Ahead of Japanese Gaming: Bet on MGM, Las Vegas Sands, or Melco Crown?


Japan's Prime Minister Shinzo Abe, along with his party that has a majority in the Japanese government, support gaming. Photo: Bloomberg

Japanese gaming is getting everyone excited. The summer legislation session was dramatic as investors waited for lawmakers to discuss the bill that would legalize gaming in Japan right up until the last few days of the session. It finally came right at the end, with high prospects that the Japanese congress will pass the bill when it reconvenes in the fall. For Foolish investors looking for early gains from what could become a vast, $40 billion market, is Las Vegas Sands (NYSE: LVS  ) , Melco Crown (NASDAQ: MPEL  ) , or MGM Resorts International (NYSE: MGM  ) a better bet when the government does allow gaming?

Pachinko, the arcade pseudo-gambling game that has Japanese people obsessed. Photo: Newsweek

The reason for the excitement over the coming legalization
Japan already has a gambling obsession that includes games such as Pachinko. Here gamers play arcade style games, win prizes, and exchange them in nearby shops for money, since playing directly for money remains illegal. However, when legal gaming finally does come, it will come with huge returns for the casinos that win bids to operate there.

According to analysts, the casino industry in Japan could be worth as much as $40 billion in a few years, which would make it the second-highest revenue-earning gaming hub in the world behind Macau. This has sparked the interest of companies like Las Vegas Sands, Melco Crown, and MGM Resorts International, which have all gained huge profits from their Asian operations in the last few years.

It didn't pass this summer, will it actually pass this fall?
Japanese Prime Minister Shinzo Abe is a major supporter of gaming in Japan. He is seeking to get his country, one that owes a quadrillion yen in government debt, back to growth and international prowess. He gave his full support for casinos as a means to add revenue for the country by saying "Integrated resorts are expected to provide a great contribution to tourism, regional economies and industry, I think, and can be one of the key elements of Japan's growth strategy."

Japan's successful bid for the 2020 Olympics will help influence the government's decision to legalize casinos. Photo: CNN

Shinzo Abe's plan for economic reform includes growth in tourism and leisure spending, two things that well-prepared integrated gaming resorts can provide. Because the country has been selected to host the 2020 Summer Olympic Games, getting casinos built in time to bank on the tourists who travel to see the games is another reason why pro-gaming legislators are rushing to pass this bill. 

While the debate only just got started during the summer legislative session, Abe and his team hope to get it passed quickly this fall now that it's under way. "I hope in my capacity as leader of the LDP that we can aim to pass it in the next extraordinary session of the Diet," he said.

Las Vegas Sands CEO Sheldon Adelson. Photo: Bloomberg

Preparing their bets
MGM Resorts, which currently gets 37% of its revenue from Asia, well below the 88% that Sands gets from Asia, is seeking a big bet on Japan. MGM plans a bid for the southern city of Osaka due to lower setup costs and more government support, which could be very lucrative going forward. Bank of America analysts have said that MGM Resorts is a "serious candidate" for a winning bid in Japan. With a background in construction and a demonstrated willingness to partner with and support the local community and culture, MGM Resorts will fight hard for a winning bid.

Melco Crown also has a track record of success with Asian gamers and 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 early on. 

One major pro for Melco Crown is that it can prove how it will incorporate world-class entertainment into its Japanese casino, which shows that it can provide the non-gaming entertainment that the government will want from an integrated resort. World-renowned live acrobatic and dance shows have made Melco Crown's Macau 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."

With 88% of its revenue coming from Asia, Las Vegas Sands knows a thing or two about Asian casino operations.

But the best bet is...?
The leader in the bidding for a Japanese casino is Las Vegas Sands. Sands CEO Sheldon Adelson said that "We will spend whatever it takes...would I put in $10 billion? Yes." 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. He sees this as a smart, though more expensive, investment for higher future revenue. Luckily, Sands has the free funds to spend on this.

Las Vegas Sands has a strong track record of pleasing governments, evidenced by its operations in Singapore. Japanese legislators have already debated whether or not the industry can be built without the seediness typical of the black-market gambling that exists in Japan now and other markets around the world. 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.


The picturesque casino built by Las Vegas Sands has become an icon of tourism in Singapore. Photo: Marina Bay Sands

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.

Foolish takeaway: an early bet now could mean huge returns this fall
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 bids may be a good way for investors to get in on this industry early. While MGM Resorts and Melco Crown look promising, with a history of success in developed Asian countries and vast free funds that allow it to bet on the more expensive Tokyo, Las Vegas Sands is looking like the stronger bet.

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