500.com IPO Is A Winning Gamble

| About: 500.com Limited (WBAI)

500.com (NYSE:WBAI), a leading Chinese online sports lottery service provider with principal offices in Shenzhen, China, plans to raise $57.9 million in its upcoming IPO. The firm will offer 5.8 million shares at an expected price range of $9.00-$11.00 per share. If the IPO can find the midpoint of that range at $10 per share, WBAI will command a market value of $329 million.

WBAI filed on October 22, 2013.
Lead Underwriter: Deutsche Bank Securities
Underwriters: Oppenheimer and Co, Piper Jaffray & Co

WBAI is a leading online sports lottery service provider in China, having captured the second largest market share in the country for 2012 and the largest market share in the country in the first half of 2013 in terms of purchase amounts of sports lottery products. The firm aggregates and processes lottery purchase orders, deriving nearly all of its revenue from service fees paid by local sports lottery administration centers for the purchase orders of sports lottery products directed to such centers.

WBAI offers the following figures in its F-1 balance sheet for the nine months ending September 30, 2013:

Revenue: $26,701,000
Net Income: $3,365,000
Total Assets: $75,990,000
Total Liabilities: $72,348,000
Stockholders' Equity: $3,642,000

WBAI has seen swift growth both in its user base over the past three years. For December 31, 2010, 2011, and 2012 and September 30, 2013, firm had 8.8 million, 13.8 million, 16.6 million and 18.4 million active users, respectively.

WBAI benefits from several macro-level trends in China, most notably including an increased interest and acceptance of lotteries and gambling, increasing internet usage, and increasing internet penetration in lottery distribution.

WBAI must compete both with other online lottery service providers and traditional offline lottery agents. The firm's largest online competitor is Taobao.com, which held a 24% market share for the nine months ended September 30, 2013 as opposed to WBAI's 29%.

Though online lotteries are making gains in China, offline lotteries remain dominant: approximately 97.5%, 96.7%, 95.0%, and 94.4% of lotteries were through offline agents.

Founder, Chairman, and CEO Man San Law has been in the online lottery service industry since 2001. Mr. Law is the founder of E-Sun Network. He previously served in various positions with Shenzhen Yangguang Co Ltd and holds a bachelor's degree from Wuhan University and an Executive Master of Business Administration Degree from Cheung Kong Graduate School of Business.

500.Com has positive numbers and consistent income available from gambling service fees. We view WBAI as an aggressive short term IPO trade in small quantities for growth oriented accounts in the proposed range of $9 to $11. The deal is already oversubscribed even though the deal is only scheduled for Friday.

Chinese internet firms are generally risk-heavy, given the Chinese regime's unstable relationship with the internet and communications in general, but the volatile nature of its lottery laws makes WBAI a doubly risky enterprise. The regime has only recently begun to regulate online lotteries, and will likely continue to change the regulations as its understanding of them develops.

The firm admits in its F-1 filing that it was already forced to shut down non-mobile sports lottery operations for a period of several months as a result of changing regulations. New regulations also led WBAI to permanently end its former welfare lottery business.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WBAI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.