Golf in China: Targeting 3 Million Players

The Wall Street Journal

China is one of the few places globally still building golf courses. As Dow Jones Investment Banker reports, potential sand traps and water hazards mean this may provide an opportunity for buyout firms and course-management companies that cut their teeth turning around busted courses in places such as the U.S. and Japan.

Growth potential for the game does exist in China, but it’s too expensive for most people; stir in a potential golf-course building glut–in the holiday island of Hainan, at least–and returns could get clobbered, pushing weak operators to the wall.

Getting accurate statistics on Chinese golf is difficult. The China Golf Association, for example, thinks there are around 500 courses; KPMG believes it was nearer 300 at end-2008. Muddying the water is a widely flouted 2004 moratorium on new golf-course construction.

Meanwhile, estimates for the number of golfers range from 300,000 to three million! KPMG thinks the number of club members who play regularly is nearer 300,000, partly due to national average initial membership fees being an eye-watering $50,000–4.5 times the level in Spain–and average weekend green fees that weigh in at $150. Depending which statistics you use, there could be as few as 600 players per course in China, suggesting heavy oversupply resulting in around one-sixth the amount of players on China’s fairways compared with in Japan, or an equally extreme dearth of courses, with 10,000 players per course, or 5.3 times more players teeing off on a typical Chinese course than on its American equivalent.

Granted even the three million golfer figure — just 0.2% of China’s population–suggests plenty of room for expansion before the game’s popularity approached what it is in, say, Japan, where it is played by roughly 7% of the population.

China’s courses are concentrated mainly in the wealthy or temperate eastern and southern provinces, such as Beijing, Jiangsu, Guangdong and Hainan.

Hainan, interestingly, is exempt from the 2004 new-course ban, as part of efforts to build out the tourism industry and cater to an expected influx of tourists wielding their five-irons.

The island currently has 21 courses, according to the 2009-2010 Golf Course Guide to China, and quite how many more courses it intends to build is unclear. Some reports put a long-term goal of 100 courses on the island, while others talk of 50 new courses within three years. One Asian golf course operator told Dow Jones Investment Banker that he believed the number would be nearer to 30 new courses over the coming decade.

None of the Chinese golf club operators is listed, so it’s hard to know financial positions and breakeven points. But Japanese operators Accordia Golf Co. Ltd. and Pacific Golf Group International Holdings K.K. make good operating profits from about 150 rounds per day being played at their 130-odd courses each. A former course manager in China told us those levels would be equivalent to peak seasonal play in China, however.

Assuming 350,000 Chinese players today–slightly more than KPMG’s figure–and that the number grows at a rude 10% annual clip gives 900,000 players by 2020. If 40% of those players came to Hainan for a five-day break to play 7-8 rounds, that yields about 1,000 local players per day playing a total 2.7 million rounds for the year. At 152 rounds per day per course that implies the island could support 50 courses by 2020 based on quite rosy domestic demand assumptions and allow the courses to be EBIT profitable assuming a cost structure similar to the listed Japanese plays. Still, the assumptions underpinning that are quite bullish.

Clearly 80-100 courses over the next decade means the island is either going to need to attract a lot more foreign players, or operators will need to change their business model from a luxury service to a mass-market approach in order to create the volume to generate necessary cash flows, or many of those courses will either never be built or some operators will need to go under. What’s more likely is that some combination of the above needs to occur.

When a shake-out happens, it could prove an opportunity for investment funds and savvy course operators too. In Japan, Goldman Sachs and Lone Star made names for themselves through buying up bankrupt courses in the wake of the real-estate bust there, and in the U.S., KSL Capital Partners bought out ClubCorp Inc. in 2006.

Japan’s Accordia Golf paid an average 1.67 billion yen for Ebitda of 0.2 billion yen for acquisitions in 2009, according to Macquarie, which equates to a going-in cap-rate of 12% for courses from mainly distressed sellers.

That could be a benchmark rate if Hainan overshoots in its golf course roll-out.


-Jamie Miyazaki
Dow Jones Investment Banker,
Golf,
Jamie Miyazaki