If Japan Legalizes Gambling, These 4 Companies Could Be Huge Winners

Casinos & Hotels

Published: December 8, 2016 10:05 am

Last Updated: January 12, 2020 4:59 pm

In the constant race for governments to find a way to generate tax revenue, gambling always ends up as the proverbial last resort. But when used properly, not only does gambling generate tax revenue, it also increases tourism, which in turns generates consumer spending in a wide variety of shops, restaurants, hotels and other related areas.

The Wall Street Journal reported this week that the lower house of Japan’s Parliament passed a bill opening the way for casinos and sent it to the upper house for review. While the report noted that the process for approval would be slow, and actual casinos may not open until after Japan hosts the 2020 summer Olympics in Tokyo, the ramifications are obvious: it could be huge for companies that go in to do business there.

While the top casino operators may end up doing joint ventures with top Japanese companies, the benefit is obvious for Japan, as tourism there has surged over the years. In fact, last year 20 million tourists visited the country, the highest reported number ever.

It would seem to us that four companies that would be likely candidates to want to be in Japan are the four companies that currently have casino operations in Macau, which is a dependent territory of China. We screened our 24/7 Wall St. research database for companies that had Buy recommendations and found four big Macau players.

Las Vegas Sands

While the gaming stocks started the year with some issues in Macau, things have really turned around. This stock has traded well, although it remains way off highs printed in 2014. Las Vegas Sands Corp. (NYSE: LVS) is the world’s leading developer and operator of integrated resorts. Its properties include the five-diamond Venetian and Palazzo resorts and Sands Expo Center in Las Vegas, Sands Bethlehem in Eastern Pennsylvania and the iconic Marina Bay Sands in Singapore.

Through majority ownership in Sands China, the company owns a portfolio of properties on the Cotai Strip in Macau, including the Venetian Macao, the Plaza and Four Seasons Hotel Macao and Sands Cotai Central, as well as the Sands Macao on the Macao Peninsula.

The stock is trading at some of the cheapest levels in years and reported very solid third-quarter numbers back in November. Merrill Lynch noted this at the time:

While third quarter headlines were helped by good luck, core trends in Macau are ahead of our and investor expectations. We think results confirm both a stabilization in mass market trends in Macau and meaningful market share gains for Las Vegas Sands.

Las Vegas Sands investors receive a 4.59% dividend. Merrill Lynch recently raised the stock to Buy with a $66 price target. The Wall Street consensus target is $60.27. Shares closed Wednesday above that at $62.68.

MGM Resorts International

This old-school company combines a very strong presence in Las Vegas with growing clout in Macau. MGM Resorts International (NYSE: MGM) owns or operates casino resorts in the United States and China that offer gaming, hotel, convention, dining, entertainment, retail and other resort amenities.

MGM’s casino operations include various slots, table games and race and sports book wagering. The company operates 12 wholly owned resorts in the United States and MGM Macau resort and casino in China, as well as develops an integrated casino, hotel and entertainment resort on the Cotai Strip, Macau.

MGM also reported very solid third-quarter results, which were ahead expectations on strength in the Las Vegas properties and in Macau. Merrill Lynch noted at the time:

With revenue tailwinds, especially in convention and entertainment, we increase our EBITDA estimates +3% for 2017 to $3.059 billion. Reiterate Buy on accelerating organic growth in Las Vegas and Macau and new openings.

The $33 Merrill Lynch price target is in line with the consensus target of $33.34. The shares closed on Wednesday at $29.95.

Melco Crown Entertainment

This is another big player in Macau that could be a likely contender in Japan, although being based in China could make this more difficult. Melco Crown Entertainment Ltd. (NASDAQ: MPEL) is a developer, owner and operator of casino gaming and resort facilities focused on the Macau market. It is jointly controlled by Crown and Melco International.

The company currently operates Mocha Clubs, Altira Macau on Taipa and the City of Dreams on Cotai. The company has a joint venture with Belle Corp to co-license and operate Belle Grande Manila Bay in the Philippines. In addition, it operates Studio City, a cinematically themed integrated entertainment, retail and gaming resort that comprises 200 gaming tables and 1,175 gaming machines in Cotai, Macau. Further, the company owns and operates 7 Mocha Clubs with 1,259 gaming machines, as well as Taipa Square casino in Taipa Island, Macau.

Like the other companies, Melco Crown posted solid third-quarter results, which beat analysts’ expectations by 5%. Credit Suisse has a $24 price objective, while the consensus target is $19.06. The stock closed most recently at $19.55.

Wynn Resorts

This top company could be a very logical contender to open a casino in Japan. Wynn Resorts Ltd. (NASDAQ: WYNN) owns and operates the Wynn Las Vegas and Encore at Wynn Las Vegas resort, with a total of 4,748 hotel rooms, suites and villas; 232 table games; 1,866 slot machines; a race and sports-book and poker room in approximately 186,000 square feet of casino gaming space, including a sky casino and private gaming salons.

The company also operates Wynn Macau and Encore at Wynn Macau resort located in the People’s Republic of China. As of February 12, 2016, its Macau resorts feature had approximately 284,000 square feet of casino space, which offered 24-hour gaming and a range of games with 458 table games and 708 slot machines, private gaming salons, sky casinos and a poker room; two luxury hotel towers with a total of 1,008 guest rooms and suites; casual and fine dining in eight restaurants; approximately 57,000 square feet of retail shopping, including stores and boutiques; approximately 31,000 square feet of space for lounges and meeting facilities; recreation and leisure facilities, including two health clubs, spas, a salon and a pool; and the Rotunda show.

Shareholders are paid a 1.96% dividend. Morgan Stanley has a $115 price target. The consensus price objective is $98.07, but shares closed above that level at $101.99.

Needless to say, the Japanese decision remains a jump-ball, but many on Wall Street feel the possibilities are very good, especially with the lower house in Japan already offering approval. High rollers from Japan that frequent Las Vegas would probably be thrilled to play closer to home.

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