IAG 2006-08-09 Aug-Sep - page 10-11

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in China will be slower than previously as-
sumed. CLS itself has revised its roll-out tar-
gets downwards – predicting 20,000 VLTs
and 10,000 Kenomachines by end-2006. As
of end-June, however, Citigroup estimates
only 8,000VLTs and400Kenomachines (the
latter in a test phase) were operating across
the country,making even themoremodest
targets appear hard toachieve.Furthermore,
Tabcorp, themajority JV-partner in theKeno
project, only forecasts for “a couple of thou-
sand”Kenomachinesbyend-2006.
CLS informed
Inside Asian Gaming
that
it is currently ironing out some technical
problems relating to theKeno terminals, and
expects themassive roll-outoriginally sched-
uled forJulytobedelayedtothethirdquarter.
CLS claims that once the technical problems
are resolved,themassive roll-outcanbedone
“veryquickly.”Furthermore,CLSpredicts rev-
enuegeneratedbyVLTs for full-year2006will
befive timesgreater than in2005.
Citigroup also suggests that the exten-
sion of CLS’ exclusive 10-year Keno and VLT
contractsareuncertain,thoughCLScounters
that “in practical and operational aspects,as
wewillhave investedhundredsof thousands
of terminals in the market in 10 years time
– we think it will be very difficult for other
companies to replace us at that time.”Thus,
despite missing its short-term roll-out tar-
gets, CLS remains confident about its long-
termprospects,especiallygivenChina’shuge
marketpotential.
Other Players
Hong Kong-daily
The Standard
ran a feature
on companies involved in the China lottery
market entitled “A Sure Bet” in October, at
which time the stocks were undergoing a
rapid ascent. The article compared the rise
of such stocks to the earlier fad for Macau
gaming-related plays, and pointed out how
several “unprofitablepenny stocks arehitch-
ing themselves to the China lottery boom
through vague announcements of potential
deals, touching off huge share price jumps.”
The article noted that such companies have
hardly prospered. Among companies that
made suchannouncementsandeither failed
Keno
involvesplayerschoosing two toeightnumbers from1 to
80.Acentral computer system randomly selects20numbersoutof
the total 80, andplayers receivepayouts dependingonhowmany
of thenumbers theypicked fallwithin the selectednumbers.
Perhaps it isfittingthataccordingtoancientrecords,Keno issaid
tohaveoriginated inChina almost 3,000 years ago to fundmilitary
provisions,andwasevensaid tohavehelpedpay forconstructionof
theGreatWall. Itwasbrought toAmerica in thenineteenthcentury
by Chinese immigrants, and it was in the US –which accounts for
over70%ofKeno salesworldwide– that thegame really tookoff.
Kenodraws take place once every 3 to 5minutes.Nationwide,
each keno terminal averages about Rmb10,000 (US$1,250) in rev-
enue per day (and Rmb5,000 in Beijing), and each terminal costs
aboutRmb12,500 to install.
Keno terminals are now available in awide range of locations,
including restaurants, karaoke lounges, coffee shops and other
food andbeverage outlets. All that is needed at the point of sales
is a ticket issuingmachine andmonitor for displaying results,with
both linked to thecentralizedoperating system.
Although only Keno itself is available through this network
in China, the system can generally support four to eight different
games. In Australia, virtual horse and car racing are also offered
through theKenonetwork,and thegovernment isexpected toap-
provemoregames in thenear future.
High-FrequencyOptions
Two types of high-frequency lottery games are available inChina
Video Lottery
draws are instantaneous, taking place at the
touchof abutton.VideoLotteryTerminals (VLTs) arevirtually indis-
tinguishable from slotmachines,andanygame that canbeplayed
on a slot machine – including poker, baccarat, roulette, mahjong
anddicegames – canbeplayedonaVLT.Sixgames arenowavail-
ableonVLTs inChina,withmore expected tobe introduced in the
near future.
The difference between slots and VLTs is that slots determine
drawsbymeansof an internal randomnumbergenerator,whereas
VLTsare linked toacentralizedoperatingsystem,whichdetermines
the results.The systemallows lotteryofficials tokeep close tabson
moneywageredandprizemoneypaidand toaddnewgameswith-
out changingequipment.
Nationwide,eachVLTgenerates anaverageof about Rmb5,000
in revenueperday,andcostsRmb25,000 to install.
VideoLotteryTerminalsarecurrently restricted toparloursop-
erated by Beijing Lottery Online Technology (CLO), and through
the centralized system,offer a singlemega jackpot.TheCLOhalls
arefinanced,built andoperatedbyprovincial andmunicipal wel-
fare lottery centres.
All CLO parlours will feature a standardized layout of 200-300
sq.metres in size,with 20-40VLTs and one Kenomonitor.The first
CLOparlourwasopenedat theendof2004,andbyJune2006 there
were267acrossChina featuringabout 8,000VLTs.
assembly, but is considering setting up its
ownproduction line inDongguan.
Meanwhile, CLS also plans to upgrade
Tianyi’s technology through its acquisition
of 90% of Octavian International, a Britain-
based gaming systems company. CLS plans
to thenmarket Tianyi’sVLTs toOctavian cus-
tomers inEurope,SouthAmericaand India.
Off andOn Target
Shares of CLShave recentlybeen solddown
hard after peaking at HK$4.2 on January 19.
OnAugust 11, the company announcedfirst
half2006 lossesofHK$9.03million,compared
to a loss of HK$10.8 in the year-ago period,
and its stock ended the day at HK$1.1. Eq-
uity analysts have alsodramatically reversed
their views on CLS’ stock price. In January,
Citigroup issuedaHK$4.3price targeton the
stock,butby July,hadcut its target toHK$1.1
– right on themoney,but not for thosewho
actedon the January target.
The main reason for Citigroup’s new-
found bearishness on CLS is the view that
the roll-out of both Keno andVLTmachines
2005– accounting for 4.7%of theestimated
US$184billionglobal lotterymarket.
Stillmoreneedstobedonetobringgam-
bling inChina back under the government’s
control.TheChinaCentre for Lottery Studies
at PekingUniversityestimates thenation’s il-
legal gambling activities – including online
betting and illegal lotteries – last year were
worthUS$87billion; ten timesmore than le-
gal lottery takings.Moreover,mainland Chi-
neseareestimated tohavespentoverUS$75
billion annually on gambling overseas in re-
cent years.
Apart from its ongoing crackdown on
illegal gambling, the Chinese government
has a three-pronged strategy to increase the
appeal of its legal gambling options. First,
it aims to offer a better deal. According to a
recentDeutscheBank report, prior toMarch
2005, Chinese lotteries returned only 50%
of sales towinning players, compared to in-
ternational lottery standards of 60-75% and
blackmarketgamblingpayoutsof80-90%.In
March, thegovernment announced itwould
gradually raise returns on selected lottery
games to international standards. The por-
tion of sales revenue going into the Social
Fundwill correspondinglydrop from25% to
10-20%,butDeutscheBankpointsout that a
rise inpayoutof thismagnitudecouldpoten-
tiallydouble legal lottery sales.
Secondly, the Chinese government has
sought to expand the range of legal gam-
bling options in the country. Prior to 2003,
theCWLConly offered twogames, lotto and
instant scratch cards.Proving the choice-cre-
ates-desire thesis, following the launch of a
simplenewgame,3D– inwhichplayerspick
a 3-digit number from 000 to 999 – lottery
revenue soared 80% year-on-year in 2005.
The Deutsche Bank report points out that
when Keno was introduced in California in
1993, lottery sales jumped 30%, and similar
growth was observed when it was brought
to the stateofGeorgia.
In order to offer even greater gambling
choice, the Chinese government introduced
high-frequency lottery games in mid-2005.
Unlike traditional lotteries, where drawings
are typicallymadeonceor twiceaweek,new
technologyallowsdrawings to takeplaceei-
ther every 3 to 5minutes, as with the Keno
network, or even instantaneously through
VideoLotteryTerminals (VLTs).
Thirdly, the government is seeking to
widen the geographical distributionof legal
gambling options in order to competewith
ubiquitous illegal gambling. Traditional lot-
tery tickets are sold inover 60,000dedicated
lottery booths or shops throughout China.
While VLTs will be restricted to parlours op-
eratedby Beijing LotteryOnlineTechnology
(CLO) – themainland’s soleoperator of elec-
tronic lottery ticketing systems, operating
under license of CWLC – keno terminals can
be located in almost any retail outlet with
space for a ticket machine and kenomoni-
tor, including food and beverage outlets,
convenience stores, bars, youth centres and
hotel lobbies. There are currently about 400
kenomachines operating in a testingphase
in separate locations in 23 provinces across
China.CLO aims to expand its kenonetwork
to 60,000 machines by 2008, at which time
it also wants 150,000 VLTs operating across
China, from8,000 in June2006.
Until recently, CSLC outgrossed CWLC,
but the latter took the lead in2004 after the
widely publicised“BMW scandal,” inwhich a
ShaanxiProvincial SportsLotteryCentercon-
tractorwas found tohavebeen settingaside
grand-prize winning tickets for his friends.
One of these tickets had mistakenly gone
to a 17-year-old migrant worker, and when
he went to claim his prize of a BMW and
Rmb120,000, the lottery center insisted his
ticket was fake, prompting the young man
to protest atop a city billboard. The scandal
dealt a big blow to CSLC’s sales, andCWLC’s
lead is likely to widen given its control of
high-frequency games, demand for which is
predicted toexplode.
Oneof thecompanies that stands togain
most from the huge expansion of keno and
VLTs is Hong Kong-listed China Lotsynergy
(CLS). CLS was formerly calledWorldMetals
Holdings andprovidedonlinemetal trading
platforms, but changed its name inOctober
2005and switched its focus to theChina lot-
terybusiness.OnAugust 12005,CLS formed
a joint venturewithAustraliangaming com-
pany Tabcorp. One-third of CLS-Tabcorp is
held by CLS and the remainder by Tabcorp,
and the JVwasawardedanexclusive10-year
contract with CLO to assist in the roll-out of
China’s first nationwidekeno system,provid-
ing CLOwith softare, central systems, termi-
nals and other technical support. CLS-Tab-
corp began testing its Keno network at the
start of this year, and has ambitious roll-out
targets.
In January,CLSpaidHK$980million for a
50%stake inCorich International,whichowns
Tianyi Electronics, amainland companywith
a10-yearexclusiveagreement tosupplyVLTs
toCLO. WhileCLS-Tabcorp receives0.92%of
keno revenues, Tianyi is entitled to 1.6% of
VLT takings. Tianyi currently outsources VLT
Unlike traditional lotteries,
where drawings are typi-
cally made once or twice
a week, new technology
allows drawings to take
place either every 3 to 5
minutes, as with the Keno
network, or even instan-
taneously through Video
Lottery Terminals (VLTs)
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