20150409-大和证券-A_return_to_the_offline_arena_13页_338kb

REXLot Summary

Core Content

REXLot is a leading lottery company in China, operating in both the Welfare and sports lottery markets. It is involved in traditional lotteries, scratch-card printing and validation, and is a major distributor of scratch cards for sports lotteries. The company has also been involved in the Internet lottery business, primarily through its Okooo.com platform and joint ventures.

2014 Results Overview

The 2014 results were heavily impacted by two major accounting adjustments:

1. Deconsolidation of web operations: REXLot's web operations were carved out due to the lack of majority control over the joint venture with People.cn, which was split 60:40. This resulted in the full removal of the Internet lottery business from the financial statements.
2. Goodwill and intangible asset impairment charge: A one-time HKD848m impairment loss was recorded, leading to a net loss of HKD104m for the year, the first in nine years.

Despite these adjustments, the adjusted 2014 revenue of HKD2.64bn was in line with expectations, representing a 21.7% YoY growth from 2013. The impairment was non-cash and does not affect the offline business.

2015-2016 Forecasts

Given the uncertainty around the resumption of Internet lottery sales, the forecasts for 2015 and 2016 have been revised downward:

• Revenue change: -25.5% for 2015, -34.2% for 2016
• Net profit change: -30.3% for 2015, -32.4% for 2016

However, REXLot is expected to maintain steady growth in its offline business, driven by the rapid expansion of its mobile electronic lottery platform (ELP) and the potential for increased demand in physical stores and telephone betting.

Financial Highlights

• Target price: Cut from HKD0.95 to HKD0.70
• Upside: 11.1%
• Current price (9 Apr): HKD0.63
• Dividend yield: 5.6%
• EPS (adjusted fully-diluted):
  • 2015E: HKD0.053
  • 2016E: HKD0.062
• EPS change (vs. consensus):
  • 2015E: -36.4%
  • 2016E: -31.7%
• Key ratios:
  • PER (2015E): 11.8
  • PER (2016E): 10.1
  • PBR: 1.0
  • EV/EBITDA (2015E): 4.1
  • EV/EBITDA (2016E): 3.4
  • ROE (2015E): 10.0%
  • ROE (2016E): 10.9%
  • ROIC (2015E): 20.2%
  • ROIC (2016E): 20.2%
  • ROCE (2015E): 12.6%
  • ROCE (2016E): 11.2%

Dividend and Payout

• 2014 dividend: HKD307m or 3.3 HK cents per share
• 2015 target payout ratio: 50%
• 2015 estimated dividend yield: 5.6%
• DPS (2015E): HKD0.036

Shareholder Structure

• Major shareholder: Victor Chan (16.5%)
• Shares outstanding: 9,960 million
• Market cap: USD0.81bn
• 3m avg daily turnover: USD4.24m

Key Uncertainties

The resumption of Internet lottery sales remains uncertain, with several factors influencing the outcome:

• Timing: No clear timeline for the return of Internet lottery operations
• Licensing: REXLot may not be issued a license due to increased competition
• Business model: The government may require a new business model for Internet lottery operations

The company's management remains optimistic about the eventual resumption of the Internet lottery business, citing its confidence in the company's position to be a licensee due to its transparent system, measures against side-betting, and financial strength.

Investment Recommendation

• Rating: Downgraded to Outperform (2) from Buy (1)
• Reason: The resumption of Internet lottery sales is viewed as a call option, and the company's offline business remains a key growth driver
• Target multiple: 12x PER, which is roughly 1SD above REXLot's past-5-year PER

Conclusion

While the 2014 results were negatively impacted by accounting adjustments, the adjusted figures reflect steady growth in the offline business. The deconsolidation of the web operations and the impairment charge were significant but non-cash. REXLot's offline business, particularly its mobile ELP, continues to show promise. However, the uncertainty surrounding the resumption of the Internet lottery business remains a key risk factor. The company's management remains confident in its ability to obtain a license and resume operations, but investors are advised to remain cautious until more clarity is provided.