20140227-新鸿基金融集团-Research_Idea__Non-Casino_Gaming_in_China_27页_2mb

Summary of Research Idea: Non-Casino Gaming in China

Core Content

The research focuses on REXLot, a leading lottery company in China, and its position in the growing non-casino gaming sector. The Chinese lottery market is transitioning to Internet and mobile distribution, which is expected to increase accessibility and potentially introduce new game styles, thereby stimulating demand. REXLot has been actively involved in this transition, with its mobile electronic lottery platform and ownership of Okooo.com, one of the largest online lottery portals in China.

Main Viewpoints

1. Consumer Spending and Industry Growth

• Lottery sales are highly correlated with Chinese disposable income, indicating strong growth potential.
• The minimum price of a lottery ticket is set at RMB 2, making it accessible to the mass market.
• Underlying wage growth is expected to drive an industry growth rate of 10%–15%.
• New games and improved payout ratios are anticipated to attract younger and more professional demographics, potentially adding 5%–10% to the growth rate.
• The Football World Cup may provide a short-term boost to sports betting in the lottery sector.

2. Industry Tailwinds

• The lottery industry is a key source of government revenue for social welfare and sports facilities, with 20%–35% of gross sales allocated for these purposes.
• The government is likely to draw more of the grey market into regulated channels through better payouts, new distribution methods, and innovative games.
• Internet and mobile distribution channels are being legitimized, with the Administrative Measures on Lottery Distribution and Sales in January 2013.
• Internet penetration in China is rapidly increasing, with a key catalyst being the 50% penetration rate, which supports the growth of online lottery sales.
• Smartphones are a suitable platform for online gambling due to their privacy and processing power, enabling more sophisticated games.

3. REXLot's Competitive Position

• REXLot is a market leader in Welfare Computer Ticket Games (CTG), holding over 50% market share in 17 out of 32 provinces.
• The company owns 60% of Okooo.com, one of the most popular online lottery platforms in China.
• REXLot has successfully launched its mobile electronic lottery platform in several provinces, including Liaoning, and is expected to expand further.
• The company has a strong position in both traditional and digital lottery distribution, with a higher commission from mobile distribution (3.5%) compared to CTG (1%–2%).
• REXLot is well-positioned to benefit from the expansion of the lottery market through its diverse business lines and partnerships.

Key Information

• Target Price: HK$1.75, based on 13X 2015 EPS of HK$0.134.
• Valuation: The stock is currently trading at a 2014 P/E of 10X, which is considered attractive given its growth rate and potential.
• Financial Growth:
  • Revenue is expected to grow from HK$1,805m (FY11) to HK$3,239m (FY15).
  • Net profit is projected to increase from HK$756m (FY11) to HK$1,462m (FY15).
  • EPS growth is estimated at 13%–24% over the period.
• Dividend Yield: Expected to rise from 2.4% (FY11) to 6.6% (FY15).
• ROE: Projected to increase from 16% (FY11) to 16% (FY15), with a potential rebound in the future.
• FCF: Free cash flow is expected to rise, with a DCF valuation of HK$1.91 per share.
• Market Cap: HK$9,896m (US$1,275m) as of the latest data.
• Shares in Issue: 8,915.4 million shares.
• Free Float: 86.2%.

Scenario Analysis

Risks

• Policy Risk: The company is operating under the assumption that it will receive official licensing from the Ministry of Finance, which is still pending.
• Regulatory Uncertainty: Changes in payout structures or regulations could negatively impact the company.
• Dilution: Previous convertible bond issues have diluted equity, affecting EPS growth and stock price performance.

Conclusion

REXLot is well-positioned to benefit from the growth of the Chinese lottery market, especially through its Internet and mobile lottery initiatives. The company's strong market share in Welfare CTG and its ownership of Okooo.com provide a solid foundation for future growth. With a conservative balance sheet and a focus on returning capital to shareholders, REXLot is considered undervalued compared to its peers and has potential for long-term value appreciation.