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Companies in the Sports Lottery New Retail Business to Become Major Beneficiaries of China’s Sports Lottery Market Opportunities

Companies in the Sports Lottery New Retail Business to Become

Major Beneficiaries of China’s Sports Lottery Market Opportunities

 

(The below content is adopted from an article published by Gelonghui on 12 February 2019.)

 

Statistics showed that China’s lottery sales revenue was RMB422.053 billion in 2019, representing a drop of RMB100 billion compared to that of 2018 – the second time that the number has dropped since 2005. The 17.5% decrement was a historical high in the 30+ years since the country has established its lottery business. The two major reasons for the decrease were: 1.) the significance of the national policy implemented at the beginning of 2019 with regard to adjustments to high-frequency lottery and sports lottery regulations were showing, and; 2.) suspension of all lottery sales was implemented for the first time during the 2019 National Day period.

 

Based on the contents of the policy, its objective was to regulate unauthorised online lottery sales, huge bets and other irrational lottery purchasing behaviours in the market. The policy reinforced regulation and control on high-frequency welfare and sports lottery games as well as bettings on a single game, in the hopes of guiding the industry towards a healthy growth and stabilise social welfare. A “return to rationality” following the country’s lottery sales rapid growth stands behind this setback to the industry.

 

There was a drop in lottery sales for the first time in a decade when online sales was banned in 2015. While the ban is still in effect, the Chinese lottery market has just undergone another transformation – where is it headed? What other certain opportunities lies ahead for the market?

 

I. Ceiling yet to be reached for the Chinese lottery market, particularly for sports lottery

 

1. Obvious room for higher lottery penetration, especially for young lottery players

The Chinese lottery market has gone through rapid growth in the last 30 years. In 2018, its annual sales revenue was over RMB500 billion, which was second only to the US around the globe. However, its market penetration was clearly well below other developed countries in Europe and America, meaning that there is still more room for growth.

 

According to statistics announced in 2019, less than 30% of the country’s population (about 300-400 million people) were lottery players in China with an average betting amount of RMB1,000/year. These numbers are much lower than that in the US, which was 70% and RMB1,700/year respectively.

 

With a rapid growth in the lottery market, the majority of lottery players is also showing a shift to the younger population. According to a report published by Cinsos Consultant, 56% of the lottery players in China are aged between 18 and 35. This shift in lottery player demographic brought a new round of investment opportunities for the capital market.

 

2. Sales channels get the most out of lottery sales profits and the rise of franchise stores is expanding the user base

In general, there are, from upstream to downstream, three parts to the lottery industrial chain, namely lottery games R&D, manufacturing (including operating systems and machinery) and lottery sales. Each part of the industrial chain is headed by different enterprises. These companies are not in complete direct competition with each other, which means that they are key beneficiaries in each of their niche in the industrial chain. In terms of industrial value, lottery sales channels get the biggest portion out of the total profits. After deducting prize rebates and social welfare contributions, sales channels get 7-10% of the lottery sales revenue.

 

Lottery sales channels in China are predominantly offline channels and traditionally, most of these channels are specialty stores, or better known as “lottery betting stations”. In terms of geographical distribution, the lottery market in Beijing, Shanghai and other first-tier cities are close to saturation by these lottery betting stations. They have also taken over most of the market share in second-tier cities. These stations have only limited room for further growth, not only because most of the market has been saturated, but also because they are facing high operation costs, limited coverage and other similar issues.

 

In contrast, such specialty stores are absent in the overseas market. Lottery sales are commonly attached to gas stations, supermarkets, convenience stores and other retail outlets across the country, which is also known as the “franchise store” model. Since self-service terminal has appeared in China in 2015, lottery sales has slowly expanded towards community retail outlets. In recent years, following the rise of new retail concepts, internet giants and capital conglomerates are rushing to enter the market, which has accelerated penetration of this model in China.

 

However, there is still room for growth compared to other developed countries. For example, in California, there would be a lottery sales outlet for every 2000 people, whereas in China, there would be sports lottery outlet for every 8000 people. It is foreseeable that this gap will be filled up by franchise stores.

 

From the point of view of lottery issuers (which, in China, would be the Sports Lottery Center and Welfare Lottery Center), the franchise store model can raise lottery sales, convert more people into lottery players and expand their geographical influence. For store owners, entry barrier for the franchise model is relatively low and their share of the lottery revenue is similar to specialty stores, which is about 7-8%. The franchise store model also makes it more convenient for lottery players to place bets.

 

Among retail outlets, convenience stores are mostly regarded as best suited for the lottery franchise store model. They can easily reach younger audience to build a lottery economic cycle. The Sports Lottery Center has also said, in its 2020 work plan, that all sports lottery centers in the country must sign cooperation agreements with 80% of the convenience store brands in its administration region and 80% of these signed convenience stores must have sports lottery terminals installed on-site. In other words, about 60% of the convenience stores in China would have installed sports lottery terminals by the end of 2020.

 

It is evident that the lottery franchise store model has become an inevitable trend in the industry new stage of development.

 

As such, where lies the path for specialty stores while franchise stores are having their way?

 

The rise of franchise stores is a hit to traditional specialty stores on multiple levels, but undeniably, specialty stores still have their unique advantage. For example, the majority of their customer base are older long-term lottery players, which have more a regular and stable lottery purchasing behaviour compared to new or younger lottery players. Moreover, specialty stores have a mature system and provide a more favourable lottery purchasing and communication environment. Therefore, while franchise stores take charge in sales outlet diversification and lottery player conversion, specialty stores will take charge in post-conversion cultivation of lottery players with its quality service and environment to develop and maintain a stable lottery purchasing community, so as to paint a new leaf for the lottery market.

 

3. Three sports years ahead where international sports events will boost sales

According to track records, the betting amount of Chinese lottery players on huge international games was rather impressive. In 2018, under the influence of the World Cup, sales of sports lottery well exceeded that of welfare lottery with a YOY growth close to 37%. It was also the first time the sports lottery sales had exceeded that of welfare lottery since 2004. According to historical data, during the World Cup period, monthly sales revenue of sports lottery in June and July was over RMB30 billion and even came close to RMB40 billion. In addition, monthly sales of sports lottery has been above RMB20 billion since March 2018, and has stably remained above RMB22 billion after the World Cup.

 

The coming three years are all major sports years where the 2020 Olympic Games, 2020 UEFA Euro, 2021 FIFA Club World Cup and 2022 World Cup will all benefit the sports lottery market. There is potential for another explosive growth. Meanwhile, the five-year plan for sports industry development acceleration as issued by China’s State Council has stated that soccer would be a key segment in the industry. Hence, betting on the Chinese Super League (CSL) is deemed to be pivotal in the transcendence of the domestic soccer and sports industry. This further reflected that there is clearly room for further growth in the Chinese sports lottery market.

 

The question, then, is how much room?

 

According to statistics, CAGR of sports lottery sales was 19% for 2010-2015, 20% for 2015-2018, and around 19% for 2010-2018. Due to further restrictive policies in 2019, it is expected that the industry will return to a normal growth pace, but the positive support of international sports events in the coming three years will also become a stimulation to sports lottery sales.

 

II. A future giant may be born amongst new retail companies

 

In recent years, companies along the industrial chain are expanding their downstream presence leveraging on their respective edge. Three different streams of operators have emerged in the process, namely the internet giants, the state-owned companies and the vertical cultivators.

 

The internet giants would include AGTech (8279.HK), which was jointly acquired by Alibaba and Ant Financial, and Suning (002024.SZ), which was known for its home appliance retail business and has started to devote more resources in expanding their offline lottery sales business in 2019. The former used to focus on upstream lottery gameplay development, lottery machine manufacturing and supporting system developments. It is now slowly moving towards downstream outlets with the support of Alibaba’s new physical retail distribution network to integrate its lottery products and services. The latter, having launched an online sports lottery purchasing service in 2012, had taken a part during the internet lottery era. Recently, it has started to devote more resources to develop its offline lottery business. It has already opened dozens of smart lottery stores across the country and has started to conduct instant lottery and computerised lottery sales in its other retail outlets.

 

The major player among state-owned companies is China Sports Industry Group (600158.SH). It is the only listed company owned by the General Administration of Sport of China. Its scope of business covers sports real estate, sport event operation & management, stadium design and construction consulting, sports intermediary services, sports lottery and other businesses, and places emphasis on the development of economic services around the lottery industry. It has been focusing on the acquisition of upstream assets such as sports lottery tech and lottery printing since 2018, which is expected to help the company achieve full industrial chain coverage.

 

A prominent player among vertical cultivators would be the founder of China’s internet lottery, 500.com (NYSE: WBAI). It became a listed company in the NYSE in 2013, but the ban of internet lottery has been imposed by the central government in 2015, it is clear that the company has lost hold of its infrastructural business. It has been actively seeking different breakthroughs since, such as initiating their new retail strategy, joining hands with offline retail outlets to launch physical sports lottery stores. Currently, 500.com’s market value is only less than USD300 million.

 

V1 Group (0082.HK) is another rather distinguished company among vertical cultivators. It has the advantage of established presence in online sports and lottery analyses, meaning that its reach is wider than its peers. It is capable of creating a user-redirecting loop for its lottery new retail business by allocating more resources in building its offline sports lottery network. The company issued an announcement on 16 September 2019, stating that it has started to commence its sports lottery new retail strategy. Its stock price skyrocketed on the day and surged 74.5%. The current price is about 30% higher than the average price before the announcement was made.

 

Announcement Date	Key Content
2019/09/13	Announcing its sports lottery new retail strategy, that the company has commenced operation of its offline sports lottery retail business and is expanding its offline retail network
2019/11/08	Obtained authorisation from Shandong Sports Lottery Center to sell sports lottery and promote the online mobile business in Shandong province
2020/01/16	Crazy Sports has signed agreements with 12 chain enterprises (including Haolinju, Quanshi, Bianlifeng, Jiajiayue, Pangzidian, Wanhexiang, 7-Eleven in Guangdong, Youkejia, Qianhui, Tianfu, Heli and Youlinyoujia) to install 8960 sports lottery terminals at their outlets across 12 provinces in China; one-to-one VIP lottery sales services has commenced at 45 specialty stores

 

V1 Group was the first listed online video company in China and has the first-mover advantage in the lottery segment. Its core team members started to engage in the lottery market in 2010. Having established and operated the China Soccer Lottery website and Lottery 365 platform, it acquired Crazy Sports, China’s leading online sports community platform, in November 2018 to introduce Crazy Recommendation, a paid lottery information services platform, to integrate its existing lottery businesses.

 

The company cultivates the sports lottery industry. By integrating its users and big data resources, it has built an online-offline loop:

 

Online, surrounding Crazy Sports and Crazy Recommendation, the company has integrated users and big data resources accumulated from the operation of China Soccer Lottery and Lottery 365 to build an online content platform that covers sports, mobile games and paid lottery information. According to disclosed figures, Crazy Sports, China Soccer Lottery and Lottery 365 have over 200 million total registered users. China Soccer Lottery, having been in operation for almost two decades, has accumulated statistics and data of 280,000 matches for sports lottery users. Together with the V1 Group’s big data analytics capabilities, this has become its unique core advantage in the sports lottery industry.

 

Offline, based on its traditional physical specialty stores and convenience store chains network, the company installs sports lottery terminals at retail outlets to achieve a light asset operation, allowing it to reach more young lottery players which would, in turn, be converted into their online users. According to disclosed information, Crazy Sports has also commenced operation of its lottery franchise store business in Beijing, Tianjin Shandong, Guangdong, Chongqing, Jiangsu and other provinces. The number of outlets of convenience stores in partnership with the company will also exceed 10,000.

 

Crazy Sports is also in partnership with top sports content media to further expand its user traffic. According to a report published by Analysys, an independent third-party research institute, Crazy Sports, together with its partners, covers almost 70% of the sports community in China.

 

V1 Group also owns the strategic resources held by Crazy Sports, its wholly owned subsidiary. Crazy Sports is the official games partner of CSL and is authorised to use its IPs in its mobile games. This has become a strategic reserve resource for CSL sports lottery, and may support another round of explosive growth over the next three years due to the major international sports events. Crazy Recommendation, an app developed by Crazy Sports, has also rode on the wave of the 2018 World Cup to achieve rapid growth before, which is solid proof of the potential positive effects brought by international tournaments.

 

III. Conclusion

 

As analysed above, 2020 may become a turning point for the lottery industry. The national policies have imposed strong medicines against problems inherited in the market, which is now entering a healthier, qualitative stage of development. Under the influence of the coronavirus outbreak, lottery sales may take a hit, but medium-to-long term speaking, China’s lottery market has yet to reach its ceiling. Compared to other developed countries with a mature market, there is obviously room for further growth, especially for sports lottery. Sales channel reformation and international tournaments will support the continued growth of sports lottery. It has stronger resilience and certainty compared to other industries. Companies with advantage in the segment, such as those that have already launched their sports lottery new retail business, are bound to become major beneficiaries.

 

The current coronavirus outbreak is bringing prosperity to the “stay-home” online entertainment segment, which is also a reflection of online content and services platforms. Live-broadcasting and paid contents has slowly become a mainstream trend in the digital content sector.

 

In the future, the convenience of digital and non-printed lottery sales, as well as diversity of products and gameplay innovation will intrigue more and more investors to participate in the industry. At the same time, as the market becomes better regulated, the consensus among industry players is also that internet channels may be opened up further, which would be beneficial to the industry’s development.