REXLot Holdings 555.HK

Transcription

1 REXLot Holdings 555.HK 1H14 growth slower than expected Rating Neutral Downgrade Target Price HK$0.97 From HK$1.08 Current price HK$0.87 Upside +11% Revenue and profit growth missed our estimate Revenue/ net profit of REXLot grew by 9%/12% yoy to HK$1,251mn/HK$551mn in 1H14 respectively, which missed our prior full year estimate of 20%/26% sale/profit growth. Competition intensified during World Cup, but management is confident in customer retention post-world Cup Okooo, REXLot's internet lottery platform, recorded 55% sales growth in 1H14, which is below the 62% national SMG sales growth during the period. Competition was intensified during World Cup with more new players and increasing promotion effort, as there are no clear timeline for the issuance of internet lottery license, in our view. However, as a long established specialized lottery platform, management is confident about their customer retention capability, and expressed that the post-world Cup growth momentum is stronger than ordinary year (~40-50% yoy). Earnings contribution from Okooo diluted by PEOPLE.CN's JV Earnings attributable to non-controlling interests increased by 96% yoy to HK$77mn in 1H14, which is mainly due to the establishment of the 60:40 JV between Okooo and PEOPLE.CN ( CH) in late This JV accounted for about 1/3 of Okooo's sales in 1H14. In response to the earnings dilution, REXLot intended to acquire additional interest in Okooo (REXLot currently owned 60%), management expect the discussion to be finalized in 2H14. Potential early renewal of Welfare CTG contracts with lower sharing rate but longer contract period REXLot is also negotiating with MoF for the early renewal of its Welfare CTG terminal contracts. Originally, 3/7/6/1 of the existing 17 provincial contracts need to be renewed in respectively. Under the current negotiation, REXLot would renew all the contracts 1 year earlier with a new sharing rate of % (from 1% now). In return, the contract duration would be 7 years instead of 5 years before. REXLot has factored in such arrangement in 1H14 results Earnings momentum weakened; Downgrade to Neutral We revised down our FY14/15E forecast by 10%/12% respectively, as we believe REXLot is facing tougher competition in internet lottery market, while its traditional segments are also under pressure. Management shared some potential initiatives to enhance earnings, including 1) acquire more stake in Okooo, 2) establish channel partnership with internet/mobile game operators, and 3) enter the VLT market by launching VLT outlets in hotels, but we need more evident before factor in their contribution. We roll forward to FY15E with an unchanged multiple of 10X PER, new target price at HK$0.97, Downgrade to Neutral. Company Update 2 September 2014 Lewis Pang lewis.pang@cinda.com.hk (852) Trading data 52-Week Range (HK$) 0.51/ Mth Avg Daily Vol (m) 60.7 No of Shares (m) 9,347 Market Cap (HK$m) 8,132 Major Shareholders (%) Chan How Chung (17.91%) Auditors Ting Ho Kwan & Chan Result Due FY14: Mar Company description REXLot is a leading player in China lottery market involving in both upstream and downstream segments, including Welfare CTG and Sport CTG/SMG terminal and system, Scratch Card printing and validation, internet lottery platform, mobile SMS and electronic lottery platform as well as SMG stores and call center. Price chart HKD million FY12A FY13A FY14E FY15E FY16E Revenue 1,962 2,166 2,456 2,620 2,862 Net Profit ,110 Consensus NP N/A N/A 1,033 1,171 1,386 Diluted EPS (HKD) P/E (x) Dividend Yield (%) Sources: Bloomberg, CIRL estimates Page 1 of 5

2 Exhibit 1: 1H14 results review RMB mn 1H13 1H14 YoY change Sales - Welfare CTG terminal and system % - Welfare Scratch Card printing % - Sport CTG/SMG terminal % REXLot factored in a lower sharing rate for 3 provinces (out of 17 provinces in operation) - Scratch Card distribution % Started to rebound after the network restructuring in 2H13 - Internet platform % - Mobile electronic lottery platform % REXLot started operating in 2 more provinces in 1H14 (a total coverage of 9 provinces) - Mobile SMS platform % Demand for SMS lottery platform is cannibalized by mobile app - SMG stores and call center % 1,151 1, % EBITDA - Welfare CTG terminal and system % - Welfare Scratch Card printing % - Sport CTG/SMG terminal % - Scratch Card distribution % - Internet platform % - Mobile (ELP and SMS) % - SMG stores and call center % % Central admin costs (169) (142) -16.3% Profit of JV % EBIT % Net finance costs (50) (68) 36.7% Higher finance costs due to issuance of CB Income tax (23) (33) 43.6% Non controlling interests (39) (77) 95.7% Profit % Increased significantly due to the establishment of the 60:40 JV between Okooo and PEOPLE.CN in late 2013 EBITDA margin - Welfare CTG terminal and system 78.0% 84.0% 6.0% - Welfare Scratch Card printing 47.0% 47.0% 0.0% - Sport CTG/SMG terminal 24.0% 24.0% 0.0% - Scratch Card distribution 72.0% 72.0% 0.0% - Internet platform 64.0% 69.0% 5.0% 1H13 margin is dragged by the temporary shut down - Mobile (ELP and SMS) 61.2% 54.0% -7.2% One-off costs is incurred to launch ELP platform in 2 provinces - SMG stores and call center 43.0% 43.0% 0.0% Source: REXLot, CIRL Page 2 of 5

3 Exhibit 2: PRC Lottery sales performance in 1H14 Welfare Lottery Lottery types Sales (RMB bn) Jan-Jun 2014 Jan-Jun 2013 YoY - CTG (Computer Ticket Game) % - SC (Scratch Cards) % - VLT (Video Lottery Terminal) % Sports Lottery - CTG (Computer Ticket Game) % - SC (Scratch Cards) % - SMG (Single Match Games) % Total % Source: MoF Exhibit 3: Key assumptions Year to Dec FY12A FY13A FY14E FY15E FY16E Revenue (HKD mn) 1,962 2,166 2,456 2,620 2,862 - Welfare CTG terminal and system Welfare Scratch Card printing Welfare Scratch Card Validation* Sport CTG/SMG terminal Scratch Card distribution Internet platform Mobile electronic lottery platform Mobile SMS platform SMG stores and call center EBITDA margin - Welfare CTG terminal and system 74.0% 81.0% 81.0% 75.0% 75.0% - Welfare Scratch Card printing 49.0% 45.0% 47.0% 47.0% 47.0% - Welfare Scratch Card Validation* 75.0% 0.0% 0.0% 0.0% 0.0% - Sport CTG/SMG terminal 29.0% 23.0% 23.0% 22.0% 22.0% - Scratch Card distribution 65.0% 72.0% 72.0% 72.0% 72.0% - Internet platform 80.0% 63.0% 71.0% 71.0% 71.0% - Mobile electronic lottery platform -55.9% 64.0% 60.0% 68.0% 70.0% - Mobile SMS platform 78.0% 64.0% 60.0% 60.0% 60.0% - SMG stores and call center 45.0% 43.0% 43.0% 43.0% 43.0% *Contribution of welfare scratch card validation segment is being regarded as profit of JV starting from 2013 Source: REXLot, CIRL Page 3 of 5

4 Exhibit 4: Peers comparison Ticker Mkt cap Price P/E(x) P/B(x) (HKD mn) (HKD) FY13A FY14E FY15E FY13A FY14E FY15E PRC lottery - HK and US listed REXLOT HOLDINGS 555 HK 8, CHINA LOTSYNERGY 1371 HK 5, N/A N/A 4.4 N/A N/A AGTECH HOLDINGS 8279 HK 5, N/A N/A N/A 4.2 N/A N/A CHINA VANGUARD 8156 HK 2, N/A N/A N/A 53.1 N/A N/A VODONE LTD 82 HK 2, N/A N/A N/A 0.9 N/A N/A 500.COM LTD WBAI US 8, Average PRC lottery - A share HONG BO CO LTD CH 6, N/A N/A XIAMEN ANNE CH 3, N/A N/A 7.0 N/A N/A CHINA SPORTS CH 11, N/A N/A PEOPLE.CN CO CH 33, Average International lottery players INTRALOT S.A. INLOT GA 2, N/A SCIENTIFIC GAM-A SGMS US 6, N/A N/A N/A PLAYTECH PLC PTEC LN 27, INTL GAME TECH IGT US 32, Average Source: Bloomberg, CIRL Exhibit 5: Financial statement Income statement Cash flow Year to Dec (HKD mn) FY12A FY13A FY14E FY15E FY16E Year to Dec (HKD mn) FY12A FY13A FY14E FY15E FY16E Revenue 1,962 2,166 2,456 2,620 2,862 Pre-tax profit 919 1,001 1,201 1,255 1,411 Gross profit (reported) 1,378 1,584 1,830 1,932 2,124 Taxes paid (53) (74) (96) (125) (141) EBITDA 1,076 1,222 1,456 1,533 1,688 Depreciation Depreciation D&A (97) (106) (106) (111) (111) Associates (14) (7) (18) (19) (20) EBIT 979 1,117 1,350 1,422 1,577 CFO bef. WC change 950 1,026 1,193 1,221 1,361 Net interest income (exp.) (53) (102) (147) (166) (166) Change in working cap (326) (233) (347) (158) (233) Associates Cashflow from operation ,063 1,127 Exceptionals/others (20) (20) (20) (20) (20) CAPEX (308) (36) (80) (80) (80) Profit before tax 919 1,001 1,201 1,255 1,411 Free cash flow ,047 Tax expenses (53) (74) (96) (125) (141) Dividends (143) (223) (396) (493) (526) Minority interest (46) (57) (127) (136) (159) Balance sheet adj. 270 (431) (139) Discontinued operation Shares issued (3) Net profit ,111 Others Dividends (143) (303) (489) (497) (556) Net cash flow Net cash (debt) start (401) ,339 Balance sheet Net cash (debt) at year-end ,339 1,722 Year to Dec (HKD mn) FY12A FY13A FY14E FY15E FY16E Cash & equiv 897 1,146 2,834 3,359 3,741 Ratios Trade receivables 988 1,115 1,279 1,364 1,490 Year to Dec FY12A FY13A FY14E FY15E FY16E Other receivables ,130 1,205 1,317 Growth rate (%) Inventories Revenue Other current assets 923 1,072 1,417 1,417 1,417 EBITDA Fixed assets EBIT Goodwill and Intangible assets 2,565 2,519 2,484 2,449 2,434 Net profit Investment, associates etc Fully diluted EPS (1.8) 5.0 (1.6) Total assets 7,011 7,596 9,966 10,631 11,237 Margins (%) Gross margin (reported) Account payables EBITDA Other payables EBIT Short-term debt Net margin Other current liabs Other ratios Long-term debts ROE (%) Convertible bonds ,919 1,919 1,919 ROA (%) Other long-term liabs Net gearing (%) (0.7) (3.9) (11.1) (16.5) (19.8) Total liabilities 1,213 1,374 2,485 2,514 2,534 Interest coverage (x) Receivables days Share capital Payables days Reserves 5,486 5,877 7,003 7,503 8,088 Inventory days Shareholders' equity 5,571 5,964 7,095 7,596 8,181 Effective tax rate (%) Minorities Total equity 5,798 6,223 7,481 8,118 8,702 Net cash (debt) ,339 1,722 Source: Bloomberg, CIRL Page 4 of 5

5 Rating Policy Stock Rating Sector Rating Rating Definition Buy Outperform HSI by 15% Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Antony Cheng Research Director (852) antony.cheng@cinda.com.hk Hayman Chiu Senior Research Analyst (852) hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) kenneth.li@cinda.com.hk Lewis Pang Senior Research Analyst (852) lewis.pang@cinda.com.hk Susanna Chui Research Analyst (852) susanna.chui@cinda.com.hk Analyst Certification I, Lewis Pang hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note. Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others. Page 5 of 5