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Play Your Luck With DJI - (DJI)
22/3/2016 (119264)

Play Your Luck At DJI

At last, after more than a year in limbo, DJI Holdings (DJI) is right back in the game in China. It could quickly come roaring back to life.

In a radical assault on illegal games, the Chinese authorities suspended the enormously popular online lottery sales throughout the land early in 2015, depriving the legal operators like DJI of a massive chunk of their business. Now, in effect, DJI is back in the game.

After months of trials, DJI's 50% joint venture Qingdao Baifa is to collaborate with Shandong Sports Lottery, the lottery authority in Shandong Province, to promote the first Ministry of Finance approved mobile lottery sales app throughout the province, the third largest in China. Online lottery sales remain suspended, but are expected to be allowed to return in the months ahead. In practice, mobile lottery apps are taking over from online games, so the ban is effectively coming off.

Shandong has 15m lottery players and the second highest sports lottery sales in China with an 11% market share, of which mobile accounts for 40% and rising. Mobile phone penetration is close to 90%.

The Shandong Sports Lottery is one of only three mobile lottery apps approved by the Ministry and the only one authorised to sell Big Lotto, China's most popular sports lottery draw, and Jingcai, the football betting game which is the fastest growing lottery game in China. The rapidly growing popularity of football in China was the main driver in nearly doubling online sports lottery revenues in Shandong in 2014 - before the suspension - to about 715m.

DJI has been especially astute in riding this trend, forming partnerships with Arsenal and Manchester City to support the Shandong mobile app with special content and prizes, and further big gains in revenue are expected with the Euro 2016 tournament this summer.

Qingdao Baifa is expected to generate significant revenues in 2016. Despite limited availability, the official app generated sales of 4.4m a month during restricted trials. The joint venture plans to step up marketing significantly, working with China Mobile (62m users in Shandong Province), China Unicom (32m users), and China UnionPay, the country's only bank card operator.

DJI will contribute to marketing costs and provide technology support and developing promotion strategy and such. DJI's technology and operating abilities are important in gaining market share, and in bringing in major partners. Clearly there could be scope for further contracts and alliances.

It has been a tough year for DJI, but prospects have suddenly changed dramatically with the mobile app permission. The full online lottery business is likely to swing back later this year, and the elimination of illegal sales, which were far greater than the legal business, promises a massive boom in business for the officially approved players who have come through the test. The Chinese are devoted gamblers, and DJI has secured a key position in the industry, sitting alongside big name Chinese operators with clear official approval.

The lotteries provide an important source of revenue for the national and local government, and will attract official support. Major Chinese corporations have demonstrated their confidence in lottery operations of late, including the purchase of a controlling stake in AG Tech, the Hong Kong listed lottery operator, by Alibaba and Ant Financial.

DJI is firmly set on further expansion, and is talking to a number of significant partners and provinces to identify new revenue streams. It has clearly established an important presence in a fast-growing area of Chinese business, and that looks especially valuable as a Western company.

Chief executive Darren Mercer, who has been back and forth to China all year, says; "This is a major milestone for DJI in using its rich experience of channel marketing and English Premier League club resources to promote the Chinese lottery since the suspension of online sales 12 months ago. The opportunity to launch the only officially approved mobile lottery app in China's second largest provincial lottery market is expected to make a substantially material impact on group revenues in the current financial year. The prospect of marketing a product that will allow millions of lottery players to take part online through their mobile phones is enormously exciting. We look forward to leveraging our exclusive football agreements and Qingdao Baifa's rights to market through third parties to dramatically expand the promotion channels for Shandong's sports lottery games."
House broker Mirabaud says mobile lottery sales through the app are very likely to be substantial, and take-up should be rapid. If the new app were to recapture fully the amount of business done online in 2014, leaving aside the underlying market growth since then, where there was annual gross revenue of 715m, that would translate into over 30m of commission for DJI's 50% joint venture, and over 10m profit for DJI itself.

The shares have gathered pace through the day, and are up 11.5p at 48.5p (47p to 50p) as I write, where the market capitalisation is a chunky 72m. They could have much further to go. and could be headed back to their 100p flotation price, and maybe then some.

Mercer is signaling other deals ahead. He clearly has credibility with the Chinese authorities and powerful partners. The prospect of gaining more and substantial lottery contracts must be high, and the return of legal online lotteries looks sure to bring massive pent-up demand to the surviving operators now that the illegal players have been kicked out.

There could also be excitement from the proposed share listing on NASDAQ in the USA. That plan was announced in October, and though it is running behind time, could now pick up pace. There will be presentations to UK institutions in the weeks ahead, but some might hesitate to take on the risk associated with any business in China, let alone one which has faced the challenges confronted by DJI.

US investors might be more excited by the prospect of backing a significant player in the Chinese lottery and marketing business - remember DJI has an important platform for booking and marketing sports facilities in Heilongjiang Province and is linked with major Chinese players - and as the lottery business becomes established again, profits could rocket.

The year's lottery suspension might have rattled some, but the determination with which the management has battled through it and gained traction - links with the likes of Arsenal and Manchester City don't come easy, let alone the Chinese deals - reflects well on the management. Obviously highly speculative, and suddenly more expensive already today, the shares still look an outstanding gamble.

I have a holding in DJI.

Ends


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19/7/2016 More money for DJI.
1/7/2016 DJI banking on growth.
30/6/2016 Goodies to come at DJI.
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21/4/2016 A brilliant deal for DJI.
22/3/2016 DJI back in the game.
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