GGRAsia – Alibaba to take majority in China lottery firm AGTech

Alibaba to take majority in China lottery firm AGTech

Mar 07, 2016 Newsdesk Industry Talk, Latest News

Alibaba Group Holding Ltd – an investor in taobao.com, mainland China’s largest online shopping portal – is linking with an affiliate to take a majority stake for around US$300 million in AGTech Holdings Ltd, a Hong Kong-listed supplier of equipment, software and services to mainland China’s regulated lottery market.

Following completion of the deal, the AGTech group will be authorised by Alibaba group subsidiary Taobao (China) Software Co Ltd to operate a “lottery channel” on the Taobao platform. Taobao Software will have the right to conduct system maintenance, webpage maintenance and “user experience-related work” on the lottery channel.

AGTech will also become the “exclusive business platform” of Alibaba group for lottery.

In the fiscal year ending March 31, 2015, the Alibaba network – including alibaba.com, said to be mainland China’s largest online platform for wholesale transactions involving small businesses – claimed revenue of about RMB76.2-billion (US$11.7-billion) in online sales, a year-on-year growth of 45 percent.

AGTech claims its lottery business covers more than 80 percent of the provinces and municipalities across mainland China. The firm also operates two offline lottery shops in, respectively, Jiangsu province and Hunan province, for the sale and distribution of lottery games.

The mainland authorities last year ordered a suspension of online sales of tickets for China’s two official lotteries – the welfare lottery and the sports lottery. Reasons given were the need to streamline government oversight and to curb fraud by unlicensed sellers. The central government said the ban was temporary but would be in place until further notice.

Total sales of official lottery products in China fell 3.8 percent year-on-year in 2015, but nonetheless reached RMB367.9 billion in 2015, according to data from the country’s Ministry of Finance.

Participation rates in China’s official lotteries are thought to remain low compared to lotteries operated by some other regional jurisdictions.

AGTech’s filing, citing the China Sports Lottery Administration Center, said that in 2013 adult participation in the lottery system in mainland China – where operation of casinos is illegal – was estimated at approximately 7.5 percent, compared to a 56 percent participation in 2012 in the Hong Kong lottery. That jurisdiction also makes illegal the operation of casinos.

Shares and bonds

Ali Fortune Investment Holding Ltd, a company majority-owned by the Alibaba group, has agreed to subscribe to HKD1.68-billion (US$216.3-million) worth of shares and HKD712.6-million worth of convertible bonds in AGTech.

The group will own about 50.7 percent of AGTech after completion of the initial transaction, and up to 59.45 percent of the company upon full conversion, according to a filing on Sunday to the Hong Kong Stock Exchange.

Sun Ho, an executive director of AGTech, will hold 21.40 percent of AGTech after the initial transaction.

Completion will take place “on the seventh business day following the unconditional date, or on such other date as the parties may agree,” said the filing, adding that the unconditional date was due to be “on or prior to 4 September 2016”.

In November, AGTech reported a 44.4-percent year-on-year increase in revenue for the third quarter of 2015, its most recent balance sheet update. Such revenue rose to HKD76.7 million. But the firm’s loss widened in that period, to HKD53.2 million from HKD49.0 million a year earlier, on higher operational expenses and costs related to share options.

Ali Fortune, the vehicle used to take control of AGTech, is 60 percent owned by Alibaba Holding and 40 percent owned by Alipay operator Zhejiang Ant Small and Micro Financial Services Group, also known as Ant Financial.

Chinese businessman Jack Ma, also known by his Chinese name Ma Yun, owns – alongside connected parties – a total of 86.7 percent of Ant Financial.

Alibaba Holding is a company incorporated in the Cayman Islands. Its American depositary shares (ADRs) are listed on the Nasdaq stock exchange in the U.S..

AGTech’s filing said that substantial shareholders of Alibaba Holding are SoftBank Group Corp, a company listed on the Tokyo Stock Exchange, and Yahoo! Inc. Respectively, the two hold – directly or indirectly – approximately 32.2 percent and 15.5 percent of Alibaba Holding.