<p>Strong growth warranted<br/>Driven by the expanding sales network and the introduction of new games,<br/>the China lottery sector is expected to have a 20% CAGR over the next<br/>five years. Nevertheless, with no well-documented policies in place,<br/>investors need to understand the government’s objectives in order to find<br/>the right investment. We initiate coverage of both China LotSynergy<br/>(8161.HK, HK$0.99, OUTPERFORM, TP HK$1.13) and RexCapital (0555.HK,<br/>HK$1.01, OUTPERFORM, TP HK$1.56) with OUTPERFORM ratings. We<br/>also put AGTech (8279.HK) under our watch-list.<br/>■<br/>Understanding the government’s objective. We have identified three core<br/>objectives of the central government: 1) redistribution of income,<br/>2) competing against illegal gaming, and 3) minimising fund leakages. In our<br/>view, the government is likely to introduce more new games, especially highfrequency<br/>games or even fixed-odd betting, through a centralised network.<br/>■<br/>Investment opportunities. In our view, as the sector gradually matures, the<br/>earnings growth of terminal suppliers will slow down gradually. We<br/>recommend investors to focus on three new segments: 1) game<br/>development, 2) retail agency, and 3) fixed-odd betting.<br/>■<br/>China LotSynergy (CLS) – initiating coverage with OUTPERFORM. In<br/>our view, CLS nationwide network for new forms of lottery games should<br/>benefit from the government’s objectives to centralise the lottery operation<br/>and redistribute income.<br/>■<br/>RexCapital – initiating coverage with OUTPERFORM. RexCapital is one<br/>of the largest terminal suppliers to both CWLC and CSLA. In our view, the<br/>rollout of new terminals, and the change in revenue model should warrant<br/>strong double-digit revenue growth through FY08.</p><p>788kb 44页</p><p></p><p>
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