Playing China’s lottery

Published in: Latest Intelligence  

An $88.5 million lottery prize, the second biggest in the country’s history, went unclaimed for more than a month two years ago before a 40-year-old man from Zhejiang province presented a winning ticket.

His equanimity is not typical. Chinese lottery sales have grown an average 33 percent a year since they started in 1987, reaching $42 billion last year and amounting to the second most in the world, behind only the US. Yet per capita lottery sales in China amounted to just $24 in 2011, a pittance compared to the $195 average US spend and $239 worth of tickets sold in Canada. That even though China, with 300,000 points of sale for its two lotteries, has 25 percent more outlets than the US, according to Dr Su Guojing, president of research institute China Lottery Industry Salon in Beijing. 

Yet the low spend and broad network position the lotteries for continued strong growth, with forecasts that annual sales will reach $46 billion by 2015.

That kind of number is naturally attracting considerable attention from both local and foreign suppliers of lottery equipment and technology. China Sports Lottery, the smaller of the country’s two state-owned operators, last month approved Hong Kong’s AGTech Holdings Ltd and China LotSynergy Holdings Ltd as well as Greece‘s Intralot SA and three other companies to supply terminals as the operator prepares to replace its existing 130,000 machines. The new generation of machines will include features such as touch screens and online ticket-verification.

AGTech, which supplied most of the Sports Lottery’s existing terminals, has done well with the business. The company, which has little business beyond various contracts with the Sports Lottery, last year earned a gross profit margin of 44.3 percent on revenue of HK$229.3 million ($29.5 million). The company expects demand for new terminals to spike in the next few months as the lottery’s provincial branches rush out orders after delaying purchases for the last two to three years, knowing that new machines were under review.

 “Local provincial authorities have been waiting for this starting gun to go off,” said Geaspar Bryne, head of corporate development, strategic planning and investor relations for AGTech. “We’ve been going round showing our new terminals … The provinces are enthusiastic.”

The larger Welfare Lottery is less centralized in both its operations and purchasing. China LotSynergy, for example, trumpeted its approval by Chongqing in January to supply new ticketing terminals and technical services. The company, which also does little business outside of China’s lotteries, last year posted a gross margin of 79 percent on revenue of HK$607.3 million.

Foreign suppliers like Intralot may keep their toehold in the Chinese market, but could find it hard to grow given incumbents like AGTech and China LotSynergy and state policy. “The government will welcome the entry into the market of foreign firms, but it is likely to want to retain a certain proportion of the market for domestic companies and it is difficult to say that the proportion allocated for foreign firms will grow,” said Su.

Government support has been key to the industry’s rapid growth. Regulators, for example, have allowed the Sports Lottery to raise the share of proceeds going to prizes as opposed to government programs to 58 percent from 50 percent over the past decade, which has helped attract more bettors.

Regulators appear to be finally ready to fully legitimize online lottery sales this year after years of conflicting signals from provincial and national officials. A renewed crackdown on illicit online ticket sales is reinforcing expectations licenses will be issued later this year,  according to Bryne. The government is particularly keen to lure players from underground gambling operators, who escape the tax net.

Su sees the most growth potential among the expanding middle class and women. “The lower classes may make up the great masses of lottery ticket buyers, but they only buy Rmb 2, Rmb 3, or Rmb 4 worth of tickets. On the other hand, white collar workers can spend up to Rmb 100,000, Rmb 200,000 or Rmb 300,000 on tickets, so from a value point of view, it will be the white collar workers that drive growth,” he said.

His group surveyed 24,230 lottery players online, and while the group may not have been representative of all lottery buyers, more than 90 percent of respondents were men. He said, “Although they make up a minority of players, women are more loyal bettors than men and repeatedly purchase lottery tickets for longer periods of time.” 

Dr. Su Guojing is Asia Gambling Brief's Chief China Lottery Advisor.