Key points of investment
The exercise of share options led to lower performance than expected. In the first half of 2013, the company achieved revenue of HK$97.2 million, a year-on-year decrease of 2.1%; gross profit was HK$50.9 million, an increase of 6.9%. However, the company's overall performance fell short of expectations and recorded a loss of HK$52.7 million as fees paid in the form of shares (including those granted to directors, employees, etc. under the share option plan and the placement of 407 million new shares granted to Macau entertainment company Mr. Zhang Liqun) increased to 49 million yuan.
“Lucky Racer” is growing strongly, and similar games are expected to be launched. As the only approved virtual fixed-reward sports lottery game, “Lucky Racer” sold RMB 1.1 billion in 2012, the first full year of operation, accounting for 34% and 1% of sports lottery sales in Hunan and the country, respectively. In the first half of 2013, “Lucky Racer” sales also accounted for 30% of Hunan Province, showing a strong growth trend. The company is promoting the integration of this game with the “next generation” system being built by the national sports lottery to remove the final technical hurdle to promotion across the country. At the same time, it has already discussed promotion matters with several provinces. The company anticipates that another similar virtual lottery game with fixed rewards will be launched in collaboration with a province in the form of a virtual competition and eventually promoted to the whole country. These games are expected to strongly support the company's revenue growth for years to come.
Benefit fully from the new round of sports lottery computer ticket terminal updates. Starting in 2013, sports lottery computer ticket terminals began a new cycle of replacement, and it is estimated that 130,000 old machines will be replaced within the next 5 years. Gao Teng, a subsidiary of the company, is the largest sports lottery terminal equipment and system supplier in the country, with a market share of over 50%. In May of this year, Gao Teng received a contract for a new generation C8 sports lottery terminal in Anhui Province. This is the first order of sports lottery in a new round of sports lottery replacement cycle, marking Gao Teng's leading position in this market. We anticipate that the company will fully benefit from the sports lottery terminal replacement business in the next 1-2 years.
The paperless lottery business is progressing well. In 2012, the Sports Lottery Center officially launched a pilot online lottery sales project. The market expects that internet and telephone lottery sales, including Fukai, will be further promoted in 2013. The company fully acquired Yinxi in May 2011. The latter is China's leading telephone and mobile lottery service provider, and has signed telephone lottery cooperation agreements with 6 provinces. The company expects that Fukai and Sports Lottery are in progress or are preparing for trial operation of provincial mobile lottery systems.
Risk factors: The development of the main business is restricted; major contracts cannot be renewed when they expire or the share ratio is lowered. Investment advice. The company already has a good layout in the lottery technology service business, but due to the cost of payment in the form of shares brought about by its grant of share options, we lowered its earnings forecast per share for 2013/14/15 to HK$0.0111/0.0182/0.0397 (the original forecast was HK$0.0133/0.0226/0.0493), corresponding to 2013/14/15 PE 55/34/15x. Considering the long-term development prospects of the company in online lottery sales and virtual fixed reward sports games, we raised the company's target price to HK$0.8, corresponding to 2013/14/15 PE 72/44/20x, maintaining the “increase in holdings” rating