Ϸ ܧ ᐢ സ พ й CHIEF EXECUTIVE S STATEMENT Several years ago, the Club committed to becoming a world leader in racing, betting and sporting entertainment and remaining Hong Kong s premier charity provider. We made this commitment because we believed in the Club s enormous potential to contribute to Hong Kong. This year, through our achievements in racing, our strong support for charity, and above all our successful launch of football betting, we have reaffirmed the value we deliver to Hong Kong. 8
This year, total Group turnover was HK$88 billion. Football betting turnover was HK$16.1 billion, an encouraging result for our start-up year. However, this must be set against a 9% decline in racing turnover. At HK$65 billion, racing experienced its seventh straight year of turnover decline. Over the year, the Club worked hard to reduce costs, with HK$180 million in cost savings achieved. Costs per race have been reduced by 35.6% over the last seven years. As a result, total tax paid to Government was HK$12.18 billion, including HK$8.8 billion in racing betting duty and HK$1.65 billion gross profit tax on football betting. The Club remains Hong Kong s largest single taxpayer, having this year contributed 11.5% of total taxes collected by the Inland Revenue Department. Through the Hong Kong Jockey Club Charities Trust, the Club donated HK$975 million to charity and community projects. The Club was also able to increase its allocation to the Trust to HK$1.12 billion, providing it with funds for future donations. HK$300 million of this allocation was contributed by football betting. On the racetrack, the Hong Kong International Races and the Audemars Piguet QE II Cup confirmed our position as one of the world s most admired providers of racing entertainment. Hong Kong horses continued their rise up the world rankings, with victories in three out of five of our international races, a record 22 in the International Classifications, and our champion horse, Silent Witness, acclaimed as the world s top sprinter. And the growing power of the Club s brand was reflected in the high profile sponsors who joined us Mercedes-Benz for the Hong Kong Derby, and Cathay Pacific for next year s Hong Kong International Races. Overseas, the Club expanded its role in international racing administration, becoming Vice Chairman of the International Federation of Horseracing Authorities, racing s highest body. And as Chairman of the Asian Racing Federation, the Club mobilised international support behind a Good Neighbour Policy designed to combat illegal and offshore gambling, including the betting exchanges that now pose a most alarming threat to the integrity and reputation of racing. Football betting, a government licensed service introduced to counter illegal football betting, was an entirely new venture for the Club. Nonetheless, The demands of racing, football and the Mark Six lottery, and the greater business volumes thereby generated, meant we had to work even harder to exceed our customers expectations. We maintained high levels of satisfaction and remained on track with improvements to facilities and service quality. building on our extensive experience and expertise we rolled the service out within weeks of legislative approval. Here I would like to acknowledge the outstanding team achievement in preparing over 10,000 frontline staff for the launch, an effort that was subsequently honoured with the Hong Kong Management Association s top award for training excellence. Thanks to the team s performance, and the Club s ability to develop products in fast response to market demand, we had a most successful first year, culminating with the Euro 2004 tournament. The demands of racing, football and the Mark Six lottery, and the greater business volumes thereby generated, meant we had to work even harder to exceed our customers expectations. We maintained high levels of satisfaction and remained on track with improvements to facilities CHIEF EXECUTIVE S STATEMENT 9
and service quality. Happy Valley Racecourse saw the opening of new Public and Members Entrances, while at Sha Tin, we unveiled the world s longest high-definition Diamond Vision screen and continued work on the covered parade ring. Offcourse, work continued on the upgrade of our betting branch network. Important progress was also made in customer management and in the provision of greater betting convenience and more timely, value-added racing information. Developments here included the introduction of private digital certificates for faster on-line registration; the launch of STRIDE, the world s first system capable of tracking the position of all horses in realtime; Easy Form, a one-page digest of expert form analysis; and SpeedPOWER, a proprietary race forecasting programme. As Hong Kong s largest charity donor, the Club continued to play an important role in the community. Among the more notable donations was HK$100 million to support Intensive Employment Assistance Projects targeted at helping the unemployed return to work; HK$27.7 million to support the Jockey Club Arts for the Disabled Scheme, the first of its kind in Hong Kong; and HK$28.2 million to support the setting up of a Minimally Invasive Surgical Skills Centre for The Chinese University of Hong Kong at the Prince of Wales Hospital. We were also pleased to see the opening of the Hong Kong Jockey Club DrugInfo Centre and to salute 2,500 of Hong Kong s senior volunteers in a special dinner extravaganza held at Sha Tin Racecourse in celebration of the 25th Anniversary of the Summer Visits Programme. The Club provides membership services to 23,300 Members and their families, for whom we are working to create the finest membership club in Hong Kong and Asia. This year saw further progress towards this goal, with the opening of the new Derby Restaurant & Bar and the refurbished Chater Room at Happy Valley Clubhouse, while our Journey to Excellence staff training programme continues to improve the quality of service. We were also delighted to see Clubhouse satisfaction ratings remain at overall high levels. Another noteworthy achievement was the ISO9001:2000 quality certification obtained by our Trackside Catering team in just nine months. Next year will see further refurbishments, and the phased Yet, despite these achievements and the encouraging initial success of football betting, the Club is deeply concerned by the continuing decline in racing turnover, which in total has dropped by 29.6% since 1996/1997. introduction of a membership management system to facilitate more personalised service as well as more convenient booking services. Underpinning our work to deliver better value to customers and to sustain our charity commitment has been a concerted effort to improve efficiency and effectiveness. For example, we have substantially improved the cost efficiency of stables operations, with a further review now underway. To drive such initiatives we have raised the quality of our management team and continue to enrich the talent mix of our staff. These achievements have required considerable sacrifices by our staff. This year we implemented across-the-board pay cuts of 8-10%, and in past years we have instituted hiring and wage freezes and increased work hours. In view of this, I am particularly appreciative of our employees 10
continuing support for the Club s mission. Yet, despite these achievements and the encouraging initial success of football betting, the Club is deeply concerned by the continuing decline in racing turnover, which in total has dropped by 29.6% since 1996/1997. As a result, tax return to Government was further reduced this year, with racing betting duty return down 7.8% to HK$8.8 billion. Over the last seven years, Government has lost HK$12.6 billion in potential betting tax revenue. We remain concerned that our charity donations may be similarly affected in future. This is a most alarming trend. As I have shown, we have worked hard to remedy the situation through continuous improvements to our racing and betting product and through better cost management. But there is a limit. Running two racecourses and associated infrastructure involves substantial fixed costs. And we have less income with which to do this. In 1974, our commission was 9.1% of turnover; today it is just 5.4%, one of the lowest in the racing world. Nor do we believe it is appropriate to cross-subsidise racing from our football betting surplus. Not only is it poor business practice but it would reduce the amount football could contribute to charity and tax. Hong Kong s economy is improving but we are not confident that racing can recover its position while illegal and offshore operators are free to exploit the Hong Kong market through the loophole of Hong Kong s outdated betting duty system. These operators should not be underestimated. Locally, illegal operators are well entrenched. Overseas, bookmakers and betting exchanges, many of them large commercial entities, are already penetrating Hong Kong using the Internet and inexpensive long-distance telecommunications. The betting duty loophole provides them with an open door to our market. The Club is obliged to deduct an average of 13.5% in betting duty from every bet placed one of the highest rates in the world. Illegal and offshore operators, for obvious reasons, are under no such obligation and can therefore offer a far higher dividend to bettors. In effect, betting duty hands illegal and offshore operators a huge and unfair price advantage, and facilitates their siphoning off of Hong Kong s betting dollar to the loss of Hong Kong s tax and charity. Whatever the past merits of a turnover-based betting duty model, it is clearly no longer workable. This is why we propose the abolition of betting duty and its replacement with a tax on the Club s gross profit, this being calculated as the difference between the total amount bet and the total amount paid out to winning bettors. Hong Kong s economy is improving but we are not confident that racing can recover its position while illegal and offshore operators are free to exploit the Hong Kong market through the loophole of Hong Kong s outdated betting duty system. In making this proposal we have considered its impact on all parties bettors, Government, charities and Hong Kong racing. It is clear to us that it is a win-win for all. The bettor wins because, with no tax deduction on his bet, he receives a higher dividend. Hong Kong racing wins because it is able, at last, to compete on fair terms with its competitors and show the true strength of its racing and betting product. Hong Kong wins CHIEF EXECUTIVE S STATEMENT 11
because, with bettors attracted back to legal channels by higher dividends, turnover increases and a greater surplus becomes available for Government taxation and charity donation. In fact, the only losers are the illegal and offshore bookmakers. The obvious benefits of this approach have already led to it being adopted by the United Kingdom, in late 2001, in response to similar challenges to its market. The UK government understood that while tax returns would decline in the short-term, the greater turnover generated and the recycling effect of higher dividends would ultimately increase tax returns. It also perceived the stabilising effect of the reform, providing a firmer footing for the growth of the racing and betting industries and a more assured flow of tax return. Within one year of the reform, UK betting turnover increased by 82%, while the UK government has declared itself satisfied with the progress achieved. After seven straight years of racing turnover decline, betting duty reform can no longer be put off. With powerful competitive forces ranged against us, turnover-based betting duty has changed from an asset to a liability. If we want to preserve our racing industry, and build a sustainable financial base for tax and charity support, Government must give immediate and urgent consideration to the abolition of betting duty and its replacement by gross profit tax. I would like to close by thanking the Club s staff for a magnificent performance in this most demanding of years. The Board of Management is immensely proud of their achievement in launching football betting, driving forward racing quality and maintaining our charity support. We believe that through their hard work, and with the proactive support of the Hong Kong community, we can continue to deliver world-class sporting entertainment and premier charity support to Hong Kong. Lawrence T Wong Chief Executive 16th July 2004 12
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