0035.HK

The property developer plans to spin off its gambling business, Palasino, for a separate listing in Hong Kong

Key Takeaways:

  • Fast East Consortium is planning to separately list its Palasino gambling unit, which earned more than HK$40 million last year on nearly HK$530 million in revenue
  • The company operates casinos in the Czech Republic, but also obtained an online gambling license in Malta last year

      

By Lau Chi Hang

Property is second nature for Far East Consortium International Ltd. (0035.HK), but gambling is a much newer affair for this old-school company. Now, Far East is rolling the dice on its newer bet, announcing a plan to spin off and separately last its Palasino Holdings Ltd.Before that, many investors didn’t even know this property developer even had a gambling business in the far-flung Czech Republic.

Palasino operates two main businesses in the gambling and hotel sectors, according to its prospectus filed late last month. The company’s gambling business includes a casino resort and two casinos in the Czech Republic, with a total of 560 slot machines and 59 gambling tables at the end of March. Last November it also received an online gambling license in Malta. The company also owns three hotels in Germany and one in Austria.

Far East Consortium acquired Palsino for $42 million in 2018, and quickly overhauled the operation. But then it collided with one of the biggest black swans of modern times, as the global pandemic dealt a huge blow to its business from 2020 until last year when most of Europe’s Covid prevention policies finally ended.

As Covid receded, Palasino’s revenues grew from just HK$146 million ($19 million) in the 12 months through March 2021, to HK$351 million in the 12 months to March 2022. It rose further still to HK$529 million in the latest 12-month period. Its annual profit rose over the three years from just HK$2.6 million in the 12 months to March 2021 to HK$44.2 million in the latest fiscal year. 

Annual gambling revenue rose from HK$108 million to HK$390 million over the three-year period, as the local industry rebounded after the pandemic.

Czech gambling potential

To see where Palasino might be headed, we should start by looking at the Central European gambling market, which mainly consists of the Czech Republic, Germany, Poland, Austria and Slovakia. Among those, most forms of gambling are legal in the Czech Republic, while any form of non-sports betting is prohibited in Germany. All gambling card games are banned in Austria, and casinos and all forms of gambling are banned in Slovakia’s capital of Bratislava.

The restrictions in most markets have made the Czech Republic a promising land for Central European gamblers, especially those from Germany and Austria. The Czech gambling industry has grown from HK$10.8 billion in 2018 to HK$18.6 billion in 2022, representing a compound annual growth rate of 14.5%, according to third-party data in Palasino’s prospectus. It’s expected to grow further still to HK$31.3 billion by 2027, showing its large potential. Unlike Macau, where the main source of gambling revenue comes from table games, the Czech Republic generates the majority of its gambling revenue – more than 85% – from slot machines.

In 2022, the Czech Republic had over 28,000 certified slot machines and over 4,000 tables. With 492 slot machines, Palasino ranked ninth in the local market.

Germany exposure 

Despite its big potential, it’s important to note the Czech gambling market is also vulnerable to economic slowdowns in nearby Germany and Austria, two of its biggest sources of gamblers. Germany’s five most authoritative economic research institutes last month made downward adjustments to their 2023 growth forecasts from the beginning of the year, forecasting a 0.6% contraction versus earlier outlook for 0.3% growth. They also estimated Germany would grow only 1.3% next year, down from a previous forecast for 1.5% growth. In Austria, GDP growth stood at 1.8% in March, down from a 2.9% growth rate at the end of last year.

Czech casino operators are also exposed to potential new taxes on the gambling industry. The current local gambling tax rate is 35% of gross receipts for slot machines and 23% for live betting games. But the government is considering hiking the live betting tax rate to 30%, which, if approved, would take effect next April. 

Another issue is license renewals. Czech gambling licenses have a relatively short duration of six years, far less than the 10 years in Macau, which means operators constantly face the risk of potentially losing their licenses when they come up for renewal.

Gambling heirs 

Palansino could get some help from its parent as it plays into the Czech Republic. Its Chairman and CEO David Chiu, known locally as “Little Tiger,” is the son of Deacon Chiu, a Hong Kong cinema and entertainment tycoon from the 1960s to 1980s. In addition to owning a number of movie theaters, the elder Chiu was once a major shareholder in Asia Television, one of Hong Kong’s two main TV stations, and the Lai Yuen Amusement Park, a sort of Hong Kong Disneyland of that era.

David Chiu made his business debut at a very young age, borrowing HK$1.8 billion from HSBC in the 1970s, and continued to acquire land in the market. His aggressive style and youth led media to liken him to a newborn calf who wasn’t afraid of tigers, leading a local columnist to give him the nickname “Little Tiger.”

Despite the younger Chiu’s ambition, Far East Consortium International took a hit in 1983 when land prices fell during Sino-British negotiations for the return of Hong Kong to Chinese rule. But he soon shifted his focus to Malaysia where he became a major real estate developer. As Hong Kong’s property market rebounded in the new millennium, Chiu returned and resumed his buying, bolstering his wealth.

The Chiu family’s history in entertainment, which includes its purchase of a 5% interest in the Australian casino The Star Entertainment as early as 2015, reflects “Little Tiger’s” ambitions to become more deeply involved in the gambling business. A successful listing of Palasino could mark the start of a new journey that could parlay his property success into the gambling arena.

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