Japan’s leading pachinko operators are likely to enjoy a more stable business environment over the next 12 months after registering higher than expected volumes in the six months to 30 September 2018, but the long-term outlook remains challenging as regulations continue to tighten, according to Union Gaming analyst Grant Govertsen.
In a note discussing the FY19 financial results of Dynam Japan Holdings – which last week reported a 2.6% fall in gross pay-ins to ¥386.84 trillion (HK$26.62 billion) and a 4.7% decline in revenue to ¥73.58 billion (HK$5.06 billion) – Govertsen said that Dynam’s gross pay-ins had exceeded expectations while pointing to a similar performance by fellow pachinko operator Niraku GC Holdings.
“While too early to call a trend … it is possible that the industry has found a temporary bottom,” he said. “This potential bottom is also evidenced by slightly higher headcounts during peak operating hours for Dynam.
“With this in mind, we expect the next two fiscal periods to look quite similar to the just-reported 1HFY19, which in turn is cause for us to raise our FY20 estimates.”
However, the good news is likely to be short-lived following new tax and pay-out regulations that will inevitably hit the pachinko industry hard in the coming years.
Japanese Prime Minister Shinzo Abe is set to increase sales tax from 8% to 10% in October 2019, while current results for Dynam and its peers have in part been boosted by the deferment of new machine purchases that will be needed to comply with incoming regulations.
“While there are some signs of stabilizing revenue within low-cost parlors, the clock is ticking with respect to the new regulations that mandate lower volatility machines, which will necessitate higher volumes of purchases in the out periods that are currently being deferred,” Govertsen said.
“At the same time, new lower volatility machines are likely to be less attractive to customers. It is for this reason that we continue to forecast a sharp decline in EBITDA in FY21 (a combination of declining revenue and increasing expenses as older high-volatility machines reach their mandated three-year life cycle and must be replaced by lower-volatility machines).
Ultimately, we also view the headwinds as a discount M&A opportunity for Dynam in the out years as significant numbers of mom and pop parlors are unlikely to survive.
“Between now and then we see little M&A activity and a largely stable number of halls in operation.”