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Asia Markets
Pachinko Parlors Tilt Toward Deals Abroad
From the Wall Street Journal of Tue, 02 Dec 2014 23:52:14 EST
Japan’s pachinko industry is looking overseas for deals and capital. Above, a parlor in Fuefuki, west of Tokyo.
Japan’s pachinko industry is looking overseas for deals and capital. Above, a parlor in Fuefuki, west of Tokyo. Reuters

As international casino giants lobby Japan to let them open up shop there, the country’s own breed of gambling companies are looking abroad to raise funds and strike deals.

Japanese companies that run pachinko halls and make the vertical-pinball machines that fill them are increasingly looking to Hong Kong as a venue for initial public offerings. They have also recently forged partnerships with casino operators in places like Macau and South Korea.

Like many slot-machine makers in the U.S., pachinko companies have been hobbled by an aging customer base and a weak domestic economy. They hope the deals will help them expand. Larger outfits also see the transactions as a way to position themselves for a piece of any potential casino action at home, though political discussions about legalizing gambling have dragged on for more than a decade.

Pachinko is a form of gambling, but parlor operators skirt Japan’s official prohibition by awarding winners prizes that can be exchanged for cash off-site.

Dynam Japan Holdings Co., a Tokyo pachinko company, led the way to Hong Kong with an IPO there in August 2012. Now, at least four pachinko-hall operators are considering listing in the former British colony, according to people familiar with the matter.

Niraku Corp., a small pachinko-hall operator based in northeastern Japan’s Koriyama city, has hired investment bank Shenyin Wanguo (HK) Ltd. to help it raise around US$75 million in Hong Kong by the end of 2015, people with direct knowledge of the deal said.

Palazzo Tokyo Plaza Group, another small hall operator, hopes to list by 2016, people familiar with the deal said. A spokeswoman for the company declined to comment.

Niraku and Palazzo Tokyo would become only the fifth and sixth Japanese companies to go public in the Chinese territory, where casual-wear giant Fast Retailing Co. , which owns the Uniqlo brand, listed last year. A couple of additional pachinko firms are also talking about listing in Hong Kong, people familiar with the matter said.

Pachinko is a huge industry in Japan, with estimated annual revenue of ¥18.8 trillion (US$159 billion) in 2013, but the total has fallen nearly 40% from its peak of ¥30.9 trillion in 1995, according to a Leisure White Paper published this year by the Japan Productivity Center. The number of people playing has dropped 67% over the same period, falling to 9.7 million in 2013 from 29 million, according to the report.

Dynam, which remains the only listed pachinko operator globally, recorded a 12.4% drop in its net profit for the six months ended Sept. 30 to 641 million Hong Kong dollars (US$83 million). Its shares closed at HK$17.32 on Tuesday, up 24% from its IPO price, though they have dropped 53% from their peak in January amid a slowing pachinko market. Dynam says its stock remains attractive because it offers a dividend yield of 5.7%.

Dynam Chairman Yoji Sato said the Hong Kong listing has helped the company, one of Japan’s biggest pachinko operators, “connect with different casino, junket and hotel operators all over the world.”

The company has also invested US$85 million in Macau casino operator Macau Legend Development Ltd. in the past year and a half and is awaiting government approval to operate pachinko machines at one of its partner’s casinos in the city.

Sega Sammy Holdings Inc., one of Japan’s biggest pachinko-machine makers, and its partner, South Korean casino operator Paradise Co. , last month broke ground on a casino resort they are building near Seoul that is scheduled to open in the first half of 2017. Sega Sammy has said that apart from driving revenue, its partnership would help it learn how to develop and operate casino resorts.

The experience could come in handy if Japan ever legalizes casinos. Legalization efforts, in the works for years, have been delayed again due to parliamentary gridlock, but proponents have vowed to keep pushing the legislation. CLSA, a brokerage, believes legalization could be a $40 billion opportunity.

The pachinko industry has historically been seen as linked to organized crime, so branching out beyond Japan hasn’t been easy. When Dynam listed in Hong Kong, the stock exchange required the company to submit documents to prove it didn’t have criminal connections in Japan, delaying the deal for a few weeks, said people with direct knowledge of the matter.

It also has been challenging for Japan’s insular pachinko firms to gain expertise in new areas. In 2007, Maruhan Corp., another major Japanese pachinko-hall operator, invested around 5% in Macau casino Ponte 16 to learn about the business. But the plan “did not work in that way,” said Takashi Kiso, chief executive at International Casino Institute, a Tokyo consulting firm.

Ponte 16 management used to invite the Japanese company’s representatives to monthly operational meetings, said Hoffman Ma, deputy chief executive of the casino. They could listen and ask questions but couldn’t make any decisions for the resort, he said.

“We can’t evaluate the investment at this stage because we are implementing it in our long-term strategy,” a Maruhan spokesman said.

Pachinko companies have also tried and failed to push their machines at casinos in Macau and Manila, said Ben Lee, managing partner of Macau-based consultancy IGamiX. The arcade game is “a uniquely Japanese thing” that hasn’t translated for other gamblers, he said.

If Dynam gets approval to install its machines in Macau, it will be the first time the Chinese territory has had pachinko machines since 2005, government data indicates.

—Takashi Mochizuki and Juro Osawa contributed to this article.

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