ROTH Write-up
China Lottery Deal Moving Forward
EGMI to JV w/ China LotSynergy. This morning Electronic Game Card(EGMI) announced that it signed a definitive agreement with China LotSynergy Holdings Ltd (8161.HK) to establish a JV partnership to sell electronic lottery tickets into the Chinese lottery market. Recall, EGMI previously filed an 8-K on June 18, 2009, indicating that it signed an MOU with China LotSynergy.
Background on China LotSynergy (CLS). China LotSynergy is a Hong Kong listed company principally engaged in the supply of gaming equipment to the China Welfare portion (~50%) of the China lottery market. We note that CLS is also partnered with some of the largest gaming equipment suppliers in the world including IGT (IGT-$21.42-HOLD) and Gtech (LTO.MI-16.22).
n China Lottery Opportunity. According to various reports the legal China lottery market generated ~$15 billion in sales in 2008 (10-yr CAGR of 15%)), while illegal forms of lottery are estimated to be ~10x this amount.
We believe the Chinese government's latest efforts to crackdown on illegal lottery operations (effective July 1, 2009) should help drive further interest and growth in the legal lottery going forward.
Timing & Impact. We believe the China lottery opportunity is sizable (i.e. +1M units annually) considering the existing market size and the government's pro-growth stance. Assuming a 50/50 JV and a retail price of USD $1.00/card we calculate that every 4 million electronic lottery cards sold translates into a penny in incremental earnings to EGMI. We note the JV will conduct initial trials in three of China's largest provinces in 4Q09 with potential sales likely to occur in 1Q10. We have not included any China lottery sales in our existing forecast and we will look to update our estimates following the conclusion of a successful trial.
Expect more deals, reiterate BUY. In addition to the China opportunity our contacts suggest the company is close to announcing several more strategic deals including adding a new U.S. retail partner, acquiring the distribution rights for a new technology platform, and signing a licensing arrangement with a leading gaming equipment supplier. With today's
announcement and a robust deal pipeline, we remain bullish on EGMI's prospects for CY10 and beyond. As such, we reiterate our BUY rating and $2.00 price target on EGMI shares.
We note EGMI mgt will be providing an overview of the China lottery opportunity at the ROTH Capital China Investor conference in Miami tomorrow at 12:30 EST.
