Principally engaged in (i) lottery system and games design business; distribution and marketing of lottery products; and (ii) financial business.
Business Review - For the year ended December 31, 2012
During the year under review, the Group was principally engaged in lottery system and games development business and distribution and marketing of lottery products in China.
The China lottery market comprises two lotteries, namely, the China Welfare Lottery and the China Sports Lottery. The Group provides services to both lotteries.
The Group's lottery business can be broadly divided into System and Games Development Business (¡§SGDB¡¨) and Distribution and Marketing Business (¡§DMB¡¨).
Turnover of the lottery business for the year increased by 12.8% to HK$2,036,116,000 (2011: HK$1,804,975,000), accounting for 100% of the total turnover. Profit before taxation arising from this segment recorded a growth of 13.6% to HK$920,532,000 (2011: HK$809,980,000).
Highlights of the year
China lottery market has once again achieved a remarkable result and created new lottery sales record of RMB261.5 billion in 2012. During the year under review, the Group continued to grow consistently over time and stay focused on the long-term initiatives affirmed. Being a major participant in the lottery industry, the Group has always been dynamic and innovative in order to drive growth in this ever-evolving market. We adopt a comprehensive and coordinated approach to ensure our strategic plans have been properly executed by leveraging our major competitive strengths: industry leading research and development capabilities, renowned business reputation, long-standing relationship with lottery authorities and extensive distribution channels for lottery products.
In 2012, the Group successfully secured another long term contract to provide lottery system, terminals and related support services in one of the top 10 lottery provinces in terms of Welfare Lottery sales in China. Commencing 2013, the Group is proud to be associated with a total of 17 provinces in China for the provision of highly professional and secured system and services for the development of Welfare Lottery in China. This once again demonstrates our Group's leading position in the expanding Chinese Lottery market place.
Another important element to our sustainable growth strategy is to continue to expand our diversified lottery distribution channels especially on electronic platform and develop the modern technologies needed for lottery distribution.
During 2012, the Group has commenced commercial operation of our Mobile Electronic Lottery Platform (¡§Mobile ELP¡¨) for Welfare Lottery in Liaoning Province. On the back of the successful launch in Liaoning, the Group prepared to further launch Mobile ELP in other provinces in China for Welfare Lottery.
The outcome of our Mobile ELP has been positive and the platform itself is ready to be developed further to offer more lottery games in addition to the already launched lottery information subscription services, CTG games of Welfare Lottery and a selection of high frequency games which have been successfully launched on the Mobile ELP. We are satisfied with the revenue growth so far driven by the growing number of subscribers and increasing average revenue per user.
Our DMB has embarked on the electronic lottery distribution platform which provides distribution service to the lottery public through paperless and electronic platform, including various sports information and internet lottery portals, for lottery distribution. During the year under review, the Group has completed the integration of these lottery portals and we are well positioned to capture the growth opportunities on this new lottery distribution channel
Lastly, during the second half of 2012, the Company successfully issued about US$55 million convertible bonds which are a follow-on issue of the convertible bonds initially issued by the Company in September 2011. The convertible bonds were largely subscribed by global institutional investors amidst challenging market conditions, which is believed to be a testimony to the recognition of and confidence in the Group as the leading lottery player in China. The follow-on issuance further improved our capital structure through the share repurchase program with low funding cost, so as to increase shareholder value of the Group.
China Lottery Market
In 2012, China Lottery Market achieved a new record sales of RMB261.5 billion (2011: RMB221.6 billion), registering a strong year-on-year growth of 18%.
Total Welfare Lottery sales was RMB151.0 billion. Welfare Computer Ticket Games (¡§CTG¡¨) accounted for about 72% of total Welfare Lottery sales; Welfare Scratch Cards was about 13% and Video Lottery Terminals (¡§VLT¡¨) took about 15%.
Welfare CTG sales in 2012 was RMB103.4 billion, increased by 19%. Dual Colour Ball, the flagship national Welfare CTG accounted for about 51% of the total Welfare CTG sales. It registered a strong growth momentum in the first half of 2012 with long jackpot runs peaked in May and created the highest sales record for single drawing. In the second half of the year, the promotion of high frequency games in different regions contributed to the growth of this segment.
Welfare Scratch Cards sales was RMB20.2 billion, increased by 1% compared with the previous year. The sluggish performance was partially attributed to the delays in launching of new games. VLT sales increased 32% and reached RMB22.4 billion. Total Sports Lottery was RMB110.5 billion. Sports CTG accounted for about 84% of total Sports Lottery sales and Sports Scratch Cards was about 16%.
Sales of Sports CTG, including Single Match Games (¡§SMG¡¨), increased by 25% to approximately RMB92.5 billion. Total SMG sales was RMB17.3 billion, increased by 39% year-on-year. The growth of SMG sales was benefited from the modification of the rule of game and promotion throughout the year as well as the stimulation of international tournament such as the UEFA Euro 2012.
Sports Scratch Cards sales was impacted due to limitations on printing capacity and lack of new games launches as a result of which, total sales dropped by 10% compared with 2011.
System and Games Development Business
The Group's SGDB is an active participant in the provision of lottery systems and specialized equipments for both CTG and Scratch Cards products in China. During the year under review, our SGDB continued to deliver solid earnings and gained market share in lottery system and printed product market.
Welfare CTG Business
The Group's SGDB participates in the Welfare CTG business in China through Shenzhen Sinodata Technology Co Ltd (¡§Sinodata¡¨), a non-wholly owned subsidiary of the Group. Sinodata is the leading lottery system and specialized equipment supplier for Welfare Lottery in China and has a long and proven track record of success in the field of lottery system and games development. During the year under review, Sinodata provided its professional services to 16 lottery provinces in China and in the coming year, will increase its market share by a newly established contract with one of the top 10 lottery provinces.
The growth of Welfare CTG market remained strong in 2012 due to the long jackpot runs of its flagship national game and the fast growing high frequency games in different region. Given our well established service network in the Welfare CTG market, the Group is well positioned to seize the growth opportunities.
Welfare Scratch Cards Business
The Group's SGDB involves in the validation and printing business of Welfare Scratch Cards in China.
The Group has jointly controlled interests, through Beijing Guard Libang Technology Co Ltd (¡§Guard Libang¡¨), in Welfare Scratch Cards validation services. Guard Libang is a 50:50 joint venture with Scientific Games Corporation (¡§Scientific Games¡¨), the world's leading instant ticket system and games provider. Our strategic partnership with Scientific Games enables us to bring its expertise and technology know-how to the Scratch Cards market in China.
Through a cooperative venture with Shijiazhuang Offset Printing House, one of the three entities authorized to print for the Welfare Scratch Cards programs, the Group has involved in Welfare Scratch Cards printing business.
Sales of Welfare Scratch Cards was affected by the delay in launching new games in 2012. Sales trend managed to stabilize in the fourth quarter after the marketing and promotion campaign took effect. Despite of the challenging market environment, the Group's scratch card printing business will manage to improve its market share by leveraging on its most advanced printing technology in the country.
Sports CTG Business
The Group's Sports CTG business involved the sales of CTG machines to Provincial Sports Lottery Centres across China serving the needs of traditional CTG segment and supporting the development of SMG. During the year under review, shipments of CTG machines driven by the replacement cycle were in line with our expectation. We expect to see the demand for machine will continue to be driven by replacement need and general expansion in 2013 since Sports CTG has achieved new record sales in 2012.
Distribution and Marketing Business
The Group's DMB is a major participant in the downstream lottery operation in China. It has successfully established a comprehensive distribution platform consist of a solid foundation of widely diversified and well recognized physical retail network across China and a best-inclass portfolio of electronic lottery distribution channels.
We pledged to provide reliable, efficient and innovative lottery services to address the need of lottery end consumers in China and assist lottery authorities to promote and develop the China Lottery market in sustainable manner.
During the year under review, the Group's DMB successfully maintained its leading position in traditional market and made significant achievement in expanding our footprint in the electronic lottery market.
Cooperation Distribution Business
Under the cooperative model, we focus on building our physical lottery distribution network with channel partners, entities and organizations that already had a widely diversified and recognized sales network located in selected prime locations in China. Our channel partners principally comprise chains of convenience store and supermarket, grocery and pharmacy chains, gasoline stations and post offices.
During the year under review, we have reached the final stage in building our comprehensive sale network in China and become one of the largest distributors for scratch card in terms of sales value and number of point-of-sales established. The roll out of new point of sales will no longer be the top priority at this stage, instead we will actively review and optimize our sales network with effective marketing and sales strategies to maximize revenue generation capability at these points of sales in order to maintain its leading market position.
Single Match Games Business
The Group's SMG business is conducted through our franchised SMG shops across 7 key provinces in China together with our strong presence in the electronic platform. The Group operates the safe, reliable and comprehensive distribution platform to facilitate the development of SMG in China.
In 2012, SMG remained the fastest growing lottery product in China and we witnessed several positive developments initiated by the lottery authorities.
In relation to regulatory development, the authorities have undertaken series of enforcement actions during the year to dispel the threat of illegal lottery websites to lottery consumers and protect the integrity of lottery industry. We are pleased with such determined efforts by the authorities to clamp down on these unscrupulous operations.
On the other hand, modification on rules of game such as the reduced number of handicap odd offering helps to attract new players by effectively lowering the difficulties of game. We believe SMG in China still has plenty of room to grow from the modification on game rule as well as the introduction of new game types. Each of these improvements will appeal to lottery consumers and result in positive effect on sales.
As we have completed the integration of our various online lottery portals, our SMG operation started to benefit from this strategy and achieved meaningful results. The Group continued to gain market shares in the SMG market through our comprehensive distribution network and became one of the largest players in the market.
Given the high growth potential of SMG in China, we strive to maintain our leading position in this segment through the strong presence on both physical and electronic lottery distribution channels and we are able to benefit from the market consolidation.
Mobile Lottery Business and Mobile Electronic Lottery Platform
The Group's traditional mobile lottery business provides subscribers with the latest lottery information and allows them to purchase CTG tickets through SMS text messaging. The subscribers of our Mobile SMS Platform grew steadily over the past few years. Mobile SMS Platform provided the lottery consumers a reliable and cost effective paperless lottery distribution channel before the arrival of other advanced electronic channels.
The Mobile ELP provides the technological breakthrough to bring in new types of lottery products and more convenient user interface. We foresee that these distinctive characteristics of Mobile ELP will be well received by the lottery consumers.
During the year under review, the Group has successfully launched the Mobile ELP in commercial operation for Welfare Lottery in 2 provinces in China. Apart from the lottery information subscription services, the national CTG games of Welfare Lottery together with a selection of high frequency games are offered.
The Group has plans to launch the mobile ELP platforms in stages across 7 provinces in China. Furthermore, the Group plans to expand its efforts in securing more contracts for the Mobile ELP during the coming year.
The Group discontinued its securities trading and asset management business by entering into a conditional sale and purchase agreement to dispose to an independent third party for a consideration of HK$11,810,000. The disposal was completed in June 2012.
Business Outlook - For the year ended December 31, 2012
In 2012, China lottery market recorded sales of RMB261.5 billion. During 2008-2012 China lottery market achieved a five-year compound annual growth rate of 25.3% against the backdrop of challenging global economic environment during the period. Given its economic resilient nature and the positive market development taking shape, we are confident in the ongoing growth story of the China lottery market. We remain buoyant on the outlook of the lottery market and believe it will sustain a strong growth momentum in the years ahead.
Today, we are already in the middle of the ¡§Twelfth Five-Year Plan¡¨ period of development which has commenced in 2011. Regulatory development in 2012 has initiated one of the most important steps towards the rise of new media distribution channels and provided an opportunity for lottery market to achieve a new vision of growth.
In December 2012, Ministry of Finance had issued the Measures for the Management of Lottery Issuance and Distribution (¡§the Measures¡¨) which came into effect on 1 January 2013. The Measures have been formulated based on the Regulation on Lottery Management and the Detailed Rules for Implementation of Regulation on Lottery Management which came into effect in July 2009 and March 2012 respectively. One of the major highlights of the Measures is that Internet has been included as one of the official lottery distribution channels by the lottery authorities. Other official distribution channels of lottery products defined by the Measures include physical retail shops, telephone network and automated sales machine. The Measures has indicated the determined efforts by the authorities to hasten the development of new media distribution channels for lottery and prepare the regulatory environment for the sequential licensing process.
When lottery market opens to new media distribution channels, it will bring about a faster growth of the brand new segment of customer base mainly consist of white collar and youths who possess stronger spending power on lottery and dominate the entire lottery population. It will also fuel the development of certain type of lottery products such as SMG, high frequency game and electronic scratch card.
The Group has eyed on this opportunity for a number of years and we have already established a strong presence in paperless and electronic lottery distribution channels. We expect the consolidation of internet lottery channels, which have already begun in 2012, will intensify in 2013. Looking ahead, we believe that the Group will benefit from the market consolidation and further strengthen our leading position in this area.
As mobile communications achieve greater penetration and advancement, mobile phone network is another paperless lottery distribution channel that cannot be neglected. The Mobile ELP enables lottery consumers to play lotteries, anytime, anywhere through a cost effective and secure channel. The Group has developed dedicated lottery products for distribution on the Mobile ELP. We foresee that the distinctive characteristics of Mobile ELP will encourage its proliferation among mobile phone users to the extent that mobile lottery should receive a similar success like that of the social gaming market which also benefit from the mobile phone channel. We believe that our Mobile ELP is on the course to make meaningful contribution to the Group's earnings in near term. The Group will further extend its coverage of Mobile ELP in the coming 12 months through additional deployment of our systems and signing up additional provinces.
We have transformed ourselves into a comprehensive lottery service provider by expanding our lottery business vertically and horizontally in the lottery value chain. On one hand we possess the expertise to operate various front end lottery distribution channels, at the same time we have a long and successful track records in lottery system development. We understand that safety and reliability of lottery operation is highly prized and vital to the industry. We believe that we are not only capable but also share the responsibility to promote the development of an industry standard of lottery system which is essential to propel the long term growth. Since the establishment of special task force in our Group to focus on the strategy outlined above, we have successfully introduced our self-developed fully integrated backend system for electronic lottery platform. This is a system that offers interoperability to different facets of lottery distribution channels and expandable to include other functional modules with customer relationship management and account management capability. It is the prototype of our next generation lottery system that will define the industry standard and showcases our highest standards of integrity and excellence of services. In future, this project will be a centerpiece of our strategic focuses to maximize the synergies of our key initiatives in SGDB and DMB.
On the back of our well established lottery business and huge customer base, the Group will continue to look into and explore the opportunity that on the one hand further diversifies our business portfolio, and on the other hand helps to cement the loyalty of and realize the potential of our customer base.
As a major participant in China's Lottery industry, we are not only confident and optimistic about the future prospects of our Group, but are also confident that the Welfare and Sports Lotteries in China will continue to make significant contributions for the good causes which benefit the general public in China. By remaining committed to our long-term strategies to innovate the lottery industry with technology and directly reach out to lottery customers by delivering lottery amusements through our comprehensive distribution platform while prudently execute our short-term plans, REXLot will continue to stand head and shoulder above its competition and present a promising outlook on our earnings and cash flow prospect. Keeping abreast of the ever-evolving market and being market-oriented, we will continue our strategic efforts on initiatives that further leverage our existing and growing lottery infrastructure to enhance the Group's long-term growth prospect and shareholder value.
Source: REXLot Holdings (00555) Annual Results Announcement
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