Race meets twice a week may no longer be enough, if Hong Kong Jockey Club is to weather its first-ever downturn

The Hong Kong Jockey Club’s racing operations are facing the possibility of going into the red for the first time in its 120-year history. CEO Winfried Engelbrecht-Bresges is thinking ahead to forestall the shortfall from affecting the many worthy projects that the club supports.

The Jockey Club accounts for about 8 percent of the territory’s tax revenues and is the territory’s largest taxpayer and donor to charitable causes. Engelbrecht-Bresges believes the club is slipping behind because the economic downturn is resulting in lower turnover on betting, and its agreement two years ago to a guaranteed minimum duty payment of HK$8 billion a year is not helpful, especially as government has not honoured another part of the original agreement by granting the club more race days and simulcast opportunities. He cites a tax scheme whereby the club pays between 72.5 and 75 percent in horse race betting duty, the highest in the world, compared to practically zero in Macau, 15 percent in the UK and 9 percent in the US.

Club officials say that in this racing season, turnover has so far dropped by up to 6 percent and the drop could reach 10 percent for the year, which may lead to a shortfall of HK$180-$350 million in gross margin.

The club will also need to top up the guaranteed HK$8 billion payment by some $250 million in the case of a 5 percent turnover drop or up to HK$600 million in the case of a 10 percent fall. This would result in a total drop of between 13 and 33 percent in racing gross margin income, forcing the club to dip into its reserves and thus affecting its charitable contributions. It would be the first time in the history of this institution that its racing operations had not been profitable.

As a not-for-profit organisation, the Jockey Club does not keep any revenue for itself. It is the territory’s largest taxpayer and one of the biggest employers. After paying tax and expenses, the club gives over HK$1 billion annually through its Charities Trust to charitable causes, and tops up its reserves. Its total contribution to the community last year, when combining the taxes and duties on racing, football betting and Mark Six with $1 billion in charitable donations and nearly the same in payments to the Lotteries Fund, was more than HK$15 billion.

This year’s downturn may cause the club to eat into its reserves rather than give more to the community, as had been planned.

"Our plan was to increase our charity contributions, especially in times when the need is greatest," said Engelbrecht-Bresges, "but if we see no change in the framework on which we are permitted to operate, we cannot effect this."

The Jockey Club tax reform package was planned in 2005 and implemented in 2006, binding the club to the HK$8 billion minimum annual payment. However, other sections of the tax reform programme were not implemented, which were to add five more race meets a year plus 20 more simulcasts of overseas races.

Engelbrecht-Bresges said that Hong Kong horses have steadily improved over the last several years and can now compete with the best overseas, while more and more overseas horses are racing in Hong Kong regularly. “Simulcasts will give Hong Kong people more opportunities to bet on their favourite horses, no matter where they are racing,” he said.

"It is ridiculous that under this completely outdated framework we cannot even take bets on our own Hong Kong horses running in world-class races at places like Ascot and Tokyo, because those races do not fall on our local race days. Our being able to broadcast and take bets on these races also combats illegal gambling because if we cannot offer these opportunities, illegal and offshore operators will.”

Currently the number of race meets is fixed to about twice a week, 10 months of the year, and simulcasts where betting is allowed count as a race meet. This means that the club has to hold race meets and simulcasts at the same time, rather than getting a boost from the betting on the simulcast alone. The most recent example was the Tuesday night meet in Happy Valley in early November that coincided with the Melbourne Cup. “We moved the race night to Tuesday to coincide with the simulcast of the Melbourne Cup at Happy Valley,” Engelbrecht-Bresges said, "but in turn this upset a number of our Wednesday night regulars. We even had a situation earlier this year where Hong Kong horses were running in the two biggest Singapore International Races but we could only take bets on one."

When the tax reform package was being negotiated, the club suggested a reduced takeout rate to combat illegal gambling and be competitive with offshore operators. It also proposed additional race meets and simulcasts as a sensible way to expand its revenue base and turnover to meet the guaranteed tax demand. Although the Home Affairs panel of LegCo raised no objection to the full package, the extra race days and simulcasts were subsequently taken out and left for a later stage, to ensure the Amendment Bill's speedy passage. Now, Engelbrecht-Bresges said, "that later stage has come, because we think the extra race meetings and simulcasts will help carry us through the bad times. We are also seeking a waiver for the HK$8 billion tax guarantee."

In addition, he said, the club is urging the government to review the issue of double taxation, which is frustrating its attempts to set up commingling agreements with other jurisdictions. "Almost every jurisdiction is now seeing the benefits of commingling bets yet Hong Kong, which has the most attractive pools of all, cannot be an active participant," Engelbrecht-Bresges explained. "This would be a perfect opportunity for Hong Kong to bring in more tax revenue from overseas at this difficult time."

Community work
The  club has been an influential force in Hong Kong for many years. It paid over HK$1 billion to build facilities for the equestrian events for the Beijing 2008 Olympics in August of this year, turning Hong Kong into what it has termed "The Equine Capital". Overall the response to this effort was strongly positive with both the International Olympic Committee and Beijing commending Hong Kong for its performance.

In addition, the club responded very quickly with a HK$30 million donation to the Sichuan earthquake relief call, which was used for emergency food, medicines and temporary shelters for the victims. The club has made an additional pledge of HK$1 billion for reconstruction. John Chan, the club’s chairman, was in Sichuan in mid-November to sign off on four large projects, including a hospital.

Changing clientele
Racing fans are changing, and the club is keenly aware it must find a way to keep racing fans loyal and attract younger people, who are not as keen on horse race betting as the older generation, and have more leisure, entertainment, as well as gaming opportunities available to them with the development of casinos in Macau, Singapore and elsewhere.

The Jockey Club wants to upgrade its club facilities to keep the regular and racing members coming to the club 365 days a year for events, banquets, corporate meetings, exhibitions, wedding, birthdays, anniversaries and holidays. “We also want to revitalise the image of horse racing by positioning it as a lifestyle entertainment choice,” the CEO said.

Engelbrecht-Bresges started planning a Racecourse Master Plan last year, to give customers more of a lifestyle experience, with shopping opportunities, fine dining and drinking, and other events in addition to racing. The club is contemplating a HK$8-10 billion dollar investment in the Happy Valley and Sha Tin facilities to complete the facelifts within a couple of years.

Engelbrecht-Bresges said, “If we don’t invest in the upgrade, we may be facing an even more severe lost of revenue over the next few years.”

Value to Hong Kong
In the club’s annual report 2007, Engelbrecht-Bresges’s statement about the club’s charitable activities mentioned the HK$1 billion plus giving to support some 100 charitable and community projects, an impressive list of donations. They included a new twin-lift system to help patients at United Christian Hospital, the staging of a six-week series of shows by equestrian theatre Zingaro, the commissioning of a new marine education centre in Sai Kung, and the opening of the third course at the Jockey Club Kau Sai Chau Public Golf Course.

In addition, the Jockey Club was the major donor to the Shep Kip Mei HKJC Creative Arts Centre, contributing HK$94 million towards refurbishing a nine-story derelict factory into a thriving arts hub.

The club is also looking to conserve and revitalise the Central Police Station Compound in Central; the design of which is undergoing modification right now. In addition, the Hong Kong Federation of Youth Groups Jockey Club LEAD Centre was designed to foster creativity. Opening in Cyberport in 2007, the new centre provides a main training base for the Leading through Engineering, Art and Design project. The club donated over HK$13 million to the project.

Learning of the desperate situation of some of the residents of Tin Shui Wai, the club stepped in to develop an off-site Telebet centre in the district that will bring 2,500 badly needed jobs to the area, and also combine it with a Volunteers and Training Centre to upgrade residents’ skills and personal development opportunities.