Pachinko operators adjust to less volatility

Pachinko operators adjust to less volatility

Friday, February 24, 2017 Posted by Andy McCarron
Industry under pressure from regulatory change

Underneath the hullabaloo surrounding the passing of the casino interested resort bill late last year, the domestic pachinko sector in in the process of transforming itself under new regulations.

After a field trip, analysts at Union Gaming said the industry is in the process of replacing higher volatility machines with lower volatility machines. They noted that for much of the industry this will have a negative effect throughout the year.

However, they noted Dynam Japan (one of the top three pachinko operators) has gotten “well out in front of this trend” with 80 percent of its machines already conforming to the low volatility regulations compared with 60 percent across the rest of the industry.

The company believes it will see stable same-store sales this year. Said Union Gaming: “Importantly, management continues to view the ongoing cost saves initiatives as still having plenty of runway (annual decline in opex per parlour of 3.4 percent over the last six years).

“The combination of generally flat same-store revenues and cost saves should result in modest earnings growth not unlike the growth profile of US regional casino operators.”

With regard to the upcoming RFP process on the smaller-scale IR as mandated by the legislation, Union Gaming noted that Dynam intends to be a participant in the discussions.

“We believe there is unrealized value in shares of Dynam as it relates to the IR opportunity,” they write. “Not only as a likely front-runner for a regional license but from the standpoint of being an ideal candidate for strategic investment by an international developer who needs to better understand the locals market.”

Dealing with the IR process itself, the Union Gaming analysts noted that after meeting with a member of Japan’s House of Representatives they are not expecting any further progress in the spring session.

“Rather, we think the Diet has already made the decision to handle the IR bill during the fall special session, suggesting that it is more likely going to be an October or November event.”

Driving tourism, along the lines of how the casinos in Singapore were pitched, remains a ley focus for Prime Minister’s Abe’s ruling administration and a in impetus for the bill.

“Clearly, some of those crafting the bill are expecting, although perhaps not actually legislating, that Japanese companies will be partners (including capital resources and strategic advice) in every IR project that gets approved. How licenses will be awarded remains up in the air.

Union believe the most likely scenario is a dual-RFP process with a geographic RFP followed by a developer RFP. “However, there could be a scenario where cities link up with a consortium and they bid jointly in a single streamlined RFP process against other cities plus consortiums.”

Totally Gaming says: It shouldn’t be forgotten that Japan has a domestic gaming industry and that it will almost certainly be involved at some level with the upcoming RFP process. For all the foreign interest – and flying visits by high-profile representatives such as Las Vegas Sands’ Sheldon Adelson within the past fortnight -  the domestic players will play vital roles, both operationally and in terms of strategic insight. Boots on the ground will be vital in Japan.

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