Buy the bookie cashing in on Asia’s sports craze

"What team do you support?"

I can't go anywhere in Asia without being asked this question. It doesn't matter if I am sitting in a taxi in Kuala Lumpur, having lunch with a Thai businessman at the Erawan Hotel in Bangkok, or meeting up with an Indonesian investment professional at the Jakarta Stock Exchange, the most common questions I am asked in Asia are almost always related to what football team I support.

(Disclaimer: I don't actually have a favourite, which is probably a reflection of my nomadic nature, and how difficult it is for me to have an emotional attachment to only one place)

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In recent years, a sports craze has swept Asia. And football from the UK and the rest of Europe is king. It's no wonder that Asia is increasingly seen as a major investment opportunity for European clubs.

They are now flocking to the region during the summer season to play promotional matches and participate in marketing events, which are generously covered by local media.

This new love of foreign sports, of course, is part of a boom in consumer spending. And I think this part of the Asian consumer story will grow exponentially. Today, I want to talk about how this will happen, and suggest one way you could profit.

The new middle class loves sports

When I lived in the region for the first time in the early 1990s, most Asians showed little interest in participating in any kind of sport. But this is not the case anymore.

At a corporate event recently, I watched with bewilderment as young attendants hit the gym early in the morning. Later, I heard these guys bragging about their weekends, which included cycling for 100 miles and playing football.

The newspapers here have beefed up their coverage of the sport and health sector. This includes reports on government campaigns to get the general population involved in sports and physical activities.

These developments suggest that increasing Asian affluence has created a strong demand for sports and related activities.

Manchester United has 325 million Asian fans

Surveys indicate that the club has 659 million followers globally, of which 325 million are in Asia. This accounts for 50% of the total. If we add the 173 million in Middle East and Africa, emerging economies account for a whopping 80% of their total fan base.

Interestingly, of the approximately two million shirts they sell a year, 50% of the buyers are from the UK. This suggests that there is a huge potential to grow the club's merchandise business in emerging markets, particularly in Asia.

Moreover, professional football leagues have started to realise their own true market value.

Between 2004-10, the pricing of sports rights rose about 10% a year. Over the last few years, the prices have jumped 40-50% as Manchester United and other sports rights holders have gained a better understanding of its popularity in emerging markets.

Although that growth rate is unsustainable in the long term, it is probably fair to assume that the long-term rate will remain in the double-digit zone. So what's next?

My bet is that the combination of increased personal interest in sport activities and skyrocketing international sport content prices will pave the way for local or regional sport content.

This trend has already started in Indonesia and Malaysia, where the domestic professional football leagues attract more viewers than the English Premier League.

The Asian leagues tend to have longer contracts and lower prices, making them attractive for content buyers.

There are a range of favourite local sports. For instance, Indonesians, Malaysians and Singaporeans love badminton, while Thais really enjoy Muay Thai boxing, and the Chinese are big fans of basketball.

Don't buy the clubs, buy the bookies

One option is cable TV operators, but it looks less exciting because they have to buy sport content at increasingly higher prices, and they really just use sport to attract fresh subscribers to bundles of programmes.

A second option would be through merchandise or local sport brands. Around the Beijing Olympic Games in 2008, a number of sport shoe and accessories manufacturers were listed in Hong Kong, Malaysia and Singapore.

They had started as equipment manufacturers to Adidas, Reebok and other sport multinationals and decided to branch out and develop their own brands and franchises.

After initially surging in price, with help from glowing broker reports, they have been creamed over the last two years. Stupendous expansions proved unsustainable, with problems ranging from managing the distribution network, to the cost of store openings, as well as inventory and brand management.

A third option is the gaming market. Rexlot Holdings (HK: 0555)provides lottery related systems, machines and services to the Chinese lottery market. While the majority of earnings are derived from the welfare lottery (China's version of the National Lottery), Rexlot also have exposure to sport betting.

Sports betting accounts for only 10% of total lottery spending in China versus 30% in Hong Kong, according to estimates by BoA Merrill-Lynch.

But sports betting is taking off. According to China's Ministry of Finance, the country's sports lottery rose 32% versus 25% for the overall lottery market in August. And over the January to August period, the growth rate was 22% versus 18% for the overall lottery market, with a total value of RMB85.2bn ($14bn).

Rexlot trades on a price/earnings (p/e) ratio for 2013 of 6.4 and offers a dividend yield of 3.7%, according to Bloomberg. Pretty cheap for a stock with exposure to a theme that is ready to explode.