Sports betting licence for Ascot Sports
We are slightly surprised that Ascot Sports has been reissued a sports betting licence as the government has not confirmed the issuance.

Although it is non-exclusive like Genting Malaysia’s casino licence, we believe that political sensitivity reduces the near-term likelihood of multiple operators.

Ascot’s licence allows bets on all forms of sports activities conducted outside Malaysia. While we are slightly disappointed that only 220 of Berjaya Sports Toto’s (B-Toto’s) number forecast operator (NFO) outlets will be used initially, this is partly compensated by a 24/7 telephone betting facility. The distribution constraints suggest that it could take a longer time before the other two NFOs are roped in as agents.

Size-wise, the RM20 billion mature market size suggested is more than twice the RM8 billion we estimated earlier and is similar to the purported size of the illegal market. Timing-wise, it is not surprising that Ascot Sports is not ready to take bets for the upcoming World Cup.

We do not expect this legalisation to affect Malaysia’s casino and NFO operations. Within our coverage, B-Toto is a beneficiary but the net bottomline enhancement for FY11-12 is minimal at 0.2%-0.5%. We reiterate our overweight on the sector.

Berjaya Corp held a briefing for analysts and fund managers in conjunction with its announcement of the acquisition of a 70% stake in Ascot Sports Sdn Bhd, a private entity of its chairman and CEO, Tan Sri Vincent Tan.

BCorp will pay RM525 million cash in the form of an initial payment of RM400m and deferred payment of RM125 million. Ascot Sports was recently reissued a sports betting licence by the Ministry of Finance. Some key conditions for Malaysia’s first legal football betting licence are:

•     The licence is not exclusive and will be renewed on an annual basis.

•     During the initial stage, only 220 of B-Toto’s 680 outlets can be used as distribution points. All these initial outlets will be in West Malaysia. Expansion plans could involve more B-Toto outlets including those in East Malaysia and also the outlets of other NFOs.

•     Ascot Sports will initially focus on soccer, notably on the popular leagues, ie English Premier League (EPL), Italy Serie A, Spanish Primera Liga and Germany Bundesliga 1. It will also only take on pre-match 90-minute bets at the starting stage. Live betting will only be available later on.
Generally, the sports betting licence allows all forms of sports activities that are conducted outside Malaysia.

•     There will be two forms of betting i) over-the-counter bets at selected B-Toto outlets and ii) telephone betting which will be on an account basis. Telephone betting will run 24 hours where during the initial period, there will be call centres with operator-assisted betting facilities.
Before placing bets, punters would need to pre-register and deposit cash at the outlets or via the various payment gateways. Credit betting is not available.

•     Online betting is not permitted. But Ascot Sports will set up an Internet information website where the interface will have a similar design as existing betting websites. Details like product offerings and odds will be made available to speed up the telephone betting process. Ascot Sports also intends to provide live streaming of sports events via its website eventually.

The company is still ironing out details like tax structure with government officials. It will not be ready to take bets for the Fifa World Cup which starts on June 11. It envisages setting up in time to capture the new EPL season, ie at end-August/early-September.

Comments
A sports betting licence for Ascot Sports. Speculation about the potential legalisation of sports betting in Malaysia has been rife in recent months.

But we were slightly surprised that Ascot Sports has been reissued a licence to take football bets given that the government has not confirmed the issuance so far. So far, government officials have only acknowledged that such licences were being considered.

We gather that similar to Genting Malaysia’s casino licence, Ascot Sports’ licence is not exclusive. Having said that, we note that Genting Malaysia has been operating the hilltop casino as a monopoly over the past 45 years.

For RM10 million+RM10 million. Ascot Sports paid a RM10 million deposit for the reissued licence and will be subject to a RM10 million annual licensing fee. The company is negotiating for staggered payment of the licensing fee, especially since it will take time to ramp up operations.

The RM10 million deposit is lower than the purported RM25 million paid by Tan to the Ministry of Finance back in June 2003.

Limited product offerings as a start. Ascot Sports’ initial product offering seemed limited relative to the illegal bookies. Notably, we view the non-availability of live betting as a shortfall in the initial stage as this segment is estimated to account for 65%-70% of total online bets currently.

Having said that, we note that the company has clearly identified plans to expand its game offerings and betting channels. It was comforting that the licence allows flexibility on this front where bets on all forms of sports activities conducted outside Malaysia are generally allowed.

Limited distribution points... We are slightly disappointed that only 33% of B-Toto’s distribution outlets will be allowed to take football bets at the initial stage as we expected B-Toto’s entire network of 680 outlets throughout Malaysia to be immediately used as over-the-counter distribution points. The distribution constraints suggest that it could take a longer time before the other two NFOs, namely Multi-Purpose Holdings’ Magnum Corp and Tanjong’s PMP can be roped in as distribution agents.

...but partly compensated by phone-betting facilities. But the limited over-the-counter channels are partly compensated by the availability of phone betting. We view the 24-hour phone betting facility positively as most of the European league football matches usually take place at night. It is not surprising that Internet betting is not allowed. However, Ascot Sports is providing an Internet information website, which provides all but the bet acceptance functionality offered by other betting websites. Malaysia’s setup appears similar to that of Singapore Pools which takes both over-the-counter and phone football bets.

The Hong Kong Jockey Club offers both and Internet bets too. In our view, distribution flexibility is important to improve the competitiveness of the legal market and help narrow its gap with the underground segment.

Creating a new segment?
Bet-size wise, Ascot Sports is aiming for the mass market better with over-the-counter bets starting from RM5. Minimum telephone bets, though higher, will still be affordable at RM20. These minimum bets are much lower than the RM50-RM100 currently available through the illegal online sites. We gather that some telephone bets require a minimum wager of RM10,000.

No World Cup boost. We confirmed again that Ascot Sports would not be able to take bets for the upcoming FIFA World Cup, which kicks off on June 11. This is consistent with our earlier view given that the hardware- and software-related setups will take time. We gather that Ascot is working around the clock and expects to capture the new EPL season at end-Aug/early-Sept.

Potentially a RM20 billion market on maturity?
During the briefing, management suggested that the legal football betting market in Malaysia could be worth a whopping RM19.9 billion once matured, much higher than the RM8 billion estimate we came up with earlier. Management used the existing legal football betting markets in Singapore and Hong Kong as a comparison and applied appropriate discount/premium factors for key demographic factors like population size, bet size and gross domestic product (GDP) per capita to estimate Malaysia’s potential market. This exercise is slightly more detailed than our market/nominal GDP estimate.

On an optimistic basis, management expects Malaysia’s legal market to reach that size in five years’ time. But management did qualify that the growth rate will depend largely on how quickly Ascot Sports can expand product offerings and distribution channels.

How profitable can sports betting be?
Over the next three years, Ascot Sports has projected annual net profit of RM30 million-RM210 million. This assumes i) a stagnant 220 distribution outlets, iii) gaming taxes at 10% and iii) a 1% commission to be shared between B-Toto and its agents. Such projections imply net margins of 3%-5%, lower than the low teens enjoyed by the NFOs. We gather that the 10% gaming tax rate has not been fixed. This tax rate is lower than the 25% we projected earlier. A favourable tax structure is particularly important for sports betting given that its prize payout is theoretically higher at 90%.

More political backlash ahead? Meanwhile, it was not entirely unexpected that this latest development has attracted criticism from the opposition. Today’s newspapers quoted Petaling Jaya Utara MP Tony Pua as saying that the award of the sports betting licence was done in the “most opaque” manner in which there were no calls for proposals, no open tenders or auctions for the licence.
He added that the government should withdraw the licence and set up a special parliamentary select committee to review the impact of sports betting in the country. These comments came soon after last Friday’s accusation by Pakatan Rakyat leaders that the government was prioritising profit over social well-being. A strong and determined opposition voice could put the continuity of this licence at risk given the sensitivity of the gaming business in Malaysia. Recall that the licence was originally issued in 2003 but the venture failed to take off due to political reasons.

Valuation and recommendation
Some positives, some disappointments. All in all, we were still slightly surprised that Ascot Sports has been reissued a licence to take football bets given that the government has not made an official announcement on the matter. It was comforting that the licence allows flexibility on product offerings where bets on all forms of sports activities conducted outside Malaysia are allowed.

Although we are slightly disappointed that only 33% of B-Toto’s distribution outlets can take football bets at the initial stage, this is partly compensated by the availability of a 24/7 telephone betting facility. The distribution constraints suggest that it could take a longer time before the other two NFOs are roped in as agents. The RM20 billion matured market size suggested by management is more than twice the RM8 billion we estimated earlier and is similar to the size of the illegal market suggested by the press earlier this week. It was not surprising that management confirmed that Ascot Sports will not be able to take bets for the upcoming FIFA World Cup.

Impact on B-Toto. Earlier on, we estimated that as an indirect beneficiary, B-Toto’s bottomline could see a RM30 million (7% of FY10-12 earnings) annual net profit enhancement assuming i) the market size is RM8 billion, ii) it is the sole distribution agent and iii) the 1% commission is shared equally with its agents. But with only one-third of its outlets being approved for football betting, there is downside risk to our earlier projections.

Using management’s figures, we estimate that the enhancement to BToto’s net earnings over FY11-12 is less than 1%. This enhancement could be even smaller if telephone betting, which B-Toto does not get a share of, forms a bigger chunk of Ascot Sports’ overall sales. Capex-wise, we gather that there will be minimal spending on B-Toto’s end as most of the software investments will be borne by Ascot Sports.

Impact on Malaysia’s other gaming operations. We do not expect the legalisation of sports betting to affect Genting Malaysia’s casino operations. Although sports betting appears to be more closely associated with the NFO business, we also do not expect a material impact on the latter as we believe that i) the profile of punters is generally different and ii) football bets are generally bigger, with over-the-counter and telephone bets estimates to start from RM5 and RM20, respectively.

For the other two NFOs, the cap on distribution channels, even for B-Toto, suggests that their role within the football betting space could be more medium- to long-term in nature.

More liberalisation ahead? This latest reissuance of a sports betting licence is momentous as it marks the legalisation of another form of gaming in a Muslim country. Despite the risk of a political backlash, we are encouraged by this evidence of a strong political will to legalise a new gaming segment in an effort to build up the government’s tax takings.

It could signal more gaming-related reforms ahead, with the closest being possibly a second IR licence in Malaysia. We believe that if the political backlash from the sports betting licence is minimal, it could improve the chances for more liberalisation ahead.

Remaining overweight. We make no change to our earnings estimates, target prices and recommendations for all the gaming companies under coverage. Within our coverage, B-Toto is a beneficiary but the net bottomline enhancement for FY11-12 is minimal at 0.2-0.5%, based on management’s projections. We remain overweight on the sector with regional casino operator Genting Bhd staying as our top pick. Within the NFO space, our preference lies with B-Toto for its pure NFO exposure.

This article appeared in The Edge Financial Daily, May 14, 2010.