During the summer of 2014, casino industry investors watched as Japanese lawmakers discussed the possibility of bringing a bill to their congress that would legalize gambling. This bill would have paved the way for historically Las Vegas-focused companies such as Las Vegas Sands (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN) to build resorts in what analysts predict could be the second largest gambling market in the world.
Then the summer legislative session came and went with a lot of discussion, but no bill was ever presented. Instead, the lawmakers in support of the bill, including Prime Minister Shinzo Abe himself, said the bill would be presented in the fall legislative session. Investors held out hope that the bill would be passed in 2014, and that the expected four gambling licenses could be distributed soon after.
However, the fall legislative session came and went, with still no bill. Now reports are out that lawmakers are submitting a new round of tactics to get a bill out and voted on this year, including actually getting a bill finally submitted this spring, to be voted on soon thereafter. As casino-industry investors who have been strung along, should we finally give up hope that Japan will open its doors to casinos?
Why Japan is so important
Gambling isn't new to Japan, and a game called Pachinko, in which people play arcade-style games and win prizes, is already popular there. Though it's not technically gambling, most often the players exchange the prizes in nearby shops for money, avoiding the illegality of playing directly for money but with the same intent.
Additionally, Japanese tourists make up a large portion of visitors to other gambling hubs, such as Macau and Singapore. Add that to the relative wealth in Japan, and the arrival of the Olympics in 2020, and analysts expect that the gambling market in Japan could be worth as much as $40 billion in a few years following its legalization. That amount would make Japan the second-highest revenue-earning gambling hub in the world, only slightly behind Macau.
Why this latest push is so important
One of the biggest things Japan's pro-gambling legislators have been pushing is that having these integrated resorts operating by the time the 2020 Olympic games arrive in Tokyo could significantly help cash-strapped Japan. During the legislative session last summer, Prime Minister Abe said he sees casinos as one part of a broader tourism industry that will help it become an economic pillar of Japan. To get casinos up in time for the 2020 games, the bill would need to get passed very soon. Having the urgency of geting the casinos operating in time for the Olympics could help get a decision made soon.
The concern of anti-gambling legislators in Japan is that allowing gambling and casinos to be legalized would open the door for gambling addictions and poor financial decisions for Japanese families, along with all of the other vices that get pinned to gambling and casinos.
Chinese President Xi Jinxing, for example, is taking a stand against corruption within networks of high-net-worth citizens and government officials. Since it was discovered that certain Chinese officials were using government funds to gamble in Macau, as well as participating in some other shady practices with the "junket operators" -- middlemen who provide credit and transportation to high-net-worth Chinese gamblers --- President Xi has taken a strong and public stance against certain casino operations in his country. The fears of the Japanese anti-gambling legislators are no doubt spurred on by these recent issues in Macau.
Making a smart bet either way
If Japan does legalize gambling and allows these integrated resorts to be built, it could be a major development for these companies, and one that could be very beneficial to their shareholders.
If gambling is legalized there, it's Las Vegas Sands that has the best chance of success. When Prime Minister Abe visited Singapore to report on how well the same model of integrated resorts used in Singapore could work in Japan, he promoted LVS's Marina Bay Sands resort, which has become a tourist icon of Singapore. If gambling is legalized, expect Sands to have the best bet to get the first bid to build a resort. Regarding his excitement to build in Japan, Sands CEO Sheldon Adelson has said: "We will spend whatever it takes. Would I put in $10 billion? Yes."
Outside this Japan-gambling bet, Las Vegas Sands is still the best bet on what looks like more long-term growth in Macau. The mass-market segment there continues to grow and will replace the lowered VIP segment. In Singapore, meanwhile, huge profit increases in the fourth quarter allowed Sands to post far more profit growth in 2014 than any other company in the industry. Even if gambling isn't legalized in Japan, Las Vegas Sands is still the best bet in the industry
Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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