China Stock 500.com Bets Big On Sports Lottery Fans

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Some people buy scratch-off lottery tickets or pick Mega Millions numbers in the hopes of getting rich quick. But others bet on their favorite sports teams because it's, well, fun. And in China, popular websites are scoring with sports lotteries that let you bet on not only whether a team wins or loses but also whether a player fouls or gets a corner kick.

"With (the number-based) lottery, people are putting in $2 hoping to get $3 million, $5 million back," Zhengming Pan, CFO of Shenzhen-based500.com ( WBAI ), told IBD. "With the sports lottery, people don't expect to be rich overnight. Money isn't the No. 1 goal for the sports match player. They love these sports and want to have a stronger sense of participation. And when they can correctly predict the outcome, they can tell their friends."

While betting on other sites can be a mere e-commerce transaction that involves buying tickets and checking numbers, 500.com offers interactivity and a sense of community with other fans.

"We are combining your lust for money with your interest in sports," said Pan.

Sports-based lotteries are 500.com's bread and butter. Founded in 2001, the company aggregates and processes lottery orders on the Web. It leads the online sports lottery market in China with around 30 million registered users, according to Pan, most of whom are casual gamblers.

While many bettors still pony up at brick-and-mortar ticket kiosks in China, a growing number of players are moving their money online to desktop and mobile lottery apps.

In 2013, active users on 500.com spent an average of $334 across 41 purchase orders. The company says that it had around 1,144,000 active users during Q1, a 28% year-over-year increase. Analysts say that 60% to 70% of 500.com's traffic comes from the site and its apps, while 20% comes from search engines, and another 20% comes from payment platforms and other third-party sources.

And though it shares the online lottery market -- competitors include Tencent Holdings and Alibaba's Taobao.com -- 500.com is only one of two firms that has received official approval from China's Ministry of Finance since the government moved to regulate lotteries in recent years.

As of 2013's first half, 500.com had 29% of China's market share vs. 27% for Alibaba's Taobao, according to market research firm iResearch. Alibaba, which is 22.5%-owned byYahoo ( YHOO ), is preparing to go public in the U.S. soon in what could be the biggest U.S. initial public offering ever .

500.com's revenues come mostly from service fees paid by lottery administration centers. The company held its U.S. IPO in November 2013 at $13 per American depositary receipt. First-quarter revenue of $14.4 million topped views for $12 million, and earnings almost doubled analyst estimates for 8 cents a share, coming in at 15 cents vs. 1 cent a year earlier.

The company is expected to report Q2 earnings in mid-August. Analysts see earnings of 17 cents a share and revenue of $18.6 million. The World Cup likely helped 500.com score in the quarter.

Big athletic events spur big-time bets among high rollers and casual gamblers alike. The once-every-four-years soccer extravaganza kicked China's year-over-year sports lottery sales up by 83%. Chinese officials said that the country's sports lottery sales shot up to over $3.1 billion in June.

Honing in on its casual-user base during the soccer tournament, 500.com debuted in-match games such as "Crazy Guess Ball" and "RMB100m cash prize." In the former, each 90-minute match was divvied up into 30 segments, and gamblers could bet on any number of events during each three-minute play, including penalties, free kicks and goals. The ultimate daily prize? A Mercedes-Benz.

These tactics boosted the company's traffic and revenue, said Deutsche Bank Research analyst Alan Hellawell III in a June 29 research note. The site's daily lottery volume during the tournament was likely around three to five times higher than in the off-season, he added, a figure that's in line with the general market.

"These activities seem to have succeeded in attracting users and boosting total lottery sales," he said.

But after all the flags have been packed up and fan frenzy has subsided, the real question is how 500.com can keep casual users from forgetting the site for another four years.

"There could be a positive residual benefit as new users become familiar with the service," said Piper Jaffray analyst Michael Olson in a May 7 note.

"It is not clear, however, that the company has developed a clear strategy on user retention strategies for post World Cup periods and as such, we are taking a 'wait-and-see' approach."

Strategic agreements were made earlier this year with both China Mobile E-commerce, aChina Mobile ( CHL ) subsidiary, and e-commerce platform Yihaodian or Yhd.com, of whichWal-Mart ( WMT ) owns a majority stake. Yihaodian has around 60 million registered users.

500.com's strategy appears to involve embracing the shift from desktop to mobile, and moving beyond just distributing games to developing them.

"In the mobile age, any popular app could be a new entry point," 500.com's Pan told IBD. Users tracking a game can bet from anywhere. 500.com's real-time data has only a 5-second lag time behind live play, which is faster than even China Central Television, he said.

Mobile purchases on the site increased to 26.4% of total purchases in Q1 vs. 18% in Q4 2013, the company said in an investor presentation.

Pan says that 500.com plans to explore lottery game design and may also acquire other lottery distributors and lottery game developers.

"Discussions with company management suggest that 500.com now aims to embed more deeply lottery into its users' daily lives by increasing interactivity and fun," said Deutsche Bank's Hellawell in a note. "This set of initiatives should provide a particularly effective means of retaining mid-low end users."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: WBAI , YHOO , CHL , WMT

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