Pachinko hall operator IPO

Dynam Japan seeks to raise $231 million from Hong Kong IPO

The pachinko parlour operator, which launches its retail offering today, is set to become the second Japanese issuer to list in Hong Kong.
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One of Dynam's 355 pachinko halls
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<div style="text-align: left;"> One of Dynam's 355 pachinko halls </div>

Focusing partly on a potential cooperation with gaming operators in Asia and expansion opportunities, Dynam Japan, a pachinko hall operator in Japan, is seeking to raise between HK$1.57 billion and HK$1.79 billion ($202 million to $231 million) from an initial public offering in Hong Kong.

If successful, Dynam will be only the second Japanese issuer to list in Hong Kong, after SBI Holdings, which raised $206 million from a sale of Hong Kong depositary receipts in April last year, according to Dealogic.

However, the deal comes at a tough time for IPOs in Hong Kong. Inner Mongolia Yitai Coal and China Yongda Automobile Services Holdings both succeeded in getting their recent deals done, but they attracted scarce retail participation, reflecting jittery market sentiment. Hong Kong’s Hang Seng Index has shed about 12% from its peak in late February, though it is up 3.4% so far this year.

Dynam said in a statement yesterday that it plans to use a large part of the IPO proceeds to set up 75 new pachinko halls during the three years ending March 2015. The remainder will be used to pay for the potential acquisition of pachinko halls, to upgrade existing information technology and management systems, as well as for general working capital.

Dynam also said that it intends to pay out a large dividend — about 45% to 50% of its consolidated profit for the year ending March 2013.

Pachinko is a ¥19.4 trillion ($247 billion) industry in Japan, accounting for about 29% of the country’s entertainment market in 2010, according to the company. It is the biggest revenue contributor in the entertainment market, followed by dining out.

Pachinko is similar to a vertical pinball machine and is played by firing small metal balls into the playing field of the machine, and into pockets that trigger the release of more pachinko balls.

“Dynam aims to maintain its leading market position and further grow its business through strategic expansion of its pachinko operations,” the company said in the statement. It also noted that it will consider potential cooperation with gaming operators in other locations throughout Asia and will actively pursue expansion when opportunities arise.

Dynam is offering 112 million shares at a price between HK$14 and HK$16 each, according to the company’s statement. Of the total, 90% will be offered to institutional investors, while 10% has been set aside for the Hong Kong retail offering, which starts today and ends on Friday. The listing is scheduled for August 3.

According to the preliminary prospectus, Dynam is the second-biggest pachinko hall operator in Japan based on the total value of pachinko balls and pachislot tokens rented in 2010, and the largest in terms of the number of halls, citing Yano Research. It has 45 years of experience in the pachinko industry, and a nationwide network of 355 halls.

Pachislot is similar to casino slot machines, and is played by spinning the reels on the machine, then stopping them so that the pictures on each reel match, which triggers the release of pachislot tokens. Customers rent pachinko balls and pachislot tokens to play the games, and the balls or tokens won can be either exchanged for prizes or saved for subsequent visits, according to the company.

The pachinko industry is highly regulated and the pachinko operators are subject to various requirements and restrictions under Japanese law and a high degree of oversight by various Japanese regulatory authorities. Japanese law and regulations prohibit cash prizes, whether direct or indirect, so the pachinko industry relies on the cooperation of three separate parties — the hall operator, the prize wholesaler and the prize buyer, the company said. The prize, known as a G-prize, is a decorative plastic card or a small coin-shaped pendant.

Among the risk factors, the company cited in the prospectus intense competition in Japan and the risk of anti-social forces being involved in the pachinko industry. It said that the industry has historically been linked to anti-social forces, typically a euphemism for organised crime. While it has in place various processes and procedures designed to ensure its operations remain clear of criminal gangs, the company said it cannot assure investors that it will be able to prevent them from interfering in its pachinko operations.

As of 2010, there were about 4,100 large and small pachinko hall operators in Japan. The company said that although it operates the most halls in Japan, its market share based on the number of halls is only about 2.8% due to the fragmented nature of the industry. It also faces competition from other types of entertainment and gaming activities, such as web-based gaming and interactive gaming channels.

The company booked a net profit of ¥15.9 billion ($203 million) for the year to March 2012, down 1.8% from a year earlier. Net profit would have been slightly higher were it not for last year’s earthquake, it said in the statement.

Gaming stocks that are already listed in Hong Kong include casino operators Sands China and Wynn Macau.

Piper Jaffray and Shenyin Wanguo Capital are joint sponsors for the deal, as well as joint global coordinators and bookrunners together with Citic Securities.

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