Rexcapital eyes HK$1b to finance expansion

PUBLISHED : Thursday, 08 November, 2007, 12:00am
UPDATED : Thursday, 08 November, 2007, 12:00am

Rexcapital Financial Holdings, a lottery equipment distributor, is raising about HK$1 billion from a share placement to fund expansion on the mainland, according to a sale document sent to investors.

The firm hired CLSA to arrange the sale of 648 million new shares at HK$1.50 to HK$1.55 each. The price represents a discount of up to 6.3 per cent on the stock's last closing price, the document shows. The offering accounts for 9.1 per cent of the firm's enlarged share capital.

'The offering drew a strong response because of the huge potential in China's lottery sector,' a source said.

Rexcapital, which is engaged in the lottery system and game design businesses, has already distributed more than 50,000 lottery machines in 15 provinces and municipalities on the mainland. The company had a market share of 50 per cent in the computer-ticket games (CTG) segment of the welfare lottery last year.

Lottery equipment is a relatively new business for Rexcapital as the company switched its core operation from financial services only in March last year. The firm reported HK$158 million in revenue from the lottery business last year, 81 per cent of total turnover. Profit from this segment amounted to about HK$44 million.

Rexcapital's first-half sales were HK$195 million, up from HK$27 million a year earlier. However, net profit dropped to HK$16 million from HK$20 million.

Besides selling equipment, Rexcapital holds exclusive rights to operate welfare lottery scratch cards, and is expanding into sports lottery CTGs.

CLSA has a 'buy' rating on Rexcapital with a target price of HK$1.06, which implies a multiple of eight times the firm's 2008 earnings.

'Rexcapital will see a significant earnings jump in 2007 and 2008 as it migrates to a revenue-sharing arrangement, [taking] 2 per cent of lottery turnover from equipment sales. Scratch cards and the sport lottery offer strong growth prospects from a low base,' the investment bank said in a research note.

Mainlanders have spent 50 billion yuan on lottery tickets this year, up 26 per cent year on year.

''Rexcapital will use the proceeds to expand into the video-lottery terminals business,' the source said.