GGRAsia – Japan casinos likely big earners but capex high: Fitch

Japan casinos likely big earners but capex high: Fitch

Sep 29, 2017 Newsdesk Japan, Latest News, Top of the deck

A Japanese casino market could generate annual gross gaming revenues of between US$6 billion and US$9 billion, depending on the number of permits, and the “physical footprint” of the venues, suggests Fitch Ratings Inc.

But any Japanese casino project would “likely be expensive” and “may pressure” the credit outlook of the winning bidders, added the ratings house in a press release about the fifth edition of its annual publication on the outlook for the casino industry, “All In: Global Gaming Handbook”.

In February this year, Jim Murren, chairman of MGM Resorts International – a company considered by some analysts as a likely front runner for a Japan permit – said a possible US$10-billion price tag for a Japan resort was a “good number” in terms of a current reference point for the market.

“Fitch would take a cautious view of the winning bidders’ credit profiles during the development phase, particularly as financing is sorted out,” said an extract from the report.

The ratings house said Japan’s Integrated Resorts Implementation Bill – likely now to be delayed until at least the spring of next year due to Japan’s snap election due in October – “would determine critical details including the number of casinos permitted and potential visitation restrictions for Japanese nationals”.

In August, Japan’s Office of Integrated Resort Regime Promotion – known as the IR Promotion Secretariat – suggested setting an “upper limit” to the size of casino floors in Japan, but it did not suggest what that limit should be, according to local media reports. Some media outlets had previously mentioned the possibility of casino floors being restricted to 15,000 square metres (161,459 sq feet).

“For gaming operators, Japan provides an opportunity to diversify their holdings and capitalise on the market’s solid supply-demand dynamics,” said Alex Bumazhny, Fitch’s senior director, U.S. corporates.

But he added: “Those benefits come at a cost – any Japanese project would likely be expensive and may pressure credit metrics.”

It is not currently clear however what size of equity stake a foreign casino operator might be able to take in a Japanese project. The U.S. project finance model – typically based on debt and/or equity issuance – might not be as appealing in Japan, where many of the country’s corporate businesses are cash-rich but yield-poor, say some industry commentators.

A June report from investment services firm Morningstar Inc had mentioned a possible US$10 billion capital expenditure for any casino resort that might be located in the city of Osaka, and a likely annual return on invested capital amounting to 17 percent; and a US$11-billion spend being required in Yokohama, with a 20 percent annual return.

But Morningstar said in follow-up note this month that the regulatory framework proposed in August “could reduce revenue projections”.