Las Vegas Sands and MGM Positioned to Win Gaming Concessions As The Rising Sun Shines On Japan IRs

Rising Sun on Japanese Gaming Opportunity Is Bright; Narrow-Moat Las Vegas Sands Best Positioned

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

Japan Hotels, restaurants and leisure / Thematic (Sector/Industry)

We think recent recommendations proposed by Japan’s government-appointed integrated resort panel could restrict gaming demand on the island nation, if stringently enacted, leading to reduced capital expenditure and lower tourism (one of Japan's main goals is increasing tourism). These recommendations include, but are not limited to, restricting a resort’s gaming area to 15,000 square meters and limiting the number of times Japanese people can visit casinos. That said, we expect debate around these proposals in the coming months. Thus, we maintain our respective $62 and $37.50 fair value estimates for narrow-moat <a href="https://www.smartkarma.com/entities/807" target="_blank" data-smartkarma-citation="entities:807:1">Las Vegas Sands Corp (LVS US)</a> (midteens percentage of 2024 EBITDA from Japan) and no-moat <a href="https://www.smartkarma.com/entities/16227" target="_blank" data-smartkarma-citation="entities:16227:1">MGM Resorts International (MGM US)</a> (nearly 20%), as we still see those firms as best positioned to win urban gaming licenses in Japan, given their global experience of operating world-renowned integrated resorts. We see MGM as slightly undervalued.The 15,000-square-meter gaming floor proposal resembles restrictions in Singapore, a gaming market Japan is studying, given its success in controlling gambling addiction while aiding economic growth. That said, the demographics of Tokyo, Yokohama, and Osaka (possible Japanese urban gaming resort locations) warrant larger gaming floors, in our view. To illustrate, the population within a 41-mile radius of Tokyo and Yokohama is 4.7 times larger than Singapore, with both Japanese cities having average household income 8% lower than Singapore. The setup is similar in Osaka, with a population 2.5 times larger and average household income 15% lower than Singapore. The density in these cities could require more tables to satisfy demand. Holding other factors constant, lower average household income in these Japanese cities versus Singapore could mean lower gaming revenue per person. We are less concerned with potential regional sites Hokkaido and Nagasaki, given their lower population density, as we don't anticipate a significant impact on their sales opportunity.In our view, the vitality of integrated resorts also lies with local gaming demand, and stringent curbs here could further decrease the revenue opportunity. As our Japan gaming revenue opportunity estimate did not assume restriction in gaming space and a limit on the number of allowed visits for Japanese, another proposal by the panel, these restrictions could reduce revenue projections. In turn, should casino operators want to maintain the same return on investment in an environment with a lower sales opportunity, their capital expenditure would need to be reduced accordingly. This could lead to integrated resorts that appeal less to foreign visitors. We estimate casino operators to have a targeted return on investment north of the midteens.We anticipate continued debate around these proposals, and we maintain our view that Yokohama and Osaka will receive integrated resort licenses and generate sales of $11.3 billion and $8.7 billion, respectively, in 2024. Further, we continue to model Las Vegas Sands and MGM opening a Japanese gaming resort in 2024. These resorts represent around a mid-single-digit and low-double-digit percentage of our unchanged fair value estimates for Las Vegas Sands and MGM, respectively.Analysts: Chelsey Tam and Dan Wasiolek

We think recent recommendations proposed by Japan’s government-appointed integrated resort panel could restrict gaming demand on the island nation, if stringently enacted, leading to reduced capital expenditure and lower tourism (one of Japan's main goals is increasing tourism). These recommendations include, but are not limited to, restricting a resort’s gaming area to 15,000 square meters and limiting the number of times Japanese people can visit casinos. That said, we expect debate around these proposals in the coming months. Thus, we maintain our respective $62 and $37.50 fair value estimates for narrow-moat Las Vegas Sands Corp (LVS US) (midteens percentage of 2024 EBITDA from Japan) and no-moat MGM Resorts International (MGM US) (nearly 20%), as we still see those firms as best positioned to win urban gaming licenses in Japan, given their global experience of operating world-renowned integrated resorts. We see MGM as slightly undervalued.The 15,000-square-meter gaming floor proposal resembles restrictions in Singapore, a gaming market Japan is studying, given its success in controlling gambling addiction while aiding economic growth. That said, the demographics of Tokyo, Yokohama, and Osaka (possible Japanese urban gaming resort locations) warrant larger gaming floors, in our view. To illustrate, the population within a 41-mile radius of Tokyo and Yokohama is 4.7 times larger than Singapore, with both Japanese cities having average household income 8% lower than Singapore. The setup is similar in Osaka, with a population 2.5 times larger and average household income 15% lower than Singapore. The density in these cities could require more tables to satisfy demand. Holding other factors constant, lower average household income in these Japanese cities versus Singapore could mean lower gaming revenue per person. We are less concerned with potential regional sites Hokkaido and Nagasaki, given their lower population density, as we don't anticipate a significant impact on their sales opportunity.In our view, the vitality of integrated resorts also lies with local gaming demand, and stringent curbs here could further decrease the revenue opportunity. As our Japan gaming revenue opportunity estimate did not assume restriction in gaming space and a limit on the number of allowed visits for Japanese, another proposal by the panel, these restrictions could reduce revenue projections. In turn, should casino operators want to maintain the same return on investment in an environment with a lower sales opportunity, their capital expenditure would need to be reduced accordingly. This could lead to integrated resorts that appeal less to foreign visitors. We estimate casino operators to have a targeted return on investment north of the midteens.We anticipate continued debate around these proposals, and we maintain our view that Yokohama and Osaka will receive integrated resort licenses and generate sales of $11.3 billion and $8.7 billion, respectively, in 2024. Further, we continue to model Las Vegas Sands and MGM opening a Japanese gaming resort in 2024. These resorts represent around a mid-single-digit and low-double-digit percentage of our unchanged fair value estimates for Las Vegas Sands and MGM, respectively.Analysts: Chelsey Tam and Dan Wasiolek

Recent Proposals for Japanese Integrated Resorts Could Negatively Affect Revenue Opportunity