VODone (82 HK) - Dial to win

China/Hong Kong Lottery Please read the analyst certification and other important disclosures on last page VODone (82 HK) 4 March 2010 Dial to win Company Rating: Sector Rating: Outperform (initiation) Overweight (initiation)
Early mover in mobile lottery with full coverage of games. VODone is one of the first authorized mobile lottery service providers in China. The company has secured mobile lottery licenses with 15 provinces, and can provide a full range of products on both welfare and sports lotteries. In addition, VODone is ready to tap the growth opportunity following the recent launch of Single Match Sports Betting (Sporttery) by opening physical outlets, as well as developing software systems suitable for mobile wagering.
Penetrating through multiple channels. The company will embed its mobile lottery software in new mobile handsets that employ MediaTek’s chipsets, and the recent acquisition of mobile gaming company, Dragon Joyce (DJ), creates natural synergy with the company’s mobile lottery business. Promotions in MSN and net cafés will effectively attract the interest of general Internet users.
Mobile gaming has strong growth prospect. The acquisition of DJ is inexpensive and earnings enhancing. We expect mobile gaming to grow strongly as users’ demand for value-added services picks up, due to the commercialization of the 3G network in China, as well as the increasing processing capabilities and functionalities of mobile handsets.
Strong growth ahead, initiate with Outperform. Mobile lottery services and mobile gaming are expected to grow and replace the traditional online advertising businesses to become major revenue contributors by 2010F. Our DCF model reveals a target price of HK$3.50. We initiate with an Outperform rating for VODone, representing 53% upside from current share price, which implies 17.3x FY11F PER. Forecast and valuation Year to 31 Dec 2007 2008 2009F 2010F 2011F Sales (HK$m) 58 66 301 887 1,147 EBITDA (HK$m) (42) (89) 83 404 597 Net profit/(loss) (HK$m) (60) (121) 69 331 490 F.D. EPS (HK$) (0.038) (0.071) 0.029 0.137 0.203 YoY change (%) +88.4 -140.1 +379.4 +47.9 PER (x) N/A N/A 75.9 16.1 10.8 EV/EBITDA (x) N/A (39.9) 56.3 10.8 6.5 DPS (HK$) 0.0 0.0 0.0 0.0 0.0 Yield (%) 0.0 0.0 0.0 0.0 0.0 ROE (%) (11.9) (20.1) 9.9 32.4 33.0 Source: VODone, CCBIS estimates Price: HK$2.29 Target: HK$3.50 (Initiation) Trading data 52-week range HK$0.13 – 2.54 Market capitalization (m) HK$5,322/US$686 Shares outstanding (m) 2,324 Free float (%) 75.7 3M average daily T/O (m share) 48 3M average daily T/O (US$m) 13 Expected return (%) – 1 year 53 Closing price as at 4 March, 2010 Stock performance and HSCEI 0.00.51.01.52.02.53.0Mar-09May-09Jul-09Oct-09Dec-09Mar-10HK$6,5007,5008,5009,50010,50011,50012,50013,50014,500VODone (LHS)HSCEI (RHS) Source: Bloomberg Jonathan Chan (852) 2532 6758 jonathanchan@ccbintl.com Timothy Sun (852) 2532 6746 timothysun@ccbintl.com VODone (82 HK) 4 March 2010 2 Table of Contents Dial to win ................................................................................................................................................................ 1 Investment highlights ............................................................................................................................................... 3 Early mover in mobile lottery ................................................................................................................................... 4 Advantages of mobile lottery ................................................................................................................................... 6 Full coverage on lottery games................................................................................................................................ 8 Sporttery – a popular new-style sports lottery ......................................................................................................... 9 Sporttery – will it go mobile?...................................................................................................................................11 Penetrating through multiple channels .................................................................................................................. 13 Indirect government support provides confidence................................................................................................. 16 Mobile gaming – a self-sustainable and profitable business ................................................................................. 18 Mobile gaming is ready for growth......................................................................................................................... 21 Other online businesses .............................................................