Over the weekend, word started to get around that Beijing is preparing to demand that all illegally operators of Internet Lottery sales will be forced to return all of their revenue to government or face stiff penalty.
There were over 2,200 Internet lottery sales websites across the country operating without proper license from Ministry of Finance. Government audit revealed many violations (400+ cases) shocking the senior leaders to take steps to bring the sector under tighter control. Policy change is likely to come including leadership changes which means longer delays for current ban in place.
It is not clear yet whether 500.com's "Permission to explore" is good enough to get them off the hook from returning all of their revenue to government but if I were them, I would be cooperating fully to give themselves any hope of obtaining proper Internet lottery sales license.
Best case scenario for 500.com doesn't look good. Even if they manage to appease the regulators by paying some sort of penalty and obtain proper license, they will be competing with mega-cap Internet / e-commerce giants like Alibaba, Tencent, Baidu to sell identical products to same audience which spells big margin compression. Second, their sports betting business is coming under pressure as National Sports Lottery and HK Jockey Club is about to release National Sports Betting IT Platform which all sports bets must go through making 500.com's platform obsolete which also means margin compression. Resumption of Internet lottery sales will not happen till National IT Platform is built which will take a long time. Years perhaps.
It's not all bad news for the sector as government plans to introduce Province Based Mobile Smart-phone Games (PBMG) as quid-pro-pro shortly. This is non-Internet based system using closed APP system which offers 100% transparency and control. Company best positioned for PBMG is HK listed company called AGTech, China's leading lottery Systems & Content provider. (local symbol 8279 HK, ADR trades under AGTEF) and China LotSynergy (1371 HK)