GGRAsia – Operators’ balance sheets comfortable for Japan: Fitch

Operators’ balance sheets comfortable for Japan: Fitch

Dec 16, 2016 Newsdesk Japan, Latest News, Top of the deck

Fitch Ratings Inc says the balance sheets of international gaming operators “are generally well positioned” to deal with the scale of investment Japanese officials may require for any new casino to be built in the country.

The upper house of Japan’s parliament – a body also known as the Diet – approved this week a bill to legalise in principle casino gambling in the country.

Most major global casino operators have expressed an interest in developing an integrated resort – including a casino – in Japan. Following the approval of the enabling bill, an implementation bill – which will spell out more detail with respect to licensing, investment, location and taxation – will likely be tackled in 2017.

In a report published this week, Fitch said global casino operators “have used the last six years of U.S. economic expansion and the early 2010s Macau boom to fortify their balance sheets”.

“Large-scale capex [capital expenditure] programmes are now at their tail ends and it would likely be at least two years before the projects in Japan are shovel-ready, allowing operators to build up more cash,” added the rating agency.

Discussions in Japan have centred on a limited number of licences for large-scale integrated resorts in major metropolitan areas and possibly a few smaller casino resorts in less densely populated regions. Tokyo (pictured), Yokohama and Osaka are the main major metropolitan areas mentioned by investment analysts as possible locations for integrated resorts.

Investment bank Morgan Stanley said it estimates Japan’s casino gross gaming revenue (GGR) to reach US$20 billion by 2025, based on its analysis of casino GGR/nominal GDP and lottery win/casino GGR in global markets.

“Based on their city GDPs as a percentage of Japan’s, we believe Tokyo/Yokohama could be a US$4 billion market, while Osaka could be a US$2 billion market,” said the Morgan Stanley analysts in a note on Thursday.

Credit positive

Fitch said in its report that winning a major integrated resort (IR) licence to operate a casino in Japan “would be a credit positive” for any global casino company. “An IR, which we think would generate more than US$1 billion in EBITDA [earnings before interest, taxation, depreciation and amortisation], would address two important credit factors Fitch assesses for gaming companies: it would improve geographic diversification and would likely benefit from a monopolistic position,” the rating agency said.

In the near-term, however, “funding a large-scale project (two operators mentioned spending up to US$10 billion) could stress liquidity and potentially drive up pro forma leverage, depending on the funding strategy and the ultimate performance of the IR,” added Fitch. U.S.-based casino operators MGM Resorts International and Las Vegas Sands Corp have said they would each be willing to invest up to US$10 billion in a casino resort in Japan.

In the report, Fitch said Las Vegas Sands was “best positioned” in terms of balance sheet among the global U.S.-based gaming operators eyeing Japan’s market. “MGM Resorts is also well positioned to undertake an IR project … Wynn Resorts [Ltd], like Las Vegas Sands and MGM [Resorts], has excellent liquidity but has the highest leverage of the three operators,” it added.

Several Asian-based casino operators are also eyeing the Japanese market, including Genting Singapore Plc, Paradise Co Ltd and Melco Crown Entertainment Ltd.

A spokesperson from South Korean casino operator Paradise Co told the Nikkei Asian Review that the company was “considering investing in Japan”. “We are definitely following up the news in Japan,” the person was quoted as saying.

Investment analysts believe Paradise Co might be well placed for a licence in Japan as it is already developing a joint venture casino resort in South Korea with Japanese pachinko operator Sega Sammy Holdings Inc. The first phase of Paradise City – a casino resort announced for Incheon, near South Korea’s capital Seoul – is scheduled to open in April 2017.

Lawrence Ho Yau Lung, chairman and chief executive of Melco Crown, said in a statement on Thursday that the company is “constantly looking for opportunities in other parts of Asia such as Japan”.

Morgan Stanley said any casino scheme in Japan might only open after 2021. “Japan will have to pass the implementation bill which may take 6 to 12 months and then undergo the RFC (Request for Concept) and RFP (Request for Proposal) process, which could at least take 6 months. This pushes the opening of the first casino to at least 2021/22,” said the institution.