Under the management of Yoji Sato and his younger brother, Kohei, Dynam Japan (6889) has grown from two Pachinko halls to become Japan’s second largest Pachinko operator with a network of 362 halls in 46 years

Game winners
Grace Cao
Monday, July 15, 2013

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The relationship between brothers is as close as hand and foot – so says an ancient Chinese proverb. And the Sato brothers – Yoji and Kohei – are an embodiment of this philosophy.

Under the management of Yoji Sato and his younger brother, Kohei, Dynam Japan Holdings (6889) has grown from two Pachinko halls to become Japan’s second largest Pachinko operator with a network of 362 halls in 46 years. Last year, Dynam Japan listed on the local main board – the first Japanese company to have its primary listing on the Hong Kong Exchanges and Clearing. The genesis of Dynam Japan can be traced back to their father, Yohei Sato, who founded Sawa Shoji in Tokyo in 1967.Twenty years later, Sawa Shoji was renamed as Dynam. Upon the death of the elder Sato, Yoji inherited the family firm, which at that time operated only two halls in Tokyo.

Yoji’s previous experience was working in Daiei, a large-scale supermarket chain in Japan, which convinced him to run the pinball business the same way as a grocery shop.

“Our target was to build Dynam Japan as a famous Pachinko chain in the industry like Walmart a well-known supermarket chain,” he smiled.

On many occasions, the 67-year-old chairman stressed the “non-gambling” side of Pachinko – a reference to the sound of games being played on a mechanical pinball machine that was invented in the 1920s but actually thrived as a commercial business in Japan after World War II.

The vertical pinball machine is played by firing s

mall metal Pachinko balls in rapid succession into the playing field of the machine and into pockets, which trigger the release of more Pachinko balls.

Players are encouraged to buy and win more balls by a variety of prizes, all valued under 10,000 yen (HK$780,902).

These range from snacks and cigarettes to decorative cards with a small embedded piece of gold or silver or coin shaped pendants of gold or silver.

In fact, Pachinko has become a popular pastime across Japan, attracting everyone above the age of 18 such as housewives, college students and white collar workers due to its reasonable costs, which can be as low as one yen for one ball.

It is estimated that one-quarter of the nation’s over-18 population play Pachinko at least occasionally, and up to 30 million people play it regularly.

According to the Leisure White Paper 2012, published by Japan Productivity Center, Japan’s entertainment market is estimated to be worth 64.9 trillion yen, out of which the Pachinko industry is the largest contributor in terms of gross payins amounting to 18.9 trillion yen.

“I used to be a Pachinko fan and played it everyday as a college student,” chief executive Kohei Sato said in fluent English.

The 58-year-old holds a master’s degree in mechanical engineering from Tennessee Technological University and once worked at Eastman Kodak.

“I had many [career] choices when I was around 40 years old. But I hoped to do something with my family,” Kohei said with a smile.

Since then, the two brothers decided to take on different responsibilities in Dynam Japan. While Yoji focuses on the company’s overseas expansion in Asia, Kohei primarily oversees Dynam’s domestic operations and reinforces its brand image.

“I never look upon Yoji as my brother in the company,” Kohei, the more Westernized brother said.

The two never disagree when it comes to the big vision for Dynam Japan, which aims to own 1,000 halls and hold 10 percent of the Japanese market by 2023.

Kohei describes the domestic Pachinko market as “diversified but big” as Dynam Japan can make full use of its huge national network to beat thousands of smaller competitors which run several mom-and-pop shops.

He also said that their firm was the first to target the mass market by lowering the cost of playing games – 1 yen per ball or 5 yen per token – from traditional games that required at least 5 yen per ball.

More than half of Dynam’s machines currently offer cheap games which cost very little to pay, Kohei noted.

“Our peers just find it difficult to make a profit from such a business model,” he said, attributing Dynam’s success to top management skills, efficient cost control measures and good human resources policy.

For example, the CEO said the firm will not add a new hall unless it can provide a 28.90 percent return on investment within 10 years.

“Dynam will focus on promoting the entertainment and recreational side of Pachinko, instead of simply offering Pachinko games,” said Yoji, who revealed that he has plans to introduce the pinball game to other Asian countries.

Dynam tried to introduce Pachinko to South Korea six years ago. but it failed despite the game becoming an overnight sensation.

After the number of halls grew to 7,000 in one year, the Korean government shut them, banning the game.

So far, Pachinko is legal only in Japan and Taiwan.

“Without a legal framework, it is almost impossible to promote Pachinko outside of Japan,” Yoji said.

But for the Sato brothers nothing is impossible.

Dynam has plans to introduce its “next generation machine,” or electronic Pachinko machines and has chosen Macau for its pilot launch.

“Macau’s slot machines are too simple. We are able to offer more attractive entertainment games to tourists,” said the chairman with a smile.

Yoji is concerned about the high- roller gaming business in Macau due to its over-reliance on wealthy mainland tourists.

As a strategy, Dynam Japan plans to target gamers of all ages by introducing various levels of difficulty in all its electronic machines.

He believes Dynam’s presence will boost Macau’s position as the world’s largest gaming hub.

In June, the firm announced that it had subscribed to US$35 million (HK$273 million) worth of shares of Macau Legend Development (1680), which listed on the main board in July.

As a cornerstone investor of the Macau gambling service provider, the two plan to jointly cooperate in the future.

“We expect to install our next generation of gaming machines in Fisherman’s Wharf in one year’s time,” Yoji said.

Works at Fisherman’s Wharf, which is currently being redeveloped as an entertainment complex in Macau, is estimated to be completed in 2016.

Yoji said a professional team that has had rich experience in tapping the South Korean market will be sent to Macau to deal with the technical issues, though he would not reveal when this would happen.

It is a Chinese tradition that the eldest brother takes over the father’s role in a family. In Dynam Japan, Yoji has done the same. He takes care of the family business and also its 9,506 employees.

Yoji describes his management style as one of “surface & root.”

Explaining the theory he said: “People always look at the surface of a tree. They feel pity when leaves fall in Autumn and then become depressed for the coming seasons.

“But it is the root that matters. Changes to the environment are inevitable. But as long as the root is stable, the tree will never be hit and will surely bloom next Spring.”

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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