Uncovering the Pachinko Industry: Part 1
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Hey Continuous Compounders,
I have gone down the rabbit hole of uncovering the pachinko industry in Japan. One look at the valuations of pachinko producers, pachinko peripheral suppliers, and pachinko parlours, and you will find that some of the companies in the industry trade for dirt cheap valuations.
In this post, I go through what is pachinko, the valuation of companies within the pachinko industry, and unique insights I’ve uncovered thus far.
This will be a multi-part series, so be sure to subscribe/follow me and share it with a friend who may be interested or is currently investing in the pachinko industry.
Preface:
I have never played pachinko before. In my trip in 2019 to Japan, I attempted to play pachinko, but the location I went to in Kabukicho was super loud. I walked in, and my eardrums were ringing. The store specialized in Hokuto no Ken pachinko or pachislot, so I kept hearing Bruce Lee-esque battle cries. I was looking for assistance to get started, but I couldn’t spot an employee, so after walking past a few machines, my eardrums told me to call it quits.
I should further preface this piece by saying I don’t find much enjoyment in degenerate gambling when the odds are not in my favour. I understand the math, and the odds don’t offer much entertainment value to my rational mind.
I gamble a relatively small sum if it’s a special occasion, but I have a stop-loss policy where I plan how much I will gamble before going into any gambling establishment. Hence, this piece is written from the perspective of a non-gambler; that is where my bias stands.
Table of Contents:
What is Pachinko?
Why am I looking at it?
Interesting insights in the world of Pachinko?
Insight #1
Insight #2
Insight #3
What to look forward to in part 2 and beyond
Intro to Pachinko
For those of you who don’t know what Pachinko is, it is essentially Japan’s version of slot machines.
There are primarily 2 types of machines:
Metal ball Pachinko Machine: (watch the first 30 seconds of the link below)
The goal of metal ball pachinko is to launch a metal ball and have it land inside the “start chucker,” which is essentially a small hole that initiates the jackpot function of the machine. For modern machines, once balls land inside the jackpot hole, a series of mini jackpots, bonus stages, or large jackpots can take place.
Pachislot Machine:
Pachislot machines do not use metal balls but tokens. Pachislot is similar to the western slot machine.
The following video showcases a very popular pachislot based on the anime Hokuto No Ken (Fist of the North Star). (Watch 30 seconds)
Like most casinos, players use cash in exchange for balls or tokens. In the video below, you see the player insert 1000 yen of cash into a pachinko/pachislot peripheral attachment. This loads a prepaid card with 1000 yen. On the pachinko machine, you simply press credit, and you will be given 500 yen worth of balls to play with. (watch 20 secs)
When you are done playing, you will be given a prepaid card. This card stores unused balance and winnings separately. For unused balances, you can immediately get a cash refund on the day of. For your winnings, you can exchange your ball/token credits for prizes. (Watch 30 seconds)
Gambling is illegal in Japan. Pachinko operates in this legal loophole where you can exchange your winnings for prizes. These prizes can be consumer goods, but most players want cash. Players that want cash are given mini gold/silver slabs, and you can take these slabs to a store outside the premise, which is usually extremely close by, to exchange the slabs for cash. (Watch 30 seconds)
Entertainment Value:
What makes Pachinko/Pachislot fun?
In the above video, you can see that when you press the 3 buttons on the pachislot and get certain images/patterns to line up in the slot machine, you not only win credits, but there are additional game elements to the slot machine.
Given the pachislot is based on Hokuto No Ken, an anime based on muscular men fighting, it will introduce certain battle sequences that are from the anime. Fans of the anime series will look forward to this experience.
What gets players to sit at the machine for hours on end is that you have to hit specific jackpots in order for certain battle sequences to play on the screen. Fans of the anime IP will try to hit those jackpots to unlock all the unique sequences/mini-films the machine has to offer.
In a sense, when gamers play mobile gacha games, they are paying for a JPEG; for Pachinko machines, you are gambling to watch an MP4 (video).
Why am I looking at Pachinko?
What initially caught my attention was Gamecard Joyco Holdings (TYO-6249). I ran a screener on Koyfin (save 20% with my affiliate link) and Gamecard came across this list as dirt cheap.
Gamecard generates EBIT margins of 10-30% and has generated so much cash that its EV is now negative. The company has no debt.
Gamecard is not a pachinko producer company, like Sega Sammy, but a pachinko peripheral company that primarily offers prepaid IC card systems to pachinko parlours like the one we saw in the video where 1000 yen was inserted to exchange for borrowed balls.
In the previous section, you should have noticed that the metal balls are inserted into pachinko machines to play. When a player wins a lot of balls (money), it can be quite laborious to move the balls to a ball counter. Often, players will request assistance from pachinko staff. With companies like Gamecard, prepaid card systems are attached to smart pachinko and smart pachislot machines, making game play less labour-intensive. It also makes switching machines much easier if you get bored playing the one you are currently at.
The following are the top 4 prepaid IC card system providers and their market valuations.
*Mamiya is a peripheral company but doesn’t compete with prepaid IC card companies.
As we can see, the above companies trade at quite depressed multiples.
Next are Pachinko machine producers:
*There are more private pachinko producers than what are on this list.
Pachinko machine producers plan, develop, and manufacture (can be outsourced) pachinko machines. The market share of any producer can shift in any given year due to the popularity of title releases. Machines compete on distinguishable IP, entertainment value of game play, and nostalgia.
Some pachinko brands are associated with certan IP title releases. Sega Sammy is known for Hokuto No Ken. Sankyo (Bisty) and Tsuburaya Fields are known for Evangelion.
From the above chart1, it can be seen that market share for Sega Sammy fluctuated significantly from year to year. It showcases what can happen when you have a good year with popular title IP releases versus a year where you don’t perform as well.
Some Pachinko producers own IP (Sega Sammy 6460) and some do not. For an IP like Evangelion, the IP is licensed. What I have observed is that very popular IP that is licensed tends to stick to certain producers if they’ve had previous successes with the IP. Meaning if a producer (licensee) originally licenses an IP and makes a hit machine, the licensor is likely to be sticky to the former licensee.
I can only speculate that this may be because the producer of a hit IP already has the R&D complete; they are likely to be successful in subsequent releases given players will recognize the producer for XYZ IP (Sankyo-Bisty/Tsuburaya Fields is known for Evangelion), and/or the licensee may be willing to pay more than other producers for the IP given they have a track record of sales.
In Japan, when a hit IP machine is released, i.e. Hokuto No Ken, players will flock to the new machines to try out the new gameplay. Sales instantly increase during the initial days/weeks/maybe months the machines become available.
Which leads me to the B2C part of the pachinko industry, the pachinko parlours:
Most pachinko parlours are privately owned, i.e. Maruhan. Some might even be owned by Yakuza. There are only 2 publicly traded pachinko parlour operators, and that is Dynam Japan Holdings (HKSE: 6889) and Niraku GC Holdings (HKSE: 1245). Both trade on the Hong Kong stock exchange.
Special Insights
Insight #1: The Bigger the Better
Despite the number of pachinko parlours declining, we can see the average number of machines per store has increased.
This can be explained by the trend of declining “101-300” machine stores and “300-500” machine stores. The decline in smaller 100-500 machine stores has been partially offset by an increase in “501-1000” and “1000+” machine stores.
Source: Amusement Industry Data Book 2024 Nichiyukyo2
The resilience of the 500-1000, 1000+, and 0-100 format stores (resilient from 2018, has declined 50% from 2008) points to 2 key trends.
Trend #1: Convenience matters
I speculate 0-100 store layouts can be placed in extremely convenient locations so outcompete on convenience. For those who have read my write-up on Fast Fitness Japan, know that one of the reasons why Anytime Fitness was able to expand so quickly and successfully is because they outcompete their large sports facility competitors on convenience. Anytime Fitness gyms are typically near train stations and population-dense neighbourhoods, making working out a seamless transition from someone’s daily commute.
Trend #2: Optionality matters
We mentioned earlier about how when a new machine is released, avid pachinko goers will flock to play the newest release.
Given the above dynamic, my analysis of why large format stores of 500-1000 or 1000+ machine stores do so well is due to optionality. Replace 30 machines in your inventory with a popular release; players compete to play those machines, and while they are waiting, they can play other machines.
Every time there is a popular title release and your store installs that machine, you are creating a reason for customers to come visit your store. In a sense, it’s an event that drives up traffic and revenues, at the expense of capex.
Parlours that operate on a smaller scale of 100-300 and 300-500 are most affected because they cannot compete on the optionality that megastores provide.
Replacing 30 machines out of a 300-machine inventory (10%) is very different from a store that has 1000 machines (3%).
More machines means more variety in machines to choose from. Anyone who has gambled before knows that if you are unlucky at one table or slot machine, you migrate to another one in hopes that it is more lucky.
A store with 100-500 machines might be in a weird middle ground where they don’t attract enough players given their limited optionality. This leads to lower potential to invest in new machines. When they do make a concentrated capex on a new title and it flops, it can have a major impact as the investment is a large % of machine inventory. i.e. 30 new Hokuto no Ken machines in a 300 machine store is 10% of machines. This makes demand forecast mistakes far more costly than big-box stores.
Other reasons that larger stores outcompete smaller stores could be:
operating leverage of employees. “# of players serviced/employee” is higher at larger stores
lower rent $/SF
operating leverage of fixed assets. i.e. prepaid IC card systems, cash refund machines, prize machines
If the larger store is part of a large chain of stores:
Can swap machines if they forecasted the demand of a new title release incorrectly and continue to invest in new machines.
Consistent brand experience. Reputation of paying out players
Customer loyalty programs and membership
If I were a pachinko parlour operator, I would put new title releases at my 0-100 store; after the popularity of the machines decline, I’d move those machines to my larger 500+ machine stores and invest in new machines at my 0-100 store again.
Summary:
The business economics of 500+ machine stores are superior to 100-300 and 300-500 stores. The 0-100 machine store has stabilized in recent years since 2018 and has increased.
My observation is that pachinko parlours are currently in a store optimization period where stores with poor business economics simply get outcompeted and are forced to close.
I believe we could be settling into what the ideal store layout/size will be. As the data shows, it seems that the trend is indicating that a pachinko operator either operates small/convenient stores or large/convenient/high optionality stores.
What this could mean for the industry is that the industry stabilizes at the level of these 3 store types and there is a continuous decline in the 100-500 machine count categories. The safest bet is still 500+ machine stores, as 0-100 has declined since 2008.
For insights #2 and #3, and to receive part 2 when it gets released, consider supporting my substack by being a paid subscriber.
In part 2, I will narrow down my findings, offer unique investment angles, and pitch stocks in areas where the market is overlooking value in the Pachinko industry.
Thanks for reading,
Continuous Compounding - Alan
Insight #2: Players are losing interest in Pachinko
What is the pillar of the pachinko industry? It’s players.
No amount of new machines, new stores, or regulation changes matter if:
players are not interested in playing pachinko/pachislot (alternative forms of entertainment)
the frequency at which they play drops
the amount they bet per visit drops (disposable income)
The following chart shows people aren’t as interested in Pachinko as they used to be.
Translated title below: Trends in Pachinko Participation Rate
Source: Amusement Industry Data Book 2024 Nichiyukyo3
Blue line: Pachinko participation rate based on “Social Life Basic Survey” conducted once every 5 years. Survey asks individuals aged 10 and older
Green line: Pachinko participation rate based on “Leisure White Paper” conducted every year and is based on individuals aged 18 and older.
*By function of asking individuals below the age of 18, the participation rate for the blue line should be lower as the denominator is larger in the equation.
Participation rate is measured as someone who has been to a pachinko parlour at least once in the year in question. Based on the “Leisure White Paper,” the participation rate dropped from 29.6% in 1986 to 7.3% in 2021. Based on the “Social Life Basic Survey,” the participation rate dropped from 18.1% in 1986 to 6.3% in 2021. Both surveys show a decline in participation rate in pachinko.
Reasons for this are potentially:
difficulty in attracting younger audiences to play pachinko, that goes without saying the obvious declining population in Japan
pachinko is still seen in a negative light as it is a degenerate activity
I speculate the decline of pachinko is due to the plethora of other entertainment alternatives one can choose from (video games, mobile games, VR, arcade games, crane games, karaoke, bars, live events, and other 18+ adult activities).
Arcades were once super popular because arcade cabinets offered a gaming experience not yet rivalled by TV consoles, handheld consoles, or PCs. As gaming consoles, PC gaming, and mobile gaming technology caught up and surpassed that of arcades, we saw the decline in the arcade industry.
In my opinion, other forms of gaming offer more entertainment value than pachinko. Pachinko machines do not have better graphics or technology than modern gaming consoles or PCs. The only competitive advantage that Pachinko has is that it is currently the only “legal” form of gambling available to Japanese people.
indirect forms of legal gambling
playing crane games
speculating on Pokemon cards or Pokemon/One Piece booster packs
playing mobile gacha games to collect JPEGs
day trading, speculative investing
In the industry data book by Nichiyukyo and Sega Sammy’s integrated report 2024, the solutions offered to tackle the decline in Pachinko are:
increase appeal of pachinko to younger adults
regulation changes to make pachinko play more about entertainment than gambling
social contributions
gambling addiction prevention programs (self-exclusion, family member exclusion)
publishing reports on the pachinko industry so the public can be better informed about the real impact of pachinko
anti-fraud initiatives
My personal opinion on the matter is that the above efforts won’t be enough to reverse or stabilize the trend.
I believe the idea of using IP younger adults find attractive to lure them in is a good effort, but won’t be enough. The reasoning is because you can find similar IP or more popular IP in other gaming formats. i.e One Piece/Naruto fighting games, card games, and mobile games.
Here are areas I believe could make an impact:
Innovation in the gameplay that caters to young audiences
Invest R&D in technology that allows gameplay to rival that of other gaming platforms.
Make pachinko more appealing to women (2.5% participation rate for women vs 10.3% for men)
Make pachinko more appealing to foreign tourists
The issue I see with the pachinko industry is that I see too much thinking inside the box and not much in the way of thinking outside of it.
The original pachinko was simply pulling a lever to see where the balls would land. Then in the 80s and 90s, as monitor technology improved, innovation came about where Pachinko offered striking visuals, audio, and animatronics. Sure screens have gotten higher definition, but other than graphics, no major leaps in the gameplay experience have really changed from the pachinko in the early 2000s until now.
Here are some ideas I’m throwing out there that randomly came to mind:
Foreigner friendly, English/Chinese/etc speaking pachinko attendants to help guide first-time tourists. English version of pachinko games with English. Or a button on the pachinko machine that allows you to turn on English dub.
Promo coupons in collaboration with nearby hotels to give 1000 yen free play to tourists that present a passport. QR code on the phamplet to direct them to a YouTube video teaching them how to play in their native language.Just like trains with carts specifically designated for women, have designated rooms in a pachinko hall for women to lounge, drink, gossip, and play pachinko. IPs targeted at women (boys love themed pachinko).
Reduced noise area, where machines operate at a lower volume
Pachinko machines are tightly spaced side by side. Not very inviting to those who are claustrophobic. Why not create a VIP area for those who want privacy and more room?
Have a room rental fee or make ordering drinks and food mandatory to use the room. Pachinko from the videos I’ve seen is mostly targeted towards mass market players; how about VIP players who can splurge?Why does Pachinko have to be limited to a small machine? Why not experiment with VR? Pachinko is all about overstimulation; VR would do a great job of that.
Instead of pressing buttons with your hands, why can’t you offer tapping the slot buttons with your feet? Or a pachinko lever for your feet, kind of like the bass pedal on Drum Mania.
Make a rhythm game pachinko. Hitting certain jackpots unlocks certain songs you can play. Getting a full combo allows you to reach the next jackpot. Add a challenge and skill aspect. Have cards that keep track of what songs you’ve played and acquired so you can track your progress and inspire repeat customers.
There are gacha machines where you can get collectible cards, postcards, and images of idols. Have a jackpot where not only do you get a ball/token payout, you get an exclusive trading card, a raffle to a collectible figurine, anything collectible.
Arcade card games where with each play you get a card. For Pachinko, given how inexpensive each play is, 1 or 4 yen, that would not be economical. If you hit a mini jackpot, you get a common card. If you hit a large jackpot, you get a rare card.
Pachinko machines can be operated in a brain-dead manner. What if you made an interactive Pachinko that requires strategy and active thinking? 99% of Pachinko machines are easy to operate. Make a hard difficulty pachinko. The Dark Souls of Pachinko machines. *There is currently a regulation that states that player skill should not be reflected in results so that would get in the way of this idea.
I see a vicious cycle of the Pachinko industry resorting to what works to cater to current fans, former fans, and to get dormant fans to ressurect. But for the continuous decline to stabilize or reverse, drastic change and innovation are required. I don’t think I have the answers; it is clearly a very difficult problem to solve as there are so many great entertainment options out there, especially in Japan.
My current stance is that the Pachinko industry will continue to decline for the foreseeable future unless they do something to increase the entertainment value to rival some of the entertainment alternatives younger adults prefer.
Insight #3: Will it stabilize? How would it stabilize?
I see a few areas and opportunities for Pachinko to stabilize:
decelerated rate of decline in the participation rate
ressurect dormant players
tapping into international gambler player pool
Let’s analyze how the economic system works in pachinko to figure out where stabilization will originate from:
The most important variable is player interest. Players leaving the player pool means less betting and less ggr (gross graming revenues).
But given in “insight #1” we discussed how we may be in a store size optimization period, where the industry could be headed in an amusement facility direction. Where smaller, inefficient locations close and the player pool concentrates on playing at stores with less than 100 or more than 500 machines. If stores are closing at a faster pace than players are leaving, then we can see a period of stabilization as those players will simply go to existing 500+ machine stores and boost their unit economics.
Source: Amusement Industry Data Book 2024 Nichiyukyo4
However, based on the above historical data on player and pachinko hall numbers, the figures indicate that the closure of pachinko halls lags that of the decline in the player pool.
The next potential opportunity for stabilization is based on gender and age demographic data:
Source: Amusement Industry Data Book 2024 Nichiyukyo5
One could speculate that once participation rates enter single digits, that the rate of decline could slow down, but that has not been the case.
It took 15 years for the participation rate to cut in half for men and women from 1991 (men: 36.1%, women: 10.8%) to 2006 (men: 18.9%, women: 5.1%), and again from 2006 (men: 18.9%, women: 5.1%) to 2021 (men: 10.3%, women: 2.5%). If the participation rate of the women demographic is any indication, it’s that the rate of decline has not slowed.
The only silver lining is that efforts to combat the decline in the industry could have higher payoffs than if participation rates were in the double digits.
As a thought experiment, in 2006 men aged 30-34 had a 30.2% participation rate. 15 years later, in 2021, they are 50-54 years old and have a participation rate of 12.2%. Like Pokemon, if there is a wave of pachinko nostalgia that can be reinvigorated in this 18% dormant player pool, that would have a massive effect on participation rate. This is evidenced by how Sega Sammy had a great year in 2023 with their Hokuto No Ken line, as it was a very popular game in the early 2000s. Sammy themselves noted that dormant players returned to experience the new Hokuto No Ken and revisit pachinko nostalgia.
The trillion-yen question is how to get dormant players back into Pachinko and get them to consistently play?
Lastly, as I alluded to in the previous section, I believe the international player pool is a hugely untapped market for pachinko. The problem in the player pool lies in that it is too focused on catering only to domestic Japanese citizens. I experienced this firsthand myself. The machines are easy to operate, but I was too intimidated to get started. Slots are still a very healthy gambling market in the US and generate substantial revenues from mass market participants. I believe if they make foreigner-friendly pachinko offerings, they could easily supplement the player pool with tourist players. Given anime IP is well received in pop culture in the West, it’s not too farfetched to say anime IP Pachinko machines with English audio/subs could tap a former untapped player base.
Ideas:
Kickstart a foreigner-friendly campaign at tourist hotspots (i.e. shibuya/kabukicho in Tokyo). Offer free tours of the facilities and tutorials on how to operate machines in English and other languages.
Tourist designated area where machines are English/Chinese/Etc. friendly (audio or subtitles)
Have specialized English/Chinese/Etc speaking employees to help guide new players on how to get started
Like arcade games, offer tutorial mode for newcomers
Offer promotions targeted at tourist. i.e. 500 yen/1000 yen free play coupons offered to foreign guests staying at nearby hotels or passed out on the street to tourists passing by
I discussed a lot in this post. Thanks for making it this far.
In part 2, I will narrow down my findings, offer unique investment angles, and pitch stocks in areas where the market is overlooking value in the Pachinko industry.
Thanks for reading,
Continuous Compounding - Alan
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https://www.segasammy.co.jp/en/ir/library/ (FY2025 Q3 Data Appendix)
https://www.nichiyukyo.or.jp/databook/23188/
https://www.nichiyukyo.or.jp/databook/23188/
https://www.nichiyukyo.or.jp/databook/23188/
https://www.nichiyukyo.or.jp/databook/23188/
It took me a while to read this, i had a 2 week vacation haha. But i greatly enjoyed the article. I especially liked a lot of your suggestions. Even before you noted it, i was thinking "why not combine with exclusive goodies for playing / winning like a collectible card that you cant just buy on ebay".
Also like the part of "add a bit of skill to the games", too bad its forbidden.
Very cool, looking foward to part 2.