New twists in China lottery online sales saga

Apr 07, 2015 Newsdesk Features, Latest News, Rest of Asia, Top of the deck  

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Questions over exactly who or what is in charge of China’s official policy regarding the online sale of state lottery tickets have been put into focus by a series of events that have occurred since the turn of the year.

There appear to be a number of strands to the debate. One is that historically the welfare lottery and its younger sibling – the sports lottery – have been administered at provincial level rather than central government level. That has led to provincial differences in policy on issues such as distribution channels and equipment procurement. It has also led to the provinces seeking to protect their right to raise lottery revenue locally rather than being told what to do by the central authorities, a lottery industry source has told GGRAsia.

Another strand to the debate is that traditional paper lotteries – where customers buy a ticket from a shop outlet – have reportedly long been vulnerable to fraud by consolidators buying up blocks of tickets, reselling them, then sometimes failing to register the resale with the lottery administrators, meaning that any winning tickets marketed in that faulty way cannot be honoured.

As a result, the central government has been seeking to standardise on a national basis both the distribution channels and the rules regarding the sale of all tickets – including ones generated by online purchase – Li Xiaohua, director of the International Exchange Department at Beijing Normal University’s Lottery Research Center of China, told GGRAsia at the Macao Gaming Summit in November.

In October 2010, China’s Ministry of Finance issued two provisional regulations regarding paperless distribution of lotteries: for online sales and for telephone sales; as part of the central government’s drive to develop national standards for state lottery business. That followed the issuance in July 2009, by China’s State Council, of ‘Regulations on Administration of Lotteries’.

Fighting fraud

Online sales channels have been seen by some within the industry and by some industry researchers as potentially an effective way of creating a national sales platform. That is because they do not depend on expensive infrastructure such as physical sales terminals being installed in more lightly populated rural districts, the lottery insider – a person not authorised to speak on the record in public about the issue – told GGRAsia. Well-managed and regulated online sales platforms are also seen as a way to minimise the risk of fraud, as the person buying the ticket must register his or her identity via the platform.

The official lottery sector’s partners in this new approach have included major names such as online retail sales business Alibaba.com and Tencent Holdings Ltd’s QQ and PC platforms.

Another partner is Shenzhen-, Guangdong-based 500.com Ltd. In November 2013, 500.com was able to conduct an initial public offering (IPO) on Nasdaq in New York on the strength of having what it said was permission for a “pilot programme” agreed by China’s Ministry of Finance to sell tickets for the China sports lottery via an online platform.

The online business had said that in 2012, the ministry had approved Shenzhen E-Sun Sky Network Technology Co Ltd, an affiliated entity of 500.com, to be one of two entities to provide online lottery sales services on behalf of China Sports Lottery Administration Centre

On the strength of that apparent guarantee, 500.com saw its US$13.00-per-share offer price rise by almost 68 percent on debut, valuing the enterprise at more than US$700 million, according to Reuters data. Its 52-week high in the 12 months to April 2, was US$41.34.

A possible reason for the interest of investors is that the combined sales of sports lottery and welfare lottery tickets in mainland China reached RMB382.4 billion (US$61.5 billion) in 2014, an increase of 23.6 percent from the previous year, according to official data.

But the challenges of doing business in a sector where rules and regulations are still emerging has been highlighted since the turn of the year, via reports that seem to have questioned the strength of 500.com’s understanding with the Ministry of Finance. The share price has taken a beating with each piece of negative news. At the close of business on April 2, the last full trading day before Easter, 500.com’s stock was below its launch price, at US$12.29 per unit.

Multiple bodies

The negative reports include announcements from a variety of official bodies that claim a say on how China’s lottery business should be run.

500.com’s share price registered one fall when on January 17, Sina.com published an article reporting, “certain Chinese governmental authorities issued a notice requiring provincial agencies to conduct self inspection with regards to unauthorised online lottery sales”.

On February 25, 500.com announced via a press release that certain provincial sports lottery administration centres to which the company provides sport lottery sales services planned temporarily to suspend accepting online purchase orders for lottery products.

On February 28, the company said the remaining provincial sports lottery administration centres to which the company provides sport lottery sales services also planned temporarily to suspend “accepting online purchase orders for lottery products.” The 500.com share price reacted negatively on both those occasions.

500.com said in a press release on March 2 that its financial results would be “materially and adversely impacted” by the administration centres’ notice of temporary suspension.

But it added the firm planned to continue processing online orders for lottery products that are distributed by local lottery stations and represented by paper lottery tickets.

At the same time, Alibaba said on Weibo – China’s equivalent of Twitter – that it had suspended sales of all types of lotteries on the Taobao lottery platform. Tencent Holdings also confirmed that all lottery business on its QQ and PC platforms had been suspended.

Bad apples

According to North Square Blue Oak Ltd, a United Kingdom-regulated investment bank with a focus on China, one of the issues worrying the authorities was that some of the fraud issues associated with paper lotteries – distributors not registering all of their sales with provincial lottery centres – had simply migrated online via unofficial platforms set up by some unscrupulous resellers.

Although the announcements of February 25 and 28 gave no indication on how long the “temporary” suspension of online sales would last, there was some optimism from North Square Blue Oak and 500.com that the move would get rid of the rotten apples and allow the trade to recommence.

On April 3, however, no fewer than eight Chinese central government agencies issued a joint public announcement regarding online sales of lottery tickets. The signatory bodies were: the Ministry of Finance, the Ministry of Public Security, the State Administration for Industry and Commerce, the Ministry of Industry and Information Technology, the Ministry of Civil Affairs, the People’s Bank of China, the General Administration of Sports of China and the China Banking Regulatory Commission.

The statement demanded firstly that “all institutions, online entities, or individuals which provide unauthorised online lottery sales services, either directly or through agents, shall immediately cease such services and all provincial governmental authorities of finance, civil affairs and sports shall investigate and sanction unauthorised online lottery sales in their respective jurisdictions according to relevant laws and regulations.”

It added secondly that local authorities also had a duty to report any suspected criminal activities regarding online sales so that prosecutions could be pursued. Thirdly, it said “lottery issuance authorities that plan to sell lottery products online shall obtain a consent from the Ministry of Civil Affairs or the General Administration of Sports of China… and any entity that provides online lottery sales services must be pre-approved by the Ministry of Finance.”

Investor viewpoint

Some 500.com investors are now arguing they were misled about the strength of the firm’s rights to conduct online sales.

Last month, United States-based law firm Kahn Swick and Foti LLC, which includes a former attorney general of Louisiana among its partners, said it was pursuing a class action lawsuit against 500.com for allegedly misleading investors about its right to conduct online sales of sports lottery tickets.

The law firm said in a statement: “500.com and certain of its executives are charged with failing to disclose material information in connection with its IPO and during the class period, violating federal securities laws.”

On April 3, 500.com issued a press statement saying it was “voluntarily and temporarily” suspending all of its online lottery sales services “starting from April 4″. It added: “During this temporary suspension period the company expects that it will not generate any revenue.”

GGRAsia approached Christensen Investor Relations Group, a global financial public relations company listed as the contact company for 500.com’s April 3 press statement. We sought clarification on what the central authorities’ statement of April 3 meant for 500.com’s business. No reply had been received by the time this story went online.

People’s Daily, one of China’s leading official newspapers, reported that the February announcements by provincial lottery administrators had been “internal documents” circulated to the lottery sales sector by officials.

500.com issued a follow up press statement on April 6, saying, “to the best of the company’s knowledge, as of the date of this announcement, all online lottery sales service providers in China have temporarily suspended their operations”.

But 500.com added: “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 [sic] is valid and has not been revoked or amended as of the date of this announcement.”

The firm stated however that the central authorities’ announcement of April 3 was “a further step by the competent government authorities to sanction [control] unauthorised online lottery sales and to ensure the healthy development of the lottery market in China.”

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