Worldwide leading companies bet on fast growing Chinese lottery market

Gambling is still officially illegal in China, but welfare and sports authorities have long been allowed to operate lotteries and have in recent years been tapping foreign expertise and investment to roll out new ways to wager beyond the traditional numbers game. Their hope is to draw players away from underground and overseas casinos and generate funds for social programmes.

"The basic government position is that the lottery sector is not open to direct operations by foreign companies, but in fact it is being stealthily opened," says Li Gang, expert on the Chinese gaming sector at Shanghai Normal University. "This is also the case when it comes to the kind of lottery activity allowed. Officially the lottery games are different from gambling, but in practice there is often no obvious distinction."

With lottery sales rising at a compound annual growth rate of 37 per cent over the past decade and reaching us$ 10.5 billion last year, international companies are competing for contracts to sell their technology or act as distributors, usually in exchange for a cut of sales.

Ladbrokes, International Game Technology and Scientific Games have all announced China lottery ventures this year, but profits are far from certain for them or for a host of lesser-known companies.

Tabcorp, the Australian gaming company, reported that in the second half of 2006 it lost us$ 2.2 million on its China operations, a joint venture with Hong Kong's China LotSynergy to introduce a bingo-like game called keno around the country. The keno network was to be set up under the welfare lottery last year, but is now set for launch later this year with electronic terminals in coffee shops, karaoke bars and restaurants.

IGT is also tying up with China LotSynergy, announcing last week that it would invest us$ 103 million for the equivalent of a 11.8 per cent stake in the Hong Kong company. The firm will be supporting a China LotSynergy venture that is supplying the welfare lottery with video lottery terminals (VLTs), units that play like slot machines but are run through network servers.

According to Chris Hoong, China LotSynergy's CEO, China now has 530 halls stocked with some 14,000 VLTs - double the number of slots in Macao. A new generation of VLTs is to be introduced in coming months and Hoong says the network will eventually boast 1.5m terminals.

Ladbrokes, the UK betting company, has meanwhile joined with AGTech Holdings, run by former China LotSynergy CEO John Sun, to provide new electronic games for the sports lottery. The first games will be virtual sporting events, such as football matches and car races, to be broadcast on large screens in lottery centres and other venues. Players will be able to buy tickets with debit cards from wandering sales staff equipped with wireless terminals.

Ladbrokes has been working with the sports lottery in Beijing and two other parts of China since last year to set up the country's first pool betting shops, which now number more than 400.

Scientific Games, one of the largest US lottery companies, has also been active as a consultant and supplier in China for several years. It announced a joint venture last week for a new instant ticket lottery game in Shandong province, one of China's largest.

Chinese gaming is far from a sure thing and there have been severe policy reversals before. More than a decade of discussion of a lottery law that would establish a clear basis for regulation has yet to lead to action. Regulatory uncertainty remains pervasive, with different policies in different parts of the country.

The legal status of the many websites that sell lottery tickets on the internet is unclear, for example, though some have the backing of regional lottery operators. Zhang Lijun, chairman of Hong Kong-listed internet video venture VODOne , says his company recently became the only one with formal approval for Internet welfare lottery sales - and warns that a clean up of the sector is coming.

Two senior staff from Betex, a London-listed company that has been involved with the sports lottery in several parts of China, were detained in Beijing last month by police who are also seeking a third employee. Its shares on London's Alternative Investment Market have been suspended for three weeks.

The control held by welfare and sports lottery authorities is another source of risk. In a recent analyst report, Deutsche Bank suggested China LotSynergy's VLT venture had been hurt by bad siting decisions by welfare lottery officials. "ChinaLot has no direct control over the rollout plan as it is only an equipment supplier," the bank said.

And Beijing remains deeply conflicted about associations with gambling, which the Chinese Communist party suppressed as a social curse following the 1949 revolution.

The Communist Youth League's recent involvement in a planned internet poker company has fuelled industry hopes that such sensitivities are fading, but league officials still appeared painfully embarrassed when their role became public.

Critics such as Li say the new forms of lottery actually help to promote underground gambling by introducing and legitimising more ways to wager. Chinese state media put total lottery sales at us$ 10.7 billion in 2006, but that figure is dwarfed by underground gambling revenues estimated at more than us$ 91.34 billion.

But even Li says the importance of lottery income in helping to make up shortfalls in state social security funding means there will be no turning back the clock. Indeed, the demand for foreign technology suppliers and distributors is likely to be increased by lottery authorities' desire to be seen not to be exploiting the poor.

Sun, of AGTech Holdings, says that by using flashy electronic displays and playing on themes like poker and European football, the agencies intend to attract the entertainment dollar of China's newly wealthy. "Most of the [VLT] players are middle class and upper class," He says, adding that authorities' goal is wealth redistribution. "Taxes are unpopular. This is an easy way to tax."