LotSynergy puts hope in disaster relief lotteries
Mainland lottery investor China LotSynergy is betting that special post-earthquake lotteries for disaster relief will help the company snap its recent losing streak and get back into the black.
LotSynergy, which leases slot-machine-like video lottery terminals (VLTs) to a unit of the state-owned welfare lottery on a revenue-sharing basis, has struggled since February when Beijing launched a nationwide campaign to rein in VLT halls. As a result, turnover plunged 72 per cent to HK$16.59 million in the second quarter, as the company swung to a HK$27.49 million loss from a HK$31.5 million profit a year earlier.
Now management is hoping new disaster-relief lotteries will breathe life into LotSynergy's VLT business. In July, the Ministry of Finance and the Ministry of Civil Affairs announced plans to raise 30 billion yuan (HK$34.3 billion) to 40 billion yuan between now and the end of 2010 from instant scratch-card lotteries and online lotteries to fund relief and reconstruction after the Sichuan earthquake in May.
'This is one big thing that we think will shorten the enhancement period for VLTs,' LotSynergy deputy chief executive Daniel Liao said. 'Because if things continue this way, the government will not be able to raise these funds needed for disaster relief.'
As part of Beijing's lottery 'enhancement' measures, three of the six games on VLTs have been suspended since February, including one that contributed about 85 per cent of all turnover. The opening hours of VLT halls were cut, maximum bets per play were lowered and payout or return-to-player ratios on the machines were raised to 65 per cent from 50 per cent of total wagers.
To offset the slump in VLT business, LotSynergy has been trying since mid-2005 to launch a keno gaming network on the mainland, but its efforts have encountered repeated delays.
Mr Liao said formal approval from the Ministry of Finance was received in July to roll out a network of 2,000 keno terminals across eight provinces in public venues such as restaurants and karaoke halls. The firm will receive just under 1 per cent of turnover from the keno terminals compared with 2 per cent on VLTs.
Analysts are wary of the regulatory risks LotSynergy faces and sceptical about the new venture's prospects.
'Not only are we worried about the policy risks that LotSynergy faces in China, we are also concerned about execution risks in terms of keno rollout,' Citi analyst George Choi wrote in a research note this month. He rated the stock a sell with a price target of 26 HK cents each.
LotSynergy's shares have tumbled 66 per cent this year, closing last week at 32 HK cents. To reassure investors, it spent HK$127.7 million buying shares back in the first half.
