Electronic Game Card: Distribution, Distribution, Distribution.

Electronic Game Card, Inc (EGMI) is growing 40%+ yr/yr, has $10m in cash, no debt, and is trading at 10x TTM, and 7.5x 09’ EPS guidance. Roth Capital this week upped 2010 EPS projections to $0.20 after the company announced two new major agreements. I would like to go into these two new agreements and their potential effect on EGMI into 2010.

On June 17^th, EGMI announced an MOU with China LotSynergy to partner to deliver EGMI lottery products to the Chinese market. From a credibility perspective this is about as good as it gets as China LotSynergy is one of the only players in the Chinese welfare lottery industry.

• Background on China LotSynergy: China LotSynergy is a Hong Kong listed company principally engaged in the supply of gaming equipment to the China Welfare portion (~50%) of the China lottery market. We note that CLS has also partnered with some of the largest gaming equipment suppliers in the world including IGT and GTech. *Roth Capital Report 6/18/09
• China Lottery Opportunity: According to various reports the legal China lottery market generated ~$15 billion in sales in 2008, while illegal forms of lottery are estimated to be ~10x this amount. We believe the Chinese government's latest efforts to crackdown on illegal lottery operations (effective July 1st) should help drive further interest and growth in the legal lottery going forward. *Roth Capital Report 6/18/09
• New Developments for China LotSynergy: In a Press release on 7/3/2009, China LotSynergy announced it has won the bid for lottery betting terminals and service for the Guangdong provincial traditional computer welfare lottery tickets business. Guangdong is the biggest province in China in terms of welfare lottery market sales.
• Conclusion: I believe that this JV when finalized with China LotSynergy will be a significant material event for the company and be highly accretive in 2010.

On June 30^th, EGMI signed an exclusive sales representative agreement with the FMM-The Moscoe Group, to sell EGMI Interactive Entertainment and Education “Know-it-All QuizCards” and “iQuizCards” branded cards.

• Background on FMM-The Moscoe Group: FMM is a privately held consumer products distributor based in Minneapolis, MN. FMM represents a variety of leading consumer brands and has relationships with key N. American retailers with the top six totaling 19k retail store locations. While the company did not disclose individual clients, we believe the likely six categories are Mass market, Consumer electronics, Convenience, Grocery, Airport, and Travel. *Roth Capital Report 6/30/2009
• Impact on EGMI: We estimate the FMM distribution agreement will add $10-$15M in revenue (7-10M units) and 3-5 cents in EPS in FY10. We anticipate initial orders to begin in 4Q and we are now modeling in $10M in revenue for the company's Education products segment in FY10 to reflect this agreement. *Roth Report 6/30/2009

Conclusion:

The future for EGMI and its shareholders couldn’t be any brighter. The current valuation suggests a company that isn’t growing at all, not a company growing 40%+ yr/yr. I believe more institutions are going to catch onto EGMI over the summer months thus valuing the shares closer to fair value. My short term target (3 month) is 25x fully taxed 2009 guidance ($2.50/share), with a 12 month target of 25x 2010 Roth Guidance of $0.20 ($5/share). I also believe the company could land additional agreements in the short-medium term that could provide 50% upward revisions to both target prices.

Disclosure: Long EGMI

Comments

[Glen Bradford:]

dude, opportunity cost.

there are lots of other opportunities that have similar growth that are cheaper.

i'm just trying to help you out. i buy (only) (i wish i could bold that "only") the most undervalued companies i can find.

i refuse to pay more than anything else i can find... and right now, paying what ben graham's formula would price as "no growth" for a growing company isn't what i'm into.

i'm looking at companies with growth above 25% with p/e's less than 4, and less than 2 preferrably.. selling less than my adjusted book value (get rid of all the bullshit assets)

anyway. that's what i do. so far, it works pretty well.

Jul 08 11:04 PM