Consumer

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

From the way investors in Macau's casino stocks have been salivating at the prospect of a bill legalizing casinos passing through parliament in Tokyo, you could be forgiven for thinking Japan was a blushing innocent when it comes to the business of taking bets.

Best of Times, Worst of Times
The daily share price changes of Macau casino stocks are being driven by Japan's parliament
Source: Bloomberg

Melco Crown Entertainment Ltd. Chairman Lawrence Ho has mused about investing $5 billion in Japan to diversify away from the company's current bases in Macau and the Philippines, and Wynn Resorts Ltd. has speculated on committing at least $4 billion.

Faced with competition from Macau and Las Vegas, how could Japan -- a country where gambling is, as everyone knows, illegal -- hope to compete?

Well, there's illegal and there's illegal. Despite the wide-ranging bans on betting and lotteries in Japan's 1907 criminal code and the fact that casinos really don't yet exist, the country has a vast (not to mention problematic) gambling industry that's quite capable of holding its own against foreign invaders.

Take the most obvious example: more than 10,000 pachinko parlors. Salarymen have long been able to fritter away their time and incomes on these pinball-type machines, under the figleaf that winnings are paid out in the form not of cash, but of prizes (which can be exchanged for yen).

Losing Big
Revenue from Japan's pachinko games may be in decline, but it's still big enough to hold its own against Macau or the U.S.
Source: Daikoku Denki via Pachinko Industry Web Reference, Macau Direccao de Inspeccao e Coordenacao de Jogos, U.S. census bureau, Gadfly calculations
Note: Pachinko figures are based on gross profit which corresponds to company revenues/player losses. Pachinko sales figures quoted by eg. the Japan Productivity Center correspond more closely to total wagers.

Even after a 31 percent decline in pachinko sales over the past decade, the industry still accounts for more than 23 trillion yen ($200 billion) of wagers player spending. While that's probably an overestimate because pachinko players typically get back most of the money they feed the machines, Daikoku Denki Co., a manufacturer of computer systems for the parlors, estimates that the halls' winnings came to 3.3 trillion yen in 2015. That's more or less equivalent to all the gambling revenues in the U.S. or Macau.

That doesn't mean there's nothing for the world's casino companies in a legalized Japanese industry. The same group of tycoons crop up again and again in the gambling world -- Steve Wynn, Stanley Ho, Lim Kok Thay, Sheldon Adelson, Kirk Kerkorian -- because governments don't hand out casino licences randomly. The tenders go to the investors with the best track record of building, operating, and most importantly generating tax revenues out of their resorts.

There's real money to be made here -- a 2014 CLSA report estimated the industry could be worth $40 billion. But at this stage, we don't even know which licenses will be offered, let alone who will win them, so investors who aren't involved in managing a casino company should ignore the process until there's more certainty about what form the industry will take.

Busted Flush
The value of pachinko spending has fallen by about 30 percent over the last 10 years
Source: Japan Productivity Center via Pachinko Industry Web Reference

The biggest threat and opportunity to pachinko suppliers like Bandai Namco Holdings Inc., Sega Sammy Holdings Inc. and Daikoku Denki comes not from casinos, but from the broad demographic changes that are seeing the game fall from favor across the country. And with an implementation bill still needing to be passed even if Wednesday's legislation goes through, Macau's casino stocks wouldn't be affected by the competition until after the first resorts opened, probably sometime after the 2020 Tokyo Olympics. 

It may be tempting to buy and sell gaming stocks on every move in the legislative process, but the better strategy is to focus on the investments that are out there at the moment, not those that may exist five years down the line. Churning a portfolio on every story out of Tokyo is quite as good a way of losing money as dropping metal balls in a pachinko parlor.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net