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Japan's casino plans remain dicey after Las Vegas Sands pullout

US operator's reticence shows licence rules are a gamble for investors, analysts say

Las Vegas Sands ended its plans to open an integrated resort (IR) casino in Japan. (Source photos by Kyodo/Reuters)

TOKYO -- Japan's legalization of casinos two years ago was supposed to usher in a golden age of gaming tourism with top names from the industry. But the sudden decision by Las Vegas Sands to take its chips off the table has cast doubt on projects that were already on shaky ground after a bribery scandal.

Analysts believe LVS's decision to pull out will make other interested casino groups much more conservative with their plans.

"The scale of the investment would considerably decrease, because Las Vegas Sands is the price leader of the industry," said Takashi Kiso, CEO of consultancy International Casino Institute. "Their withdrawal means they judged Japan's profitability would be low. Others will respond to this by reducing their bidding price."

Las Vegas Sands Chairman and CEO Sheldon Adelson had said the company would spend $10 billion in Japan to develop an "integrated resort" -- a large entertainment complex centered on casinos with hotels, restaurants and conference venues. But on Wednesday LVS abruptly changed its mind.

"The framework around the development of an IR has made our goals there unreachable," Adelson said in a statement. "It is time for our company to focus our energy on other opportunities."

LVS, which runs Singapore's renowned Marina Bay Sands, had been considered the frontrunner for a resort concession in Yokohama, the huge port and cruise terminal near Tokyo. Other candidates include Hong Kong-based Melco Resorts & Entertainment, Galaxy Entertainment and U.S.-based Wynn Resorts. Wynn declined to comment on whether it would continue projects in Japan.

Another Japanese IR is planned for Osaka, the country's third-largest city. MGM Resorts International is the only operator eyeing Osaka after Wynn and others pulled out.

LVS and other operators are under huge pressure from the coronavirus pandemic, which has led to closures. But while the pandemic may be partly why LVS scrapped its Japan plans, analysts argue that the bigger problem is the complex rules Japan has put in place for casino development -- the "framework" that Adelson referred to.

The framework remains "one of the biggest challenges" for Japan, argued Brendan Bussmann, partner and director of government affairs at Global Market Advisors, a gaming and hospitality consulting company.

"Japan needs to understand that stakeholders need to be careful not to kill the golden goose before it lays its eggs with the development of an integrated resort," he said.

After legalizing casinos in 2018, Japan planned to give licenses to three IRs, which are expected to open in 2026 or after. Some saw Japan becoming the world's second-largest gaming market after Macao. Morgan Stanley said the same year that Japan would be a market worth an estimated $15 billion per year with all three destinations.

But Japan only grants licenses for 10 years, with renewals required every five years and a 30% annual gaming tax imposed on central and local governments. For locals, a 6,000 yen entrance levy and a maximum of 10 visits per month will be set.

The measures, intended to address gambling problems, would be overly restrictive for Japanese casinos, according to some in the industry. A 10-year license is "a mistake, as it makes it extremely difficult for operators to gain enough returns in this limited amount of time for the required development cost, given it is expected to take 4-5 years for the construction," said Kiso from the International Casino Institute. By comparison, Macao issues 20-year concessions.

LVS's announcement "does not come as a complete surprise to us, as the Japan process has gotten bogged down by increasing government requirements and terms that were beginning to look less attractive," said Bernstein gaming analyst Vitaly Umansky in a client note on Wednesday.

Another U.S.-based casino operator, Caesars Entertainment, had previously pulled out of Japan.

On top of financial doubts among operators, integrated resorts remain unpopular with the public, especially after a casino policy point man from Prime Minister Shinzo Abe's Liberal Democratic Party was arrested on bribery charges last year.

Osaka and Yokohama are two large candidate cities to land a resort. Wakayama and Nagasaki are also preparing bids, while Tokyo and other cities are also in the running.

The Japanese government has been reluctant to reveal basic guidelines for the selection cities. The selection criteria were to have been revealed in January but were delayed due to the scandal and have still not been published. Local officials, however, are still required to submit their chosen operators to the central government by July 2021 and are moving on with their own bidding.

Bidders "are now being asked to provide commitments to the market when they still do not know the full rules that will be implemented and, therefore, cannot yet fully understand the market opportunity," noted Bussmann at Global Market Advisors in his research brief in late April.

Adding to the problem is the coronavirus, with global lockdowns hindering communication between parties while casino operators focus on making sure existing resorts -- notably in the U.S., Macao and Singapore -- get through the pandemic.

Bernstein's Umansky said other operators could still pull out, while Tokyo may reenter the mix, further delaying the process. "However, the likelihood of Sands coming back [unless there was a clear Tokyo opportunity] is remote due to the same reasons it pulled out in the first place," he added.

Bussmann said on Wednesday strong players remain: "Japan still has the opportunity to use integrated resorts as a vehicle to boost tourism, significant investment and job growth."

But Kiso noted it was unlikely that restrictions identified in the framework would be revised. "They are already set in law," he said.

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