As mentioned in our article about the corona crisis, we see both winners and losers. So far, it has played out, more or less, as we expected. Online casino and all kind of sport that has not been canceled are the big winners. Esport seems to get its real breakthrough as most sports betting operators have hurried to offer its customers a competitive Esports solution.
There have also been some other sports that have come out as winners. For example, betting on horse racing in Sweden increased with about 50% in May, and several operators talk about a strong interest in table tennis. On a geographical level, who knew that the Belarusian Premier League would be one of the most popular leagues to bet on in the spring of 2020. Crazy and indeed extraordinary times.
The impact of the corona crisis on the share prices for the online gambling companies was initially dramatic, with share prices falling over 50% for several of the companies. For the online gambling companies* listed in Sweden, the average decline was 45% between 21st of February to 19th of March, compared to a drop of 30% for OMXSPI during the same period. The decline for the online gambling companies was remarkable, considering they offer resistant digital solutions.
We believe that the main drivers were the worries about an unprecedented impact on the Sports betting vertical as well as some substantial divestments by major shareholders. The impact on sports betting was unprecedented during, at least April, with sports betting activity dropping more than 80% in some cases. Meanwhile, we saw several significant divestments with Bodenholm’s selling its whole 15% stake in Catena Media as well as Rolf Lundström selling large stakes in NetEnt and Betsson.
The comeback has, however, been tremendous, as we have seen close to all the shares increase over 100% since the bottom levels in March. Kambi, NetEnt, Aspire Global, and Catena Media had all passed the 200% mark in the first weeks of June. We believe the market has realized that the negative sports betting impact are short-termed. Meanwhile, the crisis is boosting online penetration, which we believe will have positive long-term effects. Furthermore, we see another factor spelled U.S.A., which is not only a growth market, but now we have really started to see increased interest from American investors, as well.
The international ownership in the larger gambling companies listed in Sweden started to increase already a couple of years ago, and we believe the opening of the US market is one crucial trigger. The international interest becomes extra apparent during the 5th and 8th of June due to the launch of the new ETF BETZ on the New York Stock Exchange. The shares of several companies increased by more than 20% in just two days when the ETF bought shares corresponding several times the normal average daily turnover. The main effect was seen in some of the companies we are covering, such as Better Collective, Enlabs, and Aspire Global, which all had an allocation in the ETF that was very large in relation to their stock liquidity.
The ETF multiplied from around SEK 150m to over SEK 700m in just a few days, which has forced the ETF to increase focus on more liquid assets. However, we believe this is just the start of an increased interest in the gambling sector from American investors, as only a small number of the states have legalized and launched online gambling so far.
*Evolution Gaming, Better Collective, Enlabs, NetEnt, Aspire Global, GiG, Global Gaming, Kambi, Kindred, Betsson, LeoVegas, Catena Media, Net Gaming, Raketech, Scout Gaming & Angler Gaming.
We want to highlight that the US online gambling market is just in its infancy, but we believe that the size of the US market could surpass the European market during this decade. For investors that are interesting in getting exposure to this enormous market, several companies in Redeye´s universe have significant exposure to the US market.
We would especially like to highlight Better Collective and its exposure towards Sports Betting that we believe will explode in the coming years in the US. Better Collective has acquired some high potential assets in the US market that the company can monetize on, and that puts Better Collective in the pole position for sports lead generation in the US. Please take a further look at the company here.
Since the birth of online gambling, the main growth driver has been the shift from land-based to online. The growth has slowed down as the online penetration has reached above 50% in some mature European markets. For Europe as a whole, online penetration was around 25% in 2019, according to H2GC. Most of the listed gambling companies have their core markets in Europe, but there are substantial growth opportunities outside Europe as the global online penetration is around 10%. The strong growth prospect for the online gambling industry has, however, not help much against the increased regulations when it comes to the impact on the bottom-line.
The last couple of years has been much colored by further regulations that have increased the pressure on the companies due to hampered revenue growth and raised gaming taxes. We believe that it is fair to demand a higher discount rate when investing in the gambling sector because of regulatory risks. These risks became extra apparent for Enlabs during the corona crisis as the Latvia authorities took extreme actions to protect its citizens during the crisis.
All gambling licenses were suspended for two months in Latvia, which, in our view, did more harm than good for Latvia, as described in our note from April. The winner from measures like this is likely the black market, and it illustrates one major underlying issue with regulations. The gambling market will always be woundable to populistic political decisions by imposing more stricter regulations, no matter the long-term consequences. It is a delicate balancing act to protect the players while maintaining the channelization at healthy levels. However, some authorities seem to lack the understanding that poor channelization makes the player protective tools useless.
We regard the regulation of online gambling in the US as a positive example of regulations that will add value to the global gambling industry, as it increases the targetable market. Meanwhile, we are somewhat concerned about the development in Europe.
In Germany, the authorities have proposed extensive measures in its new regulation that is aimed to be implemented from 1st of June 2021. The regulation includes restrictions such as EUR 1000 monthly deposit limit for players, limited in-play betting, bet limit on slots, five-second rule on spins, no jackpots, marketing restrictions, no rev share agreements, etc. The proposal would be one of the most extensive regulations in Europe, and if this proposal were to be implemented, the channelization would be very low. We would also expect a substantial decrease of the online gambling industry in Germany. However, there will likely be some amendments before the regulation is finalized according to our sources.
In the UK, the regulation has been extended on an ongoing basis, more or less, every year since the start in 2014. Much of the imposed restrictions are well motivated, such as a ban on credit cards. However, the constant stricter regulations are putting pressure on the channelization as high-stakes bettors look for options outside the license system. The companies have taken further measures during the corona crisis by ceasing all marketing activities on TV and radio.
As mentioned, in Latvia, the authorities suspended all gambling licenses, which the Swedish authorities referred to in its decision to add further restrictions during the crisis. Fortunately, the Swedish authorities have been satisfied with “only” adding a depots limit of SEK 5000 per week for players, players must set a playtime limit, and bonuses cannot excide SEK 100. The additional regulations will be in force from 2nd of July until the year-end.
The current Swedish license system was implemented 1st of January last year but has already started to fall apart. The channelization for online casino is around 75% but will drop to 52-63% due to the deposit limits, according to a report by Copenhagen Economics. Meanwhile, the Swedish Gambling Authority (SGA) is occupied with handing out fines to license holders because they are giving too many bonuses to the players. For example, Kindred received a fine of SEK 100m in March, which was the maximum possible fine.
It goes without saying, if you violate the rules, there will be consequences. However, we like to make a comparison with the very severe violation that the state-owned company Casino Cosmopol was fined for in November 2018. The company received a fine of SEK 8m for “severe and systematic deficiencies in its work to counteract money laundering and terrorist financing” that had been ongoing for several years, according to the SGA. The maximum fine for violating the money laundering act was SEK 10.3m, which indicates that Casino Cosmopol was fined with 78% of the maximum fine.
You could argue that these are two completely different violations, under two different laws. But when a state-owned company receives a fine of SEK 8m (78% of the max fine) for severe deficiencies in its work to counteract money laundering and terrorist financing, while the privately-owned company receives a fine of SEK 100m (100% of max) for handing out too many bonuses. Then you could also argue that the game is rigged in favor of the house.
The Swedish Minister for Public Administration, Ardalan Shekarabi, was reported to the Committee on the Constitution for inadequate supervision of the state-owned Casino Cosmopol. Shekarabi is now also reported to the Committee on the Constitution for a statement about increased gambling on the most “dangerous games” (online casino) during the corona crisis. A statement that seems to lack underpinning based on the statistics from the Swedish tax authorities.
So, it is no wonder why rumors are saying that licensed holders are getting tired of the distorted regulation and have started to prepare for a plan B. However, we believe a licensing system is essential to protect the players. We regard the self-exclusion register “Spelpaus” as a critical tool, and with 52 000 people currently being self-excluded, the need for tools like this is evident. The system is, however, far from waterproof as its way to easy for players to gamble on unlicensed websites.
We believe that the current system is focusing too little on both preventing unlicensed operators and protecting the players. We need player protection that does not encourage players to play outside the license system. On this matter, we regard The Swedish Trade Association for Online Gambling´s (BOS), and nine CEO´s, suggestion as well balanced, read the full proposal here.
We believe B2B licenses can be a useful tool if the B2B companies are prevented from offering their games to Swedish players on unlicensed gambling websites. We also regarded BOS´s suggestion to add a self-exclusion register to the instant loan market as a no brainer. The instant loan issue is not only connected to gambling. It is a matter of overspending and overconsumption where gambling is only a small part of the bigger picture.
The Gambling Market Inquiry, headed by Anna-Lena Sörenson, is reviewing the existing regulation to find suitable ways to improve it. The result of the revision will be reported and published on the 31st of October at the latest. We expect that they will have BOS´s proposal in mind when concluding appropriate improvement measures of the regulation. We also expect to see some sort of marketing restrictions and hope that they will look extra on limiting the marketing exposure toward minors.
In conclusion, about the Swedish regulation, we believe there is much work to be done. There is a great need for improving both channelization and player protection. To reach this, as we highlighted in our article last year, the license holders and the authorities must work closely together to set up the best possible framework. There are, however, considerable doubts about whether the current license system offers legal equality. A vital step to erase any doubt would be to privatize the state-owned gambling companies operating under the license. If the Swedish government believes in the new license system, there is no need for state-owned gambling companies. Hence, we argue that the government should start to plan for the divestment of Svenska Spel.
We expect the corona crisis will be followed by a recession, which also will impact the online gambling industry. Gambling that requires limited efforts for the gambler like the local betting shop or online gambling is viewed as recession-resistant, while casino resorts are vulnerable. We believe the recession-resistance, together with increased online penetration during the corona crisis, is fuelling both growth and interest for the online gambling sector.
In the longer-term, we believe that the trend of increased regulations with continue, which will hamper growth and pressure profit margins for the gambling industry. In this stricter environment, we believe that scale will be an essential competitive advantage, and the consolidation pace will increase. It should benefit larger companies like Kindred, Betsson, Evolution Gaming, NetEnt, and Better Collective.
Companies with strong positions in local markets should also do well, especially if the market has some sort of entry barrier. An excellent example of this is Enlabs that has a strong market position in Latvia, which is a market with a relatively high entry barrier.
The main growth driver will continue to be the online shift, especially in regions outside of Europe, as the online penetration in these markets is only 7%, according to H2GC.
All in all, there is still plenty of room for the online gambling industry to grow, which continues to make the online gambling industry a highly attractive sector to invest in, we believe.
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