Analysis: Are gambling operators starting to look at Asia?

One of the most peculiar aspects of the regulated online gambling world is how its impact has changed attitudes towards unregulated markets. You could argue this began with the ascent of GVC, but the tolerance and acceptance to grey market revenues has changed markedly over the past two years once profit margins began to feel the pressure. As the UK stalls, Germany, with all its varied regulatory challenges, is the hot market of the moment. LeoVegas’ talks of expanding into Canada and even the likes of Flutter are getting ever more global in outlook.

Playtech, meanwhile, continues to talk ever more openly of its China-facing business, while some of the rising stars and leading lights of the industry are active in the world’s most important economy. Asia, it seems, is no longer a dirty word, and nowhere was that more obvious than Jackpotjoy’s H1 results where it commented on Vera&John’s strong growth in the period. “This has been driven by the segment’s success in new markets, including Germany, Brazil and Japan. It also continues to see significant B2B growth across the broader Asian region,” the operator noted.

And Japan was the star of the show with an astonishing 27% of group revenues coming from the island nation. The reaction from industry observers was not one of shock, although perhaps a little surprise in some quarters, but discussion about how others could follow suit. While Vera&John isn’t alone in that large untapped market, its competition from the major European firms is relatively light with only William Hill of the big listed giants present and mostly private Nordic firms leading the charge with Hero Gaming particularly well invested in the market. But it would be no surprise to see others follow in.

Cracking Asia

For as long as there has been an online gambling industry, there has been talk of Asia as a sort of monolithic block indicated by a wave of the hands in the direction of ‘over there’. What was generally meant was China, although Malaysia, Singapore, Hong Kong and to a lesser extent Indonesia, Thailand, Vietnam and other less populous and wealthy nations with a propensity to gamble were often included. But what was also generally implied was this was a business for someone else, or if you must then through an arms-length subsidiary.

Asia is a huge market for some of the lesser known giants of the sector but remains a tantalising destination for large swathes of the European online gambling industry. Tall tales are told of the potential profits to be made, while others talk of the market as if it’s as black as the dead of night and a place no ethical operator should be active in. As ever in this industry, the truth lies somewhere between the extremes of opinion. But while China will always cause some issues around ethics, and more pertinently optics, Japan may not carry so much weight of history.

With the northern European slowdown showing no signs of abating just yet, it’s possible Japan could be the country that sees more than a few operators pushing into during the remainder of the year. Alongside Germany, Brazil and to a lesser extent Canada, it provides one of the largest near-term grey market cash grab opportunities that exist at the present time with relatively little apparent risk of regulatory pushback. For those not likely to be invested in the future of land-based casino in Japan, there would not appear to be any strong reasons not to test the waters at least.

The Chinese problem

But the same can’t quite be said of China. This remains a market that is just out of reach for most of the industry and one we’re unlikely to see a near-term revision on the risk profile of among investors and analysts. And it will continue to create a valuation issue for those businesses which have pushed into the market in the past couple of years on the back of the opening up of easier payment options. Profit margins are huge and revenue growth is substantial, but how do you value Chinese revenues and how do they fit into a typical mainstream corporate enterprise?

Perhaps though this too could change in the medium or even short term. Valuations in the online gambling industry are so low for businesses churning out cash that private equity is hungrily eyeing up the sector and talk of takeover deals is rife within the sector. A fairly compelling case could be made for taking some of the assets and expertise associated with some current market giants and applying it to a short-term cash grab in the Asian markets.

If you don’t have the media and the markets looking over your shoulder every quarter, then it certainly becomes easier to exploit the opportunities that still exist out there in the wider egaming world. Or perhaps even when faced with slowing growth curves, investors and the market will come around to the idea themselves. Stranger things have happened.