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Casino stocks rally on bet Japan will be the next major gaming market as legislation clears hurdle

Players in a Pachinko room in Tokyo.
Andia | UIG | Getty Images
Players in a Pachinko room in Tokyo.

Shares of big U.S. casino companies rose as much as 3 percent in trading Tuesday on news Japanese gaming legislation has cleared a major parliamentary panel and could result in Las Vegas-style casino resort development.

In trading Tuesday, Las Vegas Sands closed up more than 3 percent. MGM Resorts and Wynn Resorts gained more than 2 percent by day's end, but had traded higher earlier Tuesday. Wynn also had news that it was selling a stake in its Las Vegas retail operations.

On Tuesday, the bill won approval in an Upper House committee after getting enough support within Prime Minister Shinzo Abe's ruling coalition. The landmark bill is now expected to get to the full Upper House as early as Wednesday and is widely expected to get approved.

The casino bill previously cleared the Lower House of Japan's parliament. Pachinko gambling already is popular in Japan along with betting on horse racing.

MGM Resorts CEO Jim Murren previously indicated the Las Vegas-based company might eventually spend more than $4 billion on an "integrated resort" in the island nation. The resort would include everything from the casino and hotel space to convention facilities and retail space.

Also, Las Vegas Sands Chairman and CEO Sheldon Adelson has expressed strong interest in the Japanese casino market.

"We continue to believe Japan represents a long-term value creation opportunity for those operators fortunate enough to operate integrated resorts within the market," said Stifel analyst Steven Wieczynski in a research note issued Tuesday. "However, we sense it could take a number of years until a shovel is put in the ground and the selected operators begin generating cash flow on what is expected to be rather sizable capital investments."

Efforts to legalize casino gambling in the world's third-biggest economy have been underway for several years but only in the last year started to gain traction when a bipartisan casino bill was presented in Japan's parliament.

"The reason why everybody's spending the time on this is that the potential is absolutely enormous," Murren said in November when discussing Japan on the company's earnings conference call. "It would dwarf the Singapore market in size and could be extraordinarily lucrative for all the investors, real estate and operators alike."

Overall, researcher CLSA estimates the Japan casino market could one day represent upwards of $40 billion annually to the national economy.

According to Murren, the Japan markets most talked about for casinos are Osaka, greater Tokyo, as well as Yokohama. "I have high confidence that MGM is going to be a front runner in one of these markets," he said last month.

Backers of Japan's casino measure say it will create jobs, boost the economy and promote tourism. It also would be a boost for companies manufacturing electronic casino games.

Critics say the casino bill would increase the problem of gambling addiction in Japan.

Meantime, the Wynn Resorts announcement that it would sell a 49.9 percent stake in its Las Vegas retail operations to Crown Acquisitions was seen as a positive development by industry analysts. It comes as Wynn is preparing to add new retail space in the Las Vegas market in fall 2017.

Union Gaming analyst John DeCree said the transaction with Crown values Wynn's overall retail assets in Vegas at just under $950 million. Also, the analyst said the deal terms are favorable when compared with MGM's move earlier this year to sell its Crystals mall located on the Las Vegas Strip.