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By Chelsey Tam | 07-17-2017

Two gaming stocks that can make a push in Japan

We expect Las Vegas Sands and MGM Resorts to benefit from Japan's deregulation in the gambling sector, says Morningstar's Chelsey Tam.

Chelsey Tam: With Japan having authorized casino gaming in late 2016, we think investors can now benefit from understanding which operators are best-positioned, and the implication for our fair value estimates. We portend that integrated resorts will open in two urban locations: Osaka and Yokohama. We think two regional areas, Nagasaki and Hokkaido, also have a high probability to win gaming license in 2019.

We expect the urban locations of Yokohama and Osaka to generate integrated resort sales of US$11.3 billion and US$8.7 billion, respectively, while the regional areas of Nagasaki and Hokkaido see revenue of US$500 million and US$600 million, respectively. These estimates do not assume major restrictions on local gambling.

We model narrow-moat U.S.-listed Las Vegas Sands and no-moat MGM Resorts to receive the two urban concessions. This is given their strong experiences in operating world-renowned integrated resorts in the key markets and strong capabilities in meetings, incentives, conferences and exhibitions. These two companies have operations in Las Vegas and Macau and Las Vegas Sands itself has an operation in Singapore. We see MGM Resorts as slightly undervalued. We maintain our respective US$62 and US$37.5 fair value estimates for Las Vegas Sands and MGM Resorts.

We think the Japan gaming license will increase our fair value estimates for Las Vegas Sands and MGM Resorts by mid-single-digits and mid-teens percent.

For Morningstar, I'm Chelsey Tam.

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