bet on this coming industry, history is likely to repeat itself. Looking at Singapore, Las Vegas Sands has shown itself as the winner when it comes to betting on Asia and working with controlling Asian governments. Wynn Resorts' own track record is not so bright.
With the growth and profits expected to come from the Japanese gaming market when the government allows gaming, its no wonder that these companies are already fighting over bids to build in the country. Betting on which company will win one of the four bids may be a good way for investors to get in on this industry early. With its historic wins and its vast funds that allow it to bet on the more expensive Tokyo, Las Vegas Sands is looking like a stronger and stronger bet.
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