"Winning isn't everything…it's the only thing…" - Vince Lombardi
On November 4th, we wrote an article on SA alerting readers to the imminent, but as yet uncertain approval by the Japanese Diet of the Integrated Resorts Promotion Bill. I cited positive movement and hoped to alert investors that chances of the bill passing were moving rapidly past the better than 50/50 mark and could immediately spike the shares of the three companies among the eight I selected, who could be potential competitors and subsequently, awardees of licenses.
I followed this up again on November 14, indicating movement was positive and that an entry point was forming fast.
Late today, we learned that the bill had, in fact, passed the lower house and was headed for the upper house where my sources late last night believe it will attain passage there as well. This will pave the way for the next phase will be a long, protracted debate on the architecture of an integrated resort bill that will in effect define:
a) How many integrated casino resorts will be approved.
b) Where they are to be located.
c) What the basic rules of the road will be regarding the gaming element of the approved developments. Ex: Will the industry be designed to attract foreign tourists only? Right now, Japan attracts 20 million annual tourists a year. Advocates of the bill are projecting growth of that total to 60 million a year, partially due to the attraction of the mega resorts envisioned.
d) The regulatory matrix. Will resident Japanese be able to gamble? Our sources tell us they likely will. Will the legislators designate limits on the number of slots and table games per license or will they leave that decision to developers subject to regulatory approvals?
All these questions will be answered in Phase two of this initiative which should be buttoned up by mid-year 2017.
e) The licensing selection. This process should absorb at least till the end of 2017. At that time, we'll know who the winners are and have a detailed gander at their plans.
f) Given the immense potential of this market, the potential developers will create dazzling projects of immense scale and scope. Licenses will go to major, proven developers who demonstrate the conceptual, capital and management strengths Japanese regulators will insist on as they evaluate the competitors. We put the number of realistic applicants at roughly eight casino resort operators plus at least five more Japanese-based entertainment/technical gaming equipment giants. In this article, we will deal only with the three companies we presently believe go into the process with the best odds of coming out at the other end with a golden license. As events unfold, we'll analyze the 10 others we consider serious contenders as well.
Here's our tote board on who we believe will be the top three contenders out of the 13 and how we see this blockbuster development impacting their shares as they move toward potential licensure in Japan.
Odds on favorites and why
Las Vegas Sands (NYSE:LVS)
Price at writing: $61
Estimated spike range as this news sinks in and projections of accretive operating profits engulf the financial ecosphere.
Our call: We guided at $70 since the shares were in the low-50s early this year. We think this immediate news is worth between 3 and 5 points north.
Longer term: Given LVS's forward earning performance through Q2 of 2017 with the implied value premium of a potential in Japan, we now raise guidance on LVS to $80 by the end of 2017 or before.
Post-licensure: If and we repeat, if LVS is, in fact, successful in being awarded a license, it clearly becomes a $100 stock on that news and that's only the beginning.
After conferring with my Japanese colleagues, here are our collective thoughts on the chances of LVS's successful pursuit of a license:
Plusses: A solid track record in Macau, stress on mass tourism as a basic marketing mantra, strong financials, excellent operating margins and several years of lobbying already in the books, so LVS, by now, has separated the sheep from the goats and knows exactly who the decision makers will be. Another small but interesting nugget from our conversations today specific to LVS is the perception among Japanese decision makers of the close ties LVS's Sheldon Adelson has with President-Elect Donald Trump. Adelson was an early support of Trump, a big donor and an ideological soul mate. While in the greater scheme of things this may have little resonance, it is a fact and facts are things Japanese legislators and regulators appreciate. No, not quid pro quos at all. Nobody is suggesting that at all. But as one of our Japanese friends told me, loosely translated: "It may not help, but it sure can't hurt."
Our bottom line: We think LVS stands extremely well positioned to win a license, probably the best of all contenders going in. Adelson totes no baggage in previous operations in Japan; there have been skirmishes here and there but nothing that would be unto itself a deal killer, according to our sources.
Minuses: At this point, we don't see any provided the enabling legislation is so restrictive that LVS decides to downscale or perhaps even pass the market entirely and go on to its Vietnam initiative.
Wynn Resorts, Inc. (NASDAQ:WYNN)
Price at writing: $98
Our target by Q2 2017 absent any perceived value premium for a Japanese project: $135. We think this price will be achieved by the rapidly recovering Macau market and Wynn Palace adjustments to its initial slow start. (Its VIP business is already moving up.)
Plusses: By any stretch, this company is the leader in innovative, imaginative projects with a special flair that has characterized the company's projects for decades. Its plans will blow the regulators away - take that to the bank. It's why, despite the politically well-connected mandarins of Massachusetts against it, the company won the most coveted gaming license in that state, i.e., metro Boston. The Japanese are an ancient civilization with a demonstrated appreciation of superb design. This will go a long way toward exciting licensing authorities. Wynn's debt overhang is a consideration for certain so it's our best guess this early in the game that it will partner up with a major Japanese gaming equipment and entertainment company. Perhaps a Nintendo (OTCPK:NTDOY). Yet if the company opts to go at it alone, a round robin call to investment banking friends has yielded a total consensus that should Wynn get awarded a Japanese license, the company will have little or no problem financing "a project of any size or scope."
We see an implied value premium for a Wynn Japan possibility moving from $135 to $165 by the end of Q3 2017.
Minuses: Wynn has had legal problems with former Japanese partners, one of whom is likewise bound to be a bidder for a license.
This was highly a publicized dispute involving millions and bad blood lingers. However, all wounds have a way of healing when the money is shoved to the center of the table. So our group believes it is indeed a minus, that in the end, there will be some kind of Wynn hookup with a Japanese company and lots of kumbaya.
MGM International Resorts, Inc. (NYSE:MGM)
Price at writing: $29.
Our long-standing target: $35, not counting a value premium for Japan. Part of our bullish outlook for the shares was our confidence in a strong performance from its newest project at National Harbor Maryland open December 8th. We think MGM will move to our target of $35 before the first quarter results from National Harbor are reported and from there, we give the stock an implied premium on its very good chances in Japan to $53.
Plusses: Although heavily leveraged as well, we see MGM easily able to finance a Japan project. Its global reach, strong Las Vegas base and improving operating margins are attractive and reassuring despite its debt. We also expect to see more of its current portfolio moving into its parent controlled REIT MGM Growth Properties, Inc. (NYSE:MGP).
Minuses: With MGM there are none. Its corporate responsibility profile is strong and should sit well with Japanese authorities. It is already on the record there as indicating a willingness to invest up to $9.5 billion in a Japan development. That's something of a stretch we believe at this time. The key element here is: No baggage.
Follow up: Over the next several weeks, we'll take a look at other potential license bidders and evaluate them as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.