Pachinko operator plans controversial listing in Hong Kong

Despite the debatable legality of its business, Japan’s second-largest pachinko parlor operator is planning an estimated 20-billion-yen ($251 million) flotation on the Hong Kong Stock Exchange.

Dynam Japan Holdings Co., which operates pachinko parlors across Japan, started formal listing procedures in Hong Kong on July 9 and could schedule its initial public offering as early as this month.

The listing would be a first for a pachinko parlor operator, which exists in a legal gray-zone in Japan. Critics say pachinko, a pinball game played for money, violates gambling laws, but police have in practice taken the stance that the industry is “not immediately illegal.”

Operators and their customers dance carefully around the gambling regulations. Winnings from the pachinko machines are not exchanged for cash in the parlors themselves. Instead, players are given “special prizes,” which can then be exchanged for cash off-site. The prizes are then returned to the parlors through wholesalers.

Dynam Japan, which recorded 900 billion yen in group sales in fiscal 2011, declined to comment on the listing plan, but sources said lawyers in Japan and abroad have advised the company that pachinko is legitimate under Japanese law.

One of the attractions of the IPO and the resulting disclosure of financial information, the sources said, is that it could help the company improve its social standing.

It is not the first time Dynam Japan has looked at a public listing. Earlier plans had to be shelved after an application in 2005 by a smaller pachinko operator for listing on the Jasdaq securities exchange was rebuffed because of pachinko’s legal problems.

The Hong Kong listing would be large even by the standards of mainstream Japanese corporations. Only six companies raised 10 billion yen or more from listings on the Tokyo Stock Exchange during the past five years. Dynam Japan, which is based in Tokyo’s Arakawa Ward, would become the first Japanese company to list itself solely on the Hong Kong Stock Exchange.

However, shareholders would face the risk of a change in the treatment of pachinko by Japan’s law enforcement authorities, which could theoretically force the company to fundamentally review its operations, sources said.

Pachinko is a huge industry with estimated total annual sales of about 19 trillion yen. Many pachinko machine makers and other related companies are already publicly traded.