Investors win big with bet on Chinese lottery firm's shares
Seen as a cleaner option than casinos, China is expected to overtake the United States as the world's biggest market for lottery ticket sales by 2015
Reuters in Hong Kong
Every day during his lunch break, Shenzhen businessman Shen Bin buys three lottery tickets for about 33 US cents apiece and watches to see if his chosen numbers flash across television screens suspended from the ceiling.
“I haven’t won yet. Hopefully one day. But for now, it doesn’t matter because the money goes to charity,” Shen said in the brightly lit store on a busy road.
Half a world away in New York, investors in Chinese online lottery platform 500.com have found their own winning ticket: the stock has nearly tripled from its UA$13 initial public offering price in the six weeks since its New York Stock Exchange debut.
500.com, the only Chinese lottery firm listed in the United States, is among a handful of listed companies that stand to benefit as China whittles down thousands of private lottery operators to a handful of licensed and regulated firms serving more than 400 million punters, industry experts said.
“Over the next five years, it is very clear that the Chinese market will continue to grow very quickly and the government regulatory regime will become more open and transparent,” said Zhengming Pan, chief financial officer at 500.com.
With 20 per cent growth rates projected for the next three years, China is expected to overtake the US and leap into the top spot by next year. The US lottery market is expected to show single-digit percentage growth during the same period.
Sales revenue generated by the lottery industry in the United States, the world’s biggest lottery market. was US$71 billion in 2012, compared with US$43 billion in China, according to data from China’s Ministry of Finance and the US-based North American Association of State and Provincial Lotteries.
With just 7-8 per cent of Chinese adults buying lottery tickets, compared with 70-80 per cent of adults in the Asia-Pacific region, the government is keen to lure more punters with improved payouts, new products and wider distribution channels, industry executives say.
“The Chinese government wants to consolidate the current lottery market, making it easier to control and regulate,” said Hoffman Ma, deputy chairman of Success Universe, a leisure and gaming company authorised to provide sports lottery sales agency services in three provinces.
China caps jackpots at 10 million yuan (HK$12.7 million). Tickets sell for 2 yuan to 200 yuan, with proceeds supporting sports and welfare charities.
Lottery tickets are sold through authorised stations ranging from dedicated lottery stores to counters in supermarkets, post offices and gas stations.
Beijing is expected to announce new rules this year that will clarify and detail legislation for the fast-growing industry.
Companies like Okooo.com, the web platform of lottery terminal provider REXlot, which have a solid reputation, technological capabilities and government background, could win new licences, said research house Cinda International.
Okooo.com processed lottery orders worth 6 billion yuan in 2012 and became the exclusive partner of state-backed media website People.cn in August.
Just a few years ago, China’s lottery market consisted largely of traditional paper lotto tickets. Now, single-match games – where players bet on the results of basketball or football – video lottery terminals and scratch games are more common.
The internet and the telephone became legal lottery channels at the end of 2012, but online tickets still have to be backed by paper stubs until an actual online market is created.
The Chinese government has so far contained casino gambling to Macau, in part because of social concerns. Officials consider the lottery system more sanitised, with fewer negative effects on local citizens, said Chen Haiping, a professor at Beijing Normal University’s lottery research centre.
“It is not realistic to completely ban all forms of gambling. If the government opens gambling, it faces ethical issues, but if it does not, neighbouring countries will continue to attract Chinese tourists to gamble, and from the government’s point of view that is a loss of state income,” said Chen.
Hong Kong-listed AGTech won government approval to launch its virtual sports games in some provinces. These games are aimed at middle- to upper-income Chinese rather than the lower-income workers who account for the bulk of lottery purchasers.
AGTech’s share price has surged some 205 per cent over the past year.
John Sun, AGTech’s chairman and chief executive, expects the industry to become more open in the next five years, with new products and channels. He remains concerned, however, that the industry needs a strong gaming commission or regulator to set standards and monitor operators.
“In the gaming industry, integrity is the most critical foundation,” he said. “If you don’t have good compliance or a good check and balance, the degree of credibility is a big issue.”