Acquisition of Wu Sheng Technology Co., Ltd. On 4 July 07, LottVision entered into a non-binding sheet with Firich Enterprises Co., Ltd for the acquisition of Wu Sheng Technology Co., Ltd. The consideration will be between S$66.3 million and S$93.9 million. This amount would be funded by the issue of shares at S$0.609 per new share. There was also a guarantee of the audited net profit after tax of Wu Sheng for the financial period 1 July 2007 to 30 June 2008 of not less than HK$30 million (approximately S$5.8 million). In the event that the net profit is less than the guaranteed amount, Firich shall pay a cash amount to Lottvision of the difference between net profit after tax and the guaranteed amount.
New fair value of S$0.76. We use a 5-yr DCF valuation method to drive a fair value of S$0.76 per share on LottVision and we upgrade to a Buy recommendation after the acquisition of Wu Sheng Technology Co., Ltd. Our 5-yr forecast of revenue is based on two potential earnings streams: (1) sales of POS terminals to authorised betting outlets (trading revenue), (2) a percent of lottery sales for each POS terminal (outsourcing revenue).
Attractive valuation, but stock remains speculative. Based on our fair value of S$0.76, the stock offers upside for investors. However, there is a substantial amount of risk as the company reports a loss for FY07 and our valuations are based on expected net profit after tax from FY08 onwards. We will monitor the financial results for FY 08 and provide an update for investors.
Risk factors in our estimates. The risk factors in our estimates are (1) loss of key management and execution risks may delay the Group’s operations, (2) deregulation of the sports lottery market has opened up the competitive landscape to foreign companies, which may reduce the Group’s market share, (3) changes in China’s regulation may affect the Group’s operations and earnings.
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