Feb. 16 (Bloomberg) -- For 126 years, the Hong Kong Jockey Club has survived equine flu, bribery scandals, the Japanese invasion and the return to China. Now the operator that takes more money per race than any other faces a bigger challenge: the Internet.
As members gather in private boxes this weekend, to dine on steamed sea perch with crushed fava beans and sip Chateau Margaux at the Mercedes-Benz Hong Kong Classic Cup, about a third of the money wagered on the thoroughbreds will bypass the club’s monopoly and go to unauthorized Internet betting sites.
“Competition is just a mouse click away,” said Winfried Engelbrecht-Bresges, 55, the Jockey Club’s German chief executive officer. “Our competitiveness is at risk.”
There’s even more at stake for the government. The Jockey Club, the city’s sole provider of horse racing, football betting and lotteries is also its largest single taxpayer. Hong Kong gets about 7 percent of tax revenue --HK$12.8 billion ($1.64 billion) last year -- from the club, helping keep income tax rates in the former British colony among the lowest globally.
The operator is also the city’s biggest source of charitable donations, spending HK$1.52 billion in the year ended June on everything from hospices for single mothers to art archives.
About HK$105 million is bet on every race, according to William Nader, the club’s executive director for racing. That’s more than 50 times the average at U.S. tracks in 2010. After prizes and winning bets are paid out, the Hong Kong government takes at least 72.5 percent of what’s left in taxes. That compares with 25 percent in Singapore.
The windfall for Hong Kong is threatened by a rise in unauthorized Internet betting sites, which avoid paying gambling taxes or royalties to the track, enabling them to offer more attractive odds, said Engelbrecht.
“Online gaming has eroded racing’s capacity to ensure it achieves a fair return from all the wagering that takes place,” said Andrew Harding, who heads the secretariat of the Sydney-based Asian Racing Federation.
Some tracks are trying to fight the problem of “free riding” by online bookmakers by linking with race courses in other countries to take bets on each other’s races. The system, called commingling, broadens the pool of gamblers the race operators can access, allowing them to offer better odds.
French tracks have commingling deals with counterparts in Switzerland, the U.K., Spain, Italy and the U.S. while the Singapore Turf Club has an arrangement with Tabcorp Holdings Ltd. where some Australian bets on Singaporean races are pooled.
Hong Kong’s tax regime makes such deals prohibitive because the city doesn’t make allowances for double taxation, said Engelbrecht. The jockey club’s overseas revenue would be taxed twice -- in the country where the bet was made and in Hong Kong -- removing any profit. The city’s government said in an e-mailed response it is “willing to review the taxation structure for inbound commingling.”
Engelbrecht estimates annual revenue for illegal bookmakers from Hong Kong horse races is equivalent to between one-third and 100 percent of the Jockey Club’s receipts. That means the government lost at least HK$2.6 billion in revenue, based on the HK$7.9 billion in racing taxes the club paid in the year ended March 2010.
Growth in the club’s racing revenue is failing to keep up with global online betting. Hong Kong’s gross racing revenue grew 3.6 percent to $1.5 billion in the year ended June. Internet gambling last year grew 10.4 percent to $11.9 billion, according to GBGC gambling consultants.
One way to beat the Internet operators is to join them. The jockey club already gets 30 percent of its earnings from online soccer betting and Engelbrecht wants the government to legalize expansion into other sports, such as basketball.
That would help it compete with companies such as London-listed Betfair Group Plc, which takes bets on everything from horse racing in Tampa Bay to online poker.
“It’s more and more difficult for Hong Kong to maintain its monopoly and have a thriving business when there are so many competing alternatives out there, both illegal and legal,” said Stephen Burn, Betfair’s Global Racing Director. “There is a tidal wave of people who want to use the new technology.” Burn said Betfair doesn’t take bets on Hong Kong horse races.
Many gambling websites are based in locations such as Vanuatu or Curacao where outside authorities are powerless to shut them down. They don’t pay racing levies or share revenue with race operators and hence can offer better odds.
“They will always return better money than we do,” said Louis Romanet, chairman of the International Federation of Horseracing Authorities, said by telephone. “We have to pay for organization of the races and tax.”
Horse racing has been a pastime in Hong Kong since the British drained a malarial swamp to form a racetrack at Happy Valley in 1841. Races have taken place there ever since, except for a few years during the Japanese occupation in 1941-45, according to the jockey club’s website.
A second track and clubhouse were built at Sha Tin in 1978 to offer weekend races, including the Cathay Pacific Cup, which has a purse of HK$20 million, more than the $2 million in prize money at the Kentucky Derby. The club was forced to suspend racing for one month in 1992, when a third of the horses were afflicted by equine flu, though none died. Four years later the word “Royal” was dropped from the club name before Britain handed Hong Kong back to China in 1997.
The club’s reputation was tarnished when one of the committee of 200 people among its more than 21,000 members allowed to nominate new entrants, John Hung, was sentenced to two years in jail in June 2009 for taking bribes worth HK$450,000. In December last year, the city’s Independent Commission Against Corruption said three other members were under investigation for similar abuses.
Neither the ICAC nor the jockey club would comment on the current investigation. Engelbrecht said the 2009 case was an exception and “we rely very much on quality control of the 200 voting members made up of a who’s who in Hong Kong society.”
Those members include billionaires Victor Fung, chairman of Li & Fung Ltd. and Vincent Lo, chairman of Shui On Land Ltd.
The club has a reputation for weathering storms. During the financial crisis, some members transferred a combined HK$2 billion into their betting accounts (the club doesn’t provide credit) from banks “because they trusted us more,” said Engelbrecht.
That reputation may help the club expand into Internet betting because gamblers take a bigger risk entrusting their money to unregulated sites, said James Hollins, equity analyst at Evolution Group on London.
“In the ideal scenario you have one brand and platform for sports, poker, casino and bingo,” said Hollins.
The seeds of the club’s future may also have been sown in 1997 with the prospect of a new, much larger market in mainland China, where horse racing is currently illegal.
To attract the swelling ranks of Chinese high rollers, the Hong Kong Jockey Club spent $100 million to build a clubhouse in Beijing where it now has 1,000 non-betting memberships.
“It’s important to establish ourselves as a brand,” said Engelbrecht. “Ten years ahead, I’m pretty convinced there will be horse racing in China.”
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