Thinking Points

  • Japan’s $205 billion USD pachinko industry isn’t as big as it sounds when taking a closer look at how revenues are recorded.
  • The industry is on a long-term decline, but there are still pockets of opportunities left
  • Many key players are looking at business areas outside of the industry, but one is going all-in on a low cost growth strategy in pachinko.

Each year, the Japanese slot machine, better known as Pachinko or Pachislot, generates more revenues than Las Vegas, Macau, and Singapore’s combined gambling revenues. Though mainstream media highlights Japan’s recent openness to gambling, Pachinko is one of the few forms of “legal gambling” historically available in the country. Despite its long history, the details on how Pachinko halls operate has largely remained a mystery, thanks to negative impressions typically associated with the gaming industry. In fact, there isn’t a single Pachinko hall operator listed on any of the Japanese exchanges.

What is Pachinko?

Pachinko is an Electronic Game Machine (EGM) which operates much like a pinball machine, except with louder music and even brighter lights. Here is what it looks like:

Source: Pachinko Village

In a 2016 post about JP Holdings (TSE: 2749), I provided a brief description of what a Pachinko machine is. The keyword here is brief. JP Holdings got its start by serving coffee at Pachinko halls. It has since taken a sharp turn and evolved into the largest childcare center operator in Japan. Hence, I didn’t see the need to dig too deep back then. In any case, I decided to take a closer look at the Pachinko industry after talking to Daniel Sims (Hidden Value Blog).

Pachinko players rent small steel balls in order to play. The steel balls bounce around in the Pachinko machine. With some luck, the ball falls into a special hole and the player hits the jackpot. The player is rewarded with a flood of balls, which he can later exchange for prizes. The further reality is that players typically sell the prize to a nearby shop, which is often resold to the pachinko hall’s prize supplier, and then found again in the pachinko hall.

How big is the Pachinko industry?

At its peak in 1995, the Pachinko industry generated 34,862 billion yen ($331,189 million USD) in revenues. The industry has continuously declined since, accounting for 21,626 billion yen ($205,447 million USD) in 2016, or 4.16% of Japan’s 2016 GDP. More recently, the Japanese government has placed even more restrictive measures for the Pachinko industry, mainly reducing the jackpot payout as well as the chances of hitting the jackpot for machines purchased after February 2018.

Source: Pachinko Industry Web Reference

As of 2016, the industry consists of 10,986 stores, 2,833,133 machines, and 9.4 million players. This equates to 1,969 million yen ($18.7 million USD) in revenues per store, 7,633,246 yen ($72,516 USD) in revenues per machine, and 2,300,638 yen ($21,856) in revenues per player each year. According to these figures, you would think the entire population of Japan is addicted. The reality is that a considerable percentage of Japanese people are Pachinko addicts, but not to the extent that you might imagine. This is because Pachinko industry revenues are blown out of proportion, at least when compared to Las Vegas, Macau, Singapore, or any one of the casino hubs. In fact, the comparison should not exist at all. A quick look at basic accounting explains this.

Distorted industry size

The global standard for gaming accounting records revenues as the aggregate net difference between wins and losses. In comparison, the Pachinko industry size is gauged by ball rental revenues. This revenue figure does not take into account the cost of prizes, which distorts revenues considerably.

In the first paragraph of this article, I mentioned that there isn’t a single pachinko hall operator listed on a Japanese exchange. This made it difficult to piece together the real picture of the industry. Fortunately, Dynam Japan Holdings (HKG: 6889), the largest pachinko hall operator in Japan by store count, went public on the Hong Kong exchange in 2012. This made a flood of industry information available. The cost of prizes as a percentage of ball rental revenues in particular was information which nobody in the industry dared to share (Japanese).

Here are a couple things to take into account when looking at Dynam’s operations. Dynam is:

  • Focused on low cost, chain operations.
wdt_IDFiscal Year20132017
1Ball Rental Revenue¥929,158¥817,777
2Prize Cost¥765,197¥660,908
3Net Revenue¥163,961¥156,869
4Net Revenue %17.6%19.2%
Fiscal Year20132017

Source: Dynam Japan Holdings 2013 & 2017 reports

When we compare the Pachinko industry to gambling hubs like Las Vegas, Macau, or Singapore, the “Net Revenue” figures above would be more appropriate. Considering Dynam is a low cost chain operator in a highly fragmented industry, I believe it is reasonable to assume that most Pachinko hall operators generate net revenue margins of around 12 ~ 17%.

On the high end of estimated net revenues, the Pachinko industry would account for 3,676 billion yen ($34,925 million USD). Still larger than Nevada’s $10.76 billion and Macau’s $28 billion in gambling revenues, but smaller than the two combined.

Are there any opportunities?

The key publicly traded pachinko related players include:

wdt_IDCompanyExchangeTickerDescription
1Dynam JapanHKG6889Largest pachinko hall operator in Japan.
2FieldsTSE2767Fabless pachinko/pachislot maker. Recent focus on media contents.
3Universal EntertainmentTSE6425Major pachinko/pachislot maker. Also started casino operations in the Philippines.
4Sega SammyTSE6460General entertainment. Pachinko/pachislot account for 40% of revenues.
5SankyoTSE6417Major pachinko/pachislot maker. Also sells peripheral equipment for pachinko hall operations.
6HeiwaTSE6412Major pachinko maker. Also operates golf courses (42% of revenues).
7Mars EngineeringTSE6419Pachinko related peripheral equipment and systems.
8Fuji ShojiJASDAQ6257Smaller pachinko/pachislot maker.
9Daikoku DenkiTSE6430Information and Control systems for pachinko halls.

Half of the companies above are all-in on the pachinko industry while the other half either already had other business areas or recently started looking beyond pachinko. Some of the more interesting names are:

Dynam Japan

Since going public in 2012, Dynam increased its store count from 356 to 446. Meanwhile, the industry store count declined from 12,149 (2012) to 10,986 (2016). The company is hyper-focused on low cost operations and building a casual environment. Though it is the only publicly traded pachinko hall operator, I would guess that Dynam is a low cost leader. Dynam is probably best positioned to weather through the Japanese government’s increasingly tougher regulatory restrictions.

Fields

Fields is a fabless pachinko and pachislot maker. The company recently started focusing more on its intellectual property (IP) licensing business. This highlights the industry’s close ties to mainstream media. Pachinko machines come with a small display and is usually tied up with some sort of IP like anime, movies, famous singers, etc. The machine in the picture at the beginning of this article contains a fairly well known (and sometimes problematic) comedian Egashira 2:50.

Often times, pachinko makers sign licensing deals with the IP owners. Fields started focusing on IP licensing both in and outside of the pachinko industry. The company also owns rights to Ultraman, a famous superhero series.

Universal Entertainment

Universal Entertainment has stepped into the casino resort industry by opening its Okada Manila Casino Resort in the Philippines. The resort opened in 2017 and is operational, but the company is still adding more features to the facility.

The bottom line

The Pachinko industry is highly fragmented with the largest player holding a mere 4.1% market share. The industry has been on a long-term decline since 2005, but there are still pockets of opportunities, even among players fully exposed to the industry like Dynam Japan. Other key players are starting to focus on pachinko-related business areas like IP licensing and casino operations.

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.

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