The Real Business Of 1+3D and The Racing Totalisator

The Edge Weekly reported that the Cheng family is believed to be eyeing the gaming business of the soon-to-be privatised Tanjong plc. Other interested parties are said to be the Genting Group and Multi-Purpose Holdings. The key surprise is that the Chengs could be a new entrant into the NFO (Number Forecast) arena. Sure, many would be keen to claim the last NFO but they could face hurdles in the form of competition objectives and regulatory approvals.



The key is many seem to forget that the "dastardly-run-hands-tied" Racing Totalisator (RTO) will be part of the package. If its just 1+3D operations, thats fine, I am not sure if the bidders are aware of the "most 'beguiling' business unit in the whole of Malaysia". Many would think they know what they are buying, when even Ananda Krishnan cannot get the "political will" to make the necessary changes to the RTO, you think anyone else can???

While AK may be wanting to shed the gaming business to mould the business to be shariah compliant for future fund raising purposes, I doubt that is his main motivation. I mean, he can easily source for lenders, shariah or otherwise. Who does not want a mini-monopoly with the 3rd leg of NFO business in Malaysia? Its a brilliant cash cow. Its the RTO business that is making them crazy.

The Chengs are looking into the deal and have arrived at a valuation of about RM2bn for the entire business. Should the Chengs decide to bid, the proposed acquisition will be done in a private capacity, and that they will probably partner a private equity fund.



Of course the Genting Group would be a keen bidder as well. Four years ago, when Tanjong expressed interest in selling the business, Genting Bhd and Multi-Purpose Holdings had said they were interested, but pricing was a problem then. There has been speculation in the past that Tanjong and Genting could swap assets, with the former hiving off its gaming business in exchange for the latter’s power division. That would make a lot of sense.

For MPHB which owns 51% of Magnum Corp, acquisition of Tanjong’s gaming assets is, on the surface, an easy way to expand its market share. But most NFO outlets are so close to one another that the real value may not be as attractive to Magnum's operations. To relocate some of the outlets to improve yields may not be as easy as it is on paper.

The Cheng family: Headed by Datuk David Cheng, is in the gaming slot machine business, mostly in the Klang Valley. The family is also in the food and beverage industry. One of David’s two sons, Datuk Douglas Cheng, teamed up with Datuk Vincent Tan Ting Wong and Henry Yip to establish the popular Chinese restaurant chain Dragon-I in 2004.

Trust me, AK wants to get rid of the RTO and he wouldn't mind bundling the NFO with it. However all bidders would want the NFO business only and they should get that out of their business model, it will come with the RTO.



For the year ended Jan 2010, NFO under Tanjong recorded an operating profit of RM234.9m while the RTO registered a loss of RM65.8m. For the previous year the RTO business posted losses of RM26.9m. I tell you that the RTO business will be losing RM100m or more a year very soon.

The key here is, what ails RTO. I mean its a monopoly with the 3 turf clubs in Malaysia. For those of you not familiar with horse racing, Malaysian horse racing garners possibly more betting revenue than the Genting Highland casino + illegal football bets + all 4D operators all added together, and is in multiples of that collective sum. I would not be off a lot if I were to say that the number one place on earth for horse race betting is HK, followed by Australia and then Singapore and Malaysia. How on earth can the RTO business be in the red all the time???

Its the most "hands-tied-business" in the country for sure. Its also the biggest sector in the "shadow economy". The country loses billions in taxes foregone, at least we still get taxes from NFOs and the casino business.

There is a lot of inertia with the "boards" that run each turf club, there is so much vested interest. Race fixing is rampant in Malaysia, probably second in the world next to Macau. For each race, the total betting received by the local turf clubs may be around RM300,000. The actual real betting with bookies is conservatively 20x-30x that amount.

Say the government tax is 15% and the RTO gets 10%. Technically the government gets RM45,000, the RTO gets RM30,000. Now, you add the fact that there are at least 30 races a week x 52 = 1,560. The government gets RM45,000 x 1,560 = RM70.2m and the RTO getsRM46.8m. When you start to deduct funds needed to pay the prize money for each race and the usual operating expenses, its a wonder they only make RM80m losses.

If we take the low end of estimate of actual illegal betting, the government is losing 20 x RM70.2m = RM1.4 billion a year in uncollected taxes/duties. While the RTO could very well have gotten 20 x RM46.8m = RM936m in revenue.



Why would the RTO allow that to happen? Firstly, they are not paid as per revenue/profit achieved. It is better to allow for status quo because of "certain information flow". Now, it is so rampant that a substantial number of horse owners are also bookies themselves, how to win at this?

New owners of NFO and RTO would be likely to try to implement the following (which I am sure Tanjong and Ralph Marshall have tried their hardest):
- reduce government taxes by half, the lower the duties, the better the pool payout which will eat into bookies' margins
- improve access, convert at least half of 1+3D outlets to take racing bets and allow for live broadcast at these outlets
- have a truly independent steward board and disciplinary board, now 90% of all riders who "pull" horses get off scot-free, same for the trainers (btw do you know how many jockeys and trainers get bashed up a year ...more than you know)
- have a special task police unit to haul up all illegal bookies, at the tracks and elsewhere, if they can be so effective during the World Cup, this can be done
- remove all the turf club board members, replace with one professional management unit that is paid professionally and with credibility
- work with authorities to block the enterprising internet betting sites continuously

So, think again before you bid for Tanjong's NFO and RTO business. If you want just the former, I think AK will ask to to go fly wau.

Posted in: Saki Aibu