ANOTHER CHINESE ACQUISITION FOR PACIFICNET

14 September 2007

Guangdong Poly Blue a fast entry into China's lottery market?


The always enterprising Chinese-facing gaming technology and e-commerce group PacificNet has reported another acquisition. The company's Chinese subsidiaries, PacificNet Technology (Shenzhen) Limited and PacificNet Games Limited, have entered into an agreement to acquire 51 percent equity interest in Guangdong Poly Blue Express Communications Co., Ltd.

The acquisition is expected to enable PacificNet to participate in China's rapidly growing state-sponsored legal gaming and electronic lottery market. Guangdong Poly is a major operator approved by China's Welfare Lottery Center to develop and operate real-time electronic paperless lottery services in China.

According to the agreement, the PacificNet subsidiaries will acquire 34 percent and 17 percent of Guangdong Poly Blue Express Communications Co., Ltd, respectively, with the investment so structured as to be dependent on the achievement of certain profit milestones. The investment by PacificNet is subject to the successful completion of customary due diligence and final documentation.

The financial terms of the deal were not disclosed.

In China, the central government has granted the rights to issue only two types of lottery: China Welfare Lottery (CWL) and Sports Lottery. Other lotteries issued outside these two government bodies are illegal and are prohibited by the government.

Lottery activities in China are run by the government for welfare purposes, and the country's lottery market surpassed US$10 billion in 2006 and is expected to continue growing, according to the Chinese Ministry of Finance. Of the US$10 billion spent on lotteries in China, over US$6 billion was generated via China Welfare Lottery (CWL) system, representing a 20 percent increase over 2005.

"We are very pleased with this acquisition," said Victor Tong, President of PacificNet. "Paperless e-Lottery is an area where we see potential for growth in the Chinese market. As player returns are increased from the current 55 percent payout to the 65 percent planned, we feel the market for legalised lottery in China will increase substantially and the market for new video lottery terminals will blossom.

"This acquisition is in line with PacificNet’s gaming focus and will enjoy a synergy with our other subsidiary companies in the areas of software development, hardware, distribution, etc. We see this acquisition adding to our bottom line and to our shareholder value."

"We are delighted to successfully complete this acquisition with PacificNet," said Gu Hao, General Manager of Guangdong. "With the rapid development of the domestic market and the gradual opening of the lottery market, more and more companies will rush to take a piece. As a member of PacificNet, we will be well positioned to make the most of market resources and foster better online lottery services and relevant value-added services as to attract more customers and promote the company's competitiveness in the market."

According to reports by China's Ministry of Finance, China's total lottery sales revenue has been enjoying rapid growth in recent years and reached a record high of 81.93 billion yuan (US$10.5 billion) in 2006, an increase of 10.54 billion yuan from 2005’s RMB 71 billion (US $8.6 billion).

Analysts predicts that China's lottery market will reach RMB 200 billion (US$25 billion) in 2008. Every day about 229 million yuan (US$29.5 million) of lottery tickets were sold in China in 2006 (excluding the eight days around the Chinese New Year holidays when lottery sales were suspended).

China lottery experts projected that China's lottery market to grow by CAGR of 31 percent to US$34.5bn by 2010 to become the world's second-largest lottery market after the US, which turned over US$54.2bn in 2005. In per capita terms this would equate to US$26 for China's lottery, among the lowest in the world.

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