Japan is likely to issue casino licences in the summer of 2018. In December 2016, the Japanese Parliament passed the Bill to promote the implementation of specific Integrated Resorts (IR Act), which effectively legalized casinos. We met with Mr. Akimoji, a member of the House of Representatives of Japan, who is also a member of the League of members for the Revitalization of the International Tourism Industry. According to Mr. Qiu Yuan, Congress is working on specific regulations for the IR bill, which will take about a year. The county government needs to indicate whether it intends to carry out the integrated resort (IR) business for approval by the central government, and if the process goes well, it is expected to issue a licence in the summer of 2018.
DYNAM's potential resort project is close to China and South Korea. DYNAM owns a total area of 342760 square meters of land in Shimonoseki City, Yamaguchi Prefecture in southwestern Japan. If it is licensed by IR, DYNAM plans to use the land to develop a casino resort. The place is close to China and South Korea, and there are two main airports nearby, Fukuoka and Ubu Airport. It takes 1.5 to 2 hours to drive from the airport to Xiaguan City. For the time being, it is hard to know whether the Government will improve the transport infrastructure if DYNAM is granted an IR licence.
Grab market share in shrinking industries. Even if it is allowed to operate a casino, it is not expected to make a contribution until 2021 at the earliest, until then, DYNAM's revenue will depend on the operation of the pinball machine. Total bets in the pinball machine industry have declined repeatedly over the past decade, in part because of an increase in the proportion of low-cost pinball machines. DYNAM complies with this trend by grabbing market share, with low-cost pinball machines accounting for 70 per cent of the company, much higher than its rivals'45 per cent. As a result, DYNAM's market share in terms of pinball machines rose from 3.6 per cent in 2013 to 4.4 per cent in 2015. As the industry is very fragmented, with more than 3500 operators, we believe that DYNAM, which has net cash and is a listed company, can continue to increase its market share.
A prudent expansion plan. DYNAM aims to add 40 to 50 pinball pavilions a year, but it won't be easy. In fiscal year 16, it added 49 pavilions (39 from acquisitions). In fiscal year 15, only 18 were added. In order to control rental costs, the company mainly opened new pavilions outside the city center. While mergers and acquisitions may be a faster way to expand, DYNAM is cautious in its bid to acquire pinball venues that have to be closed due to financial difficulties. No matter how to add new pavilions, DYNAM has set a 20% return on investment target.
High dividend, waiting for catalyst. The pinball machine industry is mature and gradually shrinking. Despite the increase in market share, DYNAM's revenue grew at an average CAGR of-1 per cent between FY10 and FY16. DYNAM's strict cost control and robust expansion strategy may help maintain stable revenue. High dividend distribution ratio and high dividend yield make DYNAM shares more defensive. Potential catalyst: Japan successfully formulated specific laws and regulations on IR. Risk: exchange rate fluctuations may lead to foreign exchange losses.