How Big Is The Japan Opportunity For Las Vegas Sands?

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Japan legalized casino operations in the country last year, and is currently formulating laws for the industry. Japan, the third largest economy in the world, presents a big opportunity for global casino operators as it is completely unpenetrated. Many global casino operators, including Las Vegas Sands (NYSE: LVS), MGM (NASDAQ: MGM) and Wynn are in the race for the licenses to build casino resorts in the country. Although the rules have yet to be finalized in Japan, and the licenses have yet to be distributed, Japan is most likely to follow Singapore’s footsteps in the implementation phase. LVS chairman Sheldon Adelson recently traveled to Japan to meet with industry and government officials and discuss the country’s gaming industry. LVS is thought to be a leading candidate to receive one of Japan’s sought-after casino licenses. Some estimates peg the potential for casinos/gaming in Japan at $25 billion, though strict proposed regulations may keep it lower than that. Below we analyze how much Las Vegas Sands could benefit from Japan casino resorts should it receive a license.

Singapore Casino Industry Highlights

Casino gambling was legalized in 2005 in Singapore and about 5 years later, Las Vegas Sands and Santosa started their integrated resort operations. By 2013, Singapore casinos were among the most profitable casinos globally. In the last few years, casinos in Singapore generated nearly $6 billion in revenues annually. Las Vegas Sands holds nearly 70% market share and Santosa’s share is around 30%. In Singapore, the government restricts locals from excessive gambling by imposing a fee to get into casinos because of the concerns surrounding the social impact of gambling. We believe that these factors may also play out in casino regulation in Japan, which could even restrict the amount of gambling that can take place.

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How Much Could LVS Gain From Japan Contract?

Brokerage firm CLSA recently estimated the total market size of Japanese casino industry to be around $25 billion. We believe, however, that the market size will likely be smaller than that in the near term, as Japan’s government may restrict the entry of locals in casinos and put a ceiling on the amount of gambling that can take place. As LVS has the experience of successfully developing casinos in Singapore and the Cotai strip in Macau, it is likely a front runner to receive a casino contract. If LVS does win a deal to build casinos in the region, the casino operations will likely begin after 2022 and LVS’ market share could be between 30% and 60% depending on the number of contracts given out by the Japanese government. Assuming a market size of about $15 billion and a 30-50% market share for LVS, this opportunity could potentially result in around $6 billion in annual revenues for the company. According to our estimates, this could add up to over 20% of company’s overall revenues by 2022.

Marina Bay Sands is likely the most profitable casino globally, with EBITDA margins of nearly 50% in 2016 despite a decline of 500 basis points between 2014 and 2016. We expect the margins in Japan would likely be between 30% and 40% over the long run, as LVS’ Macau casino margins stood at about 30% in 2016 and Japan, being an unpenetrated market, could have higher margins. LVS’ chairman recently stated that the casino resorts in Japan could cost up to $10 billion. Overall, we believe that this presents a great opportunity for LVS, as the company could potentially break even in less than 5 years.

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