January 20, 2009 - 1:28am EST by
2009 2010
Price: 0.24 EPS $0.045 $0.085
Shares Out. (in M): 7,400 P/E 5.0x 3.0x
Market Cap (in $M): 230 P/FCF 5.0x 3.0x
Net Debt (in $M): -40 EBIT 400 725
TEV ($): 190 TEV/EBIT 4.0x 2.0x

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RexCapital (555 HK)

 A ridiculously cheap name. 

I) Balance sheet (as of 6/30/08)

 Cash: just under HK$300mm (excluding roughly HK$200mm expected from sales of financial services business)

Debt: virtually none

 Disposal of financial service business is rather irrelevant at this price level since it doesn't lose much money in the first place and in the worst case the expected HK$200mm proceeds should not be taken into account for valuation. The business is kind of unwinding by itself as the equity market decline is forcing its customers to repay their margin loans.

 II) Businesses:

 1. Machine-based lottery: collect 2% of revenue share

2. Machine-based scratch cards: collect 1.3% of revenue share

3. Outsourced (as a distributor) lottery franchising: collect 3% of revenue share

 Mkt size/ Mkt share, segmented by products

 1. Welfare

 '08 YTD total market @ Rmb 44bn, split btw. CTG or "computer ticket games"(37bn) and Scratch card (6bn). So if annualized, total welfare lottery market is Rmb 55-60bn, with CTG at almost 50bn and scratch card at 8bn.

 Rex's share in CTG is 50% and share in scratch card is 100% thanks to its monopoly control over the underlying system developed by itself (patent/license to expire some time btw. 2013-2015). At 2% profit cut for CTG and 1.3% for scratch card, Rex's revenue from CTG is running at 500mm p.a. and revenue from scratch card in the welfare channel is running at just above 100mm.

 In terms of growth, CTG was growing at 13% in 1H08 and scratch card grew by 1.5x.

 From welfare CTG and scratch card together, Rex has a revenue of roughly 600mm a year.

 2. Sports

 '08 YTD total market size @ 33bn, split btw. CTG (25bn) and scratch card (7bn). If annualized, total sports lottery market is Rmb 44bn, with CTG at 33bn and scratch card at 9bn.

 Rex has not much exposure in sports CTG, just some small equipment sales there. After all, it's not a growing market - it actually decline by 10% in the 1H08.

 Sports scratch card got benefit from Olympic but since Rex is not a developer of the system there so it adopted distribution (i.e. outsourced franchising) model. It has 20% shr there but expects to double the share in next several yrs. Today it's running at 50+mm revenue, based on 3% fee cut.

 III) Earnings and Valuation

 Welfare and sports combined together, it appears Rex today has a revenue base in excess of Rmb 650mm or HK$700-750mm. Tax rate for CTG and scratch cards is 15% due to machine-based nature, which enables Rex to enjoy some technology venture tax benefit. For distribution model, profit is taxed at regular rate of 25%.

CLSA analyst has HK$500mm revenue est. for 2008, which will rise to HK$800mm. Rex actually earned 2c/shr in 1H08. So full year of 2008 it probably will earn 4-5c/shr. So at HK$0.24, it's trading at less than 5x this year's earnings with 4c/shr net cash sitting on the balance sheet.

IV) Ownership

 Insiders only own under 20% of the company and the rest is widely spread among institutional investors.

 Exiting shareholders: Fortress (believe all out by now), Gandhara Advisor, Citigroup, etc.

 Adding shareholders: Fidelity, BDT Investment,

Risk: the government regulation of video lottery (problem for China Lotsynergy, 8161.HK) raised concern about CTG and scratch card but these concerns are overblown since the former is believed to be used as gambling while CTG and scratch cards are well-received lottery products.


In late 2008, the RexCapital propsoed to its shrhlders that the name of the firm be changed to REXLot Holdings Ltd. The forthcoming SGM will be held on Jan 30, 2009, which could act as a catalyst to raise the company profile among investors. Also, the 2008 earnings will be released at end of April, 2009.

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