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DJI Holdings scratching the surface in China

Published: 23:35 29 Aug 2014 AEST

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To the two great certainties in life – death and taxes – we can probably add another: many Chinese people love to gamble.

DJI Holdings (LON:DJI) is a distributor and promoter of lottery products in China so it was slightly surprising when Rodney Davis, the company’s chief financial officer, started off his interview with Proactive Investors by revealing that gambling is actually illegal in China.

“Gambling is still illegal in China, which is why gambling type games have their home in lottery,” Davis said.

The two state regulated lotteries – the Welfare Lottery and the Sports Lottery – are well-established and started out by offering the familiar lucky numbers draw and scratch card offerings, but the growth of the lotto schemes had flat-lined by around 2007.

This was in contrast with a thriving illegal gambling market which in 2008, the year DJI entered the market, dwarfed the official market in size.

Happily, for DJI, the state recognised that the offering needed a reboot, which made the timing of DJI’s entry propitious.

“The government started looking at how they could stimulate growth. They realised after a number of discussions among stakeholders that access was probably an issue, getting the product more accessible to the public.

“They also realised that the product itself might need some refreshing, or changing.”

Since then, the lotteries in China have evolved to encompass the type of sports betting that would be familiar to the average denizen of a UK high street betting shop or owner of an online betting account.

“Games of skill that have some element of chance are the fastest growing segment of the market,” Davis reveals.

“Poker has not found its way into this area yet, and I think it will be a while before it does,” Davis said.

Sports betting, however, is part of the gaming landscape, with the favoured markets being (association) football, particularly the European leagues and some of the Asian leagues, and NBA basketball.

Even in China, the state has no interest in directly operating betting shops, lottery kiosks and online gaming sites, and has gone down the route of licensing gaming specialists, which is where DJI comes in.

The company is a licensed and authorised distributor and promoter of regulated lottery products. It works both front of shop and back, selling lottery tickets directly to consumers via web sites it owns and operates, and handling the lottery ticket fulfilment function for Chinese gaming giants such as Taobao and Alipay.

DJI established its credentials with an old-school bricks & mortar lottery business in the country but for some years it has been preparing for the day when the lion’s share of the market would be online, and that day has now arrived, Davis says.

What the company is able to do is offer a unified platform for digital ticket fulfilment for the major players.

“It is not efficient for us to be shifting truckloads of scratch cards around the country; it served no useful purpose for us and we’ve modernised the industry considerably,” Davis maintains.

As well as technical capability, relationships in the industry and with government, the company also has the capital base and expertise to survive in the stricter regulatory environment being introduced by the state.

The company raised £9.0mln at the time of its flotation on AIM on 24 July, placing shares at 100p each, and a further £6.0mln through the issue of convertible loan notes.

The company has pursued a ‘buy and build’ strategy in the past but Davis said it is not in any hurry to make further acquisitions.

“On the fulfilment side, I don’t think we need to do any more acquisitions … because we believe we got a good suite of licences and we’ve got good partners in China who can get us access to any licences.

“On the retail side, we believe we’ve got the right offering, but we certainly would look at acquisitions if they were opportunistic.”

The industry is going to consolidate, in Davis’s view, so there may be opportunities to gaining access to new customer bases via the acquisition route, but for now it is more likely the company will focus its efforts on partnerships, especially a recently signed key partnership with a government-owned body.

Davis is mindful of a certain level of scepticism in London about China-focused companies and says the company floated at a lower price than it probably could have done to allay those fears.

This claim is backed up by share price performance since the flotation; the shares are up around 40% on the 100p flotation price, giving a market capitalisation of around £185mln.

In respect of addressing scepticism about Chinese stocks or, for that matter, gambling stocks, Davis said: “We believe we’ve got to play it out in a transparent way, and hopefully as the transparency translates into results, the market will begin to lose its trepidation and we’ll see the value emerge.”

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