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China – China’s suspension of online lottery halts 500.com’s revenues

By - 17 August 2016

500.com, a leading online sports lottery service provider in China, has reported its unaudited financial results for the second quarter of 2016 with revenues being devastated by the temporary suspension of online lottery sales.

Since March 2015, all provincial sports lottery administration centers to which the company provides sports lottery sales services have temporarily suspended accepting online purchase orders for lottery products by the Ministry of Finance, the Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China on January 15, 2015.

As a result net revenues were RMB1.2m (US$0.2m), compared with RMB2.2m for the first quarter of 2016, and nil for the second quarter of 2015. Net revenues for both the first quarter and the second quarter of 2016 were primarily generated from the rendering of technical and data maintenance services by Sumpay.cn.

As a result of the provincial sport lottery administration centers’ decision to temporarily suspend accepting online lottery orders, or temporary suspension, the company did not generate any revenue from sports lottery sales in the second quarter of 2016. The company recorded an operating loss for the second quarter of 2016.
On March 31, 2016, the Company announced that it has disposed of its 63 per cent equity interest in Sumpay.cn for a total consideration of RMB359.1m.

Zhengming Pan, CEO of 500.com, said: “We voluntarily and temporarily suspended our online lottery sales operations in response to the promulgation of the Self-Inspection Notice. Such temporary and voluntary suspension materially and adversely impacted our financial and operational results for the second quarter of 2016. We want to restate that the Company was one of the two entities approved by the Ministry of Finance in 2012 to provide online lottery sales services on behalf of the China Sports Lottery Administration Center.

“In particular, such approval mandated that the China Sports Lottery Administration Center use its best effort to develop an online lottery sales management system as part of a pilot program for online lottery sales in China, and once such a management system is finished, the China Sports Lottery Administration Center should apply again for approval from the Ministry of Finance for official commencement of online lottery sales in China,” he added. “The Company notes it has been working and will continue to work with the China Sports Lottery Administration Center to develop the management system. To the best of the Company’s knowledge, the approval by the Ministry of Finance for the Company to provide online lottery sales services on behalf of the China Sports Lottery Administration Center is valid and has not been revoked or amended as of the date of this earnings release.”

Research and Markets believes the online lottery market in China will grow at a CAGR of 4.53 per cent during the period 2016-2020.
It said: “One of the key trends for the market will be introduction of new types of lottery. Lotteries are available in various forms, ranging from schemes for maximum monetary benefits to charitable funds. China Welfare Lottery and China Sports Lottery are the only two legalised lottery operators in the country. China Welfare Lottery deals with raising fund for charity and societal welfare, whereas funds raised by China Sports Lottery are used for building community sports facilities. The sports segment made huge profits in 2014. Once the ban is lifted, it is expected to introduce more innovative lottery options to attract buyers.”

The report states that one of the challenges for the market will be high tax imposed by the government. “High taxes and duties on licensees to conduct legal gambling activities are expected to affect the lottery market during the forecast period,” it stated.

“The government increased the tax from 20 per cent to 25 per cent in its March 2014 budget. Also, the recent ban on online lottery resulted in the closing of many online lottery service providers. There are high chances that stringent tax regulations will be implemented by the government when they reopen the online lottery service for all the vendors. This will adversely affect the revenue during the forecast period and will also prevent new players from entering the market.”

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