Key points of investment
The commission share ratio was lowered, and the performance fell short of expectations. According to the agreement signed between the company and Beijing Zhongcai Online, as of January 1, 2012, the “Zhongfu Online” service fee was reduced from 2% to 1.7%. This is the main reason the company's performance in 2012 and the first quarter of 2013 did not meet expectations. Revenue for the first quarter of 2013 was HK$171 million, an increase of 10.92% over the previous year; gross profit of HK$127 million, an increase of 0.74%; profit attributable to shareholders was 23.52 million yuan, an increase of 3.74%.
The growth rate of lottery ticket sales has picked up, and “Zhongfu Online” is outstanding. Beginning in July 2012, mainly affected by factors such as the regulation of online lottery ticket sales, the growth rate of lottery ticket sales in China declined markedly, and began to pick up in November. In April 2013, monthly year-on-year growth recovered to more than 20% for the first time, reaching 21.1%. There is a clear differentiation in the growth of the various color varieties. From January to April 2013, sales of video (the company is the exclusive equipment supplier for “Zhongfu Online”), quiz, lotto, and instant lottery ticket sales grew by 39%, 20.6%, 20.2%, and -12.7%, respectively. By the end of the first quarter, the company had distributed a total of 21,000 “Zhongfu Online” third-generation aircraft, and the company expects to complete the distribution of the remaining 27,000 units in the second quarter. We believe that the full launch of the third-generation aircraft will ensure that the “Zhongfu Online” game will continue to grow rapidly in the future.
The computer ticketing business maintained the advantage of Lucky and successfully broke through Sports Lottery. The company maintained its position as a supplier in Guangdong, the largest province of Fukai, and successfully won the Chongqing Fukai 2,700 sales terminal contract. In addition to this, starting in 2013, sports lottery computer tickets will begin a new round of terminal replacement cycle. In the selection and evaluation process of betting terminal suppliers at the National Sports Lottery Center, the company shortlisted 6 suppliers for the first time.
We look forward to the explosion of the paperless lottery sales business. In 2012, the Sports Lottery Center officially launched a pilot online lottery sales project. The market expects internet and telephone lottery sales, including Fukai, to advance further in 2013. The company's telephone lottery sales increased 260% year-on-year in the first quarter, and reached a lottery business agreement with SPD Bank with the built-in mobile client. Previously, the company had established paperless lottery sales partnerships with institutions such as Bank of Communications, CMB, and UnionPay. With the comprehensive advantages the company has built over the years, we believe it will fully benefit from the relaxation of its paperless lottery policy.
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. In view of the decrease in the equipment supply ratio of the company's main business “Zhongfu Online”, we lowered its 2013/14 earnings forecast per share to 0.016/0.023 yuan (original forecast 0.0197/0.0286). The estimated EPS for 2015 was 0.0309, and the corresponding growth rate was 76.1%/43.1%/34.5% respectively. Considering the increase in market valuation levels, we raised the company's target price to HK$0.192, corresponding to 2013/14/15 PE 12.0/8.4/6.2x to maintain the “buy” rating.