China Lotsynergy Executive Vice President and CFO Daniel Liao explains the background to the Chinese central government’s decision to expand the distribution channels for the country’s lottery products
China’s lottery journey began with Premier Deng Xiaoping’s realization that ideology had to give way to economic pragmatism if the Communist Party was to survive, leading to the introduction of his “socialism with Chinese characteristics” from the late seventies. This, along with the recognition that illegal gambling was rampant in China, prompted the introduction of welfare lotteries in 1987 in order to provide a regulated outlet for mainlanders to fulfil their gambling desires, with lottery profits going to fund social welfare—the need for which increased as a result of Premier Deng’s economic reforms that resulted in massive layoffs from stateowned enterprises.
Two agencies oversee lotteries in China. The China Welfare Lottery Issuance Centre (CWLC) was established in 1987 to raise funds for social welfare. The China Sports Lottery Administration Centre (CSLC) was set up in 1994 to fund sports development, and in addition to lottery-type games, also offers limited football betting on matches in the major European leagues. Chinese lottery sales have grown at a compound annual rate of 30% since 1987 to reach RMB166.3 billion (US$25.7 billion) in 2010. Internationally, China’s lottery sales now lag only those of the US.
In the first quarter of 2011, 61.9% of China’s lottery sales derived from traditional lotto games run by both the CWLC and CSLC. Another 19.1% came from instant scratch cards, and 11.0% from single match games run by the CSLC. Although revenue from video lottery terminals (VLTs) run by the CWLC accounted for only 8.0% of China’s total lottery sales in Q1 2011, they had grown 159% year on year in the quarter, and look set to be one of the fastest growing components of the market. Another strong performer is likely to be betting on single match games, which grew 136% year on year in Q1 2011.
One company that could gain from the predicted huge expansion of KENO (a highfrequency lotto game) and VLTs in mainland China is Hong Kong-listed China Lotsynergy (CLS). CLS has two long-term, exclusive contracts with CWLC: one for providing VLTs and the other for providing a KENO system and terminal equipment. CLS also has an exclusive five-year contract (which commenced July 2009) to provide betting terminals and services to the Guangdong provincial government, as well as several mobile phone lottery contracts.
Inside Asian Gaming spoke to CLS Executive Vice President and CFO Daniel Liao about the prospects for China’s lottery industry.
IAG: Please tell us about some of the major recent developments in China’s lottery industry.
Daniel Liao: The government in China published its first lottery law back in mid-2009, making lottery the only legitimate form of cash gaming in mainland China. This is very important because before this, lotteries had been running in China for nearly 23 years without clear central direction from the government to the market.
In mid-2009, the first lottery law was signed directly by Premier Wen Jiabao. This law gives a very important corporate or government structuring to the lottery business in China.
After the lottery law was passed, the Ministry of Finance became the most important regulatory authority of the entire lottery industry. Now, all the data on the lottery industry is being officially published by the Ministry of Finance.
After the Ministry of Finance took over, they reviewed the entire market. The lottery in China is regarded as a means for the government to raise revenue to help the poor and needy, but the Ministry of Finance realised that the majority of participants in China’s lottery were poor, so effectively, the government was collecting from the poor to help the poor. In order to increase the proportion of more rich people participating in the China lottery, the government decided to approve more ‘aggressive’ lottery products including sports betting.
A lot of investors are surprised that although China is run by communists, in the lottery domain, they are probably moving much faster than a lot of countries, say the United States. In order to increase the proportion of more rich people who participate in the lottery industry, the Ministry of Finance not only introduced more aggressive products, but has also started to expand the distribution channels. There were two policies issued by the Ministry of Finance in October last year, allowing lottery products in China to be sold on the Internet and mobile phones.
I think this is going to happen very soon, in the next six to twelve months’ time. That offers great potential since China has the world’s biggest population of Internet and mobile phone users, at around 600 million subscribers.
This obviously bodes well for China’s lottery market, and for your business.
Today, lottery products are sold in China through about 200,000 terminals. But in the Internet world, even if you capture 5% of the 600 million subscribers, you are talking about 30 million new sales outlets already, versus 200,000. There will be a huge boom in the lottery space. A lot of investors were very surprised, and even sceptical, that the government had decided to become so aggressive in the lottery market.
The reasons are twofold. First, the new products and outlets allow the government to collect more money for social welfare spending and disaster relief funds. Secondly, everybody knows that illegal gaming is rampant in China, so it’s better for the government to expand its own range of legal offerings and collect the money for worthwhile causes.
Does China Lotsynergy have any exclusive arrangements with mobile phone operators to provide them with lottery products?
Although we don’t have any exclusive agreements yet, China Lotsynergy has probably invested more money in the sector and started to prepare for it earlier than anybody else. We started preparations to offer lottery products through new media [mobile phones and Internet] three years ago. As of today, officially no one can launch this business yet because we are still waiting for the so-called sales agent licence from the government that enables you to sell those tickets on behalf of the government through the new media. We have been preparing for that for a long time. For example, we are—if not the only one, then definitely one of the few—companies that have already developed applications for all types of mobile phones in China.
Mobile phones are very different from the Internet because you have so many different platforms to deal with. With mobile phones, you have Android, Symbian, iPhone, etc. We have developed over 500 different kinds of phone applications for the currently existing 600 different kinds of phones in China. We’ve also gone further to sign up agreements with telecoms providers like China Mobile, China Unicom and China Telecom, so that they would be able to bring their customers to buy lottery tickets on our platform, and so we can perhaps do some kind of revenue sharing with them. This is a very smart arrangement.
And what about your existing core business of providing VLTs? How’s that going?
We have been the exclusive VLT provider in China since 2005. We’ve seen a very strong performance in the video lottery sector. What we’ve seen is that even as the number of installed terminals has increased, the revenue per terminal has actually increased.
That is a very different situation from most ordinary markets, where the more units you put in, the revenue per unit usually declines. This is because in China, VLTs are currently significantly undersupplied. As of today, we have more than 19,000 terminals installed across the country. In most mature [slot or VLT] markets, there are roughly about 10,000 people per terminal. That shows you how far we still have to go in China, which now has a population of 1.4 billion [translating to roughly 73,684 people per terminal]. Over the next two quarters, we are going to implement or roll out our next generation terminals, which are dual touch-screen terminals. That will be coupled with some more new games on those new terminals.
The VLT market has been recovering since the government’s shutdown of VLT operations across the country in February 2008. What was the background to that shutdown?
At that time, there were some social incidents, including some people losing more money than they could afford. This led the government to shut down the market for close to two years. During the two years of shutdown, the government introduced three very rigid but powerful policies regulating the market. First, they shut down all the VLT halls, and the ones that were reopened are now directly run by the government. The government also installed camera surveillance in every VLT outlet in order to ensure no more funny things go on inside them. Lastly, the government imposed a daily limit of RMB200 expenditure per person on VLTs.
On the one hand, that may seem a very rigid restriction, but on the other hand it ensures a very safe operation of this product. In China, we want to see this, whether for the lottery or whatever form of gaming; it should be highly regulated in a very small and safe operation. I never worry about the demand in any single setup.