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HONG KONG, April 26 (Reuters Breakingviews) – If Japan is the next Macau, $16 billion MGM Resorts International (MGM.N) may be the only winner left at the table.
U.S.-listed rivals Las Vegas Sands (LVS.N), Wynn Resorts (WYNN.O) and Caesars Entertainment (CZR.O) all decided against pursuing a chance to operate the country’s first casino. By the time the last of them backed down in 2020, it seemed a sensible call as the pandemic took hold. But it left a big prize for MGM.
After years of debate and delays, Japan has finally given approval for a resort in Osaka. MGM and its local partner Orix (8591.T) will each have a 40% stake and have committed to spend a total $8.1 billion to get the project up and running by its expected opening in 2029.
Although Japan’s population is aging and shrinking, Osaka’s crowded, well-connected sprawl makes the site accessible for millions of local punters. An established market for gaming in arcade-like pachinko parlours, worth $150 billion in sales before Covid-19 struck, suggests there will be plentiful domestic demand for gambling too.
It has been tough to get this far however. To bolster public and political support for casinos, Japan imposed tough responsible-gaming rules such as an entrance fee for gamblers. That could suppress visitors and revenue. And the plan itself, part of an effort to boost tourism, is a reminder that economic growth has been lacklustre.
Nonetheless, the government expects around $4 billion in annual revenues from the new property, and the figure could be higher because two other mooted casino projects have yet to progress beyond the drawing board. MGM seems set to enjoy a first mover advantage.
Assume $5 billion of sales, MGM’s share is not far off the $2.9 billion top line the U.S. company’s subsidiary, MGM China (2282.HK), delivered from the Chinese territory in 2019. Even if revenue didn’t breach $4 billion in 2029, an EBITDA margin of around 20% – 10 percentage points less than Macau enjoyed pre-pandemic – would see the Osaka project score a low-teen return on invested capital for the project, according to Morningstar calculations, easily besting MGM’s 8.7% weighted average cost of capital.
Meanwhile, the pace of Macau’s recovery from a long, hard pandemic is uncertain. MGM is by no means giving up on what was once the world’s largest gambling hub: it will manage the Japan commitment alongside a pledge to invest $2 billion more in the Chinese territory. It has the firepower to pursue both after selling American assets. But as diversifying from China becomes a popular mantra, this big bet looks smarter than it once did.
Follow @KatrinaHamlin on Twitter
CONTEXT NEWS
Japan on April 14 approved a plan to build the country’s first casino, in the western city of Osaka. The 1.08 trillion yen ($8.1 billion) resort is set to open in 2029.
U.S. casino operator MGM Resorts International and local partner Orix will each own a 40% stake in the company set up to manage the complex.
The resort is targeting 520 billion yen of revenue annually, mostly from the gaming business.
Editing by Una Galani and Pranav Kiran
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