On Tuesday, April 30th, the procurement division of The Ministry of Finance released details of the winning bid to implement Block Chain Technology to games offered by Welfare Lottery Administration nationwide. The winner was AGTech (8279 HK, $AGTEF) AGTech is 60% owned by Alibaba-ANT Financial and is the exclusive lottery arm of the conglomerate. (Alibaba purchased the controlling stake of AGTech in early 2016) China Welfare Lottery is one of two lottery operator in China with about 50% market share of $90 Billion business.
There is a mandatory seven day cooling off period in which time the company will release more details of this bid to the stock market including the potential application of BlockChain Technology to improve on current lottery backend systems and allow greater transparency. Meanwhile, 99.9% of investors have no idea about this news creating a great buying opportunity to own AGTech. (Buy local stocks in HK for liquidity. 8279 HK)
Block Chain & China
The Chinese government does not like Cryptocurrencies but loves Block Chain Technology (BCT). BlockChain give the Chinese government the efficiencies and knowledge they require in order to maintain their firm control over the country as an authoritarian entity. ANT Financial One of the parent company of AGTech has been working on developing its own proprietary BCT since the birth of cryptocurrency. ANT's 350+ engineers have been working closely with AGTech to design BCT for the Chinese lottery and online gaming industry for the last two years.
Chinese Lottery Industry
China is the second biggest lottery market behind the U.S. with less than 10% of the population ever having played the lottery games (enormous potential). Distribution is the biggest bottleneck to growing the business. There are two authorized operators (Welfare Lottery & Sports Lottery), and there are appx 250,000 standalone lottery shops or terminals located throughout the country. That is not nearly enough to service 1.5 Billion consumers.
Like all emerging economies where the use of the Internet allows the country to leapfrog antiquated methods, the Internet Sales put the lottery business on the fast track. +35% CAGR. Unfortunately, the lack of an adequate nationwide platform invited criminal elements to steal from the government and ultimately the Chinese Citizens. Beijing had no choice but to ban Internet Lottery Sales in 2014 temporarily.
Welfare Lottery's Path To Redemption
Welfare Lottery was always a bigger player than Sports lottery in China with 55% market share. However, with success comes money and temptations. The industry-wide audit back in 2013 caught numerous lottery officials doing "wrong." Unfortunately, most of the officials that got caught came from the Welfare lottery side. I believe this was why AGTech never dealt with anyone at the Welfare Lottery in the past.
By working with AGTech to implement Block China Technology in all of their Lottery products, this is Welfare Lottery management's attempt to regain the trust of the Central Government. The use and implementation of the BCT will show that they are using cutting edge technology and are committed to absolute transparency. Many experts agree that the Block Chain Technology is the solution to everything problematic about Internet "commerce" in China including Online/mobile games and lottery.
This is also the first time AGTech is working with the Welfare Lottery signaling that AGTech believes Welfare Lottery administration has turned a corner opening up 100% of the Chinese Lottery market for AGTech.
This winning bid is to implement Block China Technology to Welfare lottery games and demonstrate the power of Block Chain Technology. AGTech management is highly confident that the Welfare Lottery and the government officials will love what will they see. Of course, Block Chain is best applied when the Internet is involved so I have no doubt that the Welfare Lottery will be pushing very hard for the resumption of Internet Lottery Sales.
For AGTech, as the only company working with the Chinese government is looking at an opportunity to control the entire verticle of lottery and gaming business.
Government: Provide absolute transparency and track every single dollar on command
Businesses: Sell AGTech's equipment and services to vendors who want to sell lottery and online games to consumers. Install Smart Technology system to two million consumer-facing Alibaba retail entities to market lottery and other online entertainment/gaming products (retail distributors receive 6%-8% commission on each lottery ticket they sell)
Consumers: Provide safe, secure, and state of the art lottery and online gaming experience. AGTech will also have full access to data of every consumer that play Welfare lottery and games.
AGTech has a Monopoly in China
Tencent & NetEase were moving into the Chinese lottery business aggressively over the last few years. But last year, both companies got caught operating Online Sports Betting and lottery business without a license. These two companies literally made billions without paying any taxes. Of course, Pony Ma, and William Ding pleaded ignorance (How can you not know about a business unit that was generating billions in revenue?) But one of the penalty was that they both had to shut down their Chinese Lottery business unit for good. This means Alibaba-AGTech is the only super-tech conglomerate with all the resources to work with the Chinese government.
Not Just Lottery
For AGTech, the lottery is just one product. AGTech wants to become the Block Chain company in China that works with the government for EVERYTHING! What price tag would you put on such a company?
Due to "Guilt by Association" with other de-listed (555 HK) and have no business model (1371 HK) once-dominant lottery companies, the market cap of AGTech has shrunk to $675 million including $200 million in net cash. Once this news of winning the Welfare Lottery bid to implement Block Chain Technology to Games and lottery products, I would think that a light bulb will come on top of few smart investors and begin to value AGTech more appropriately.
Till then, this lull should be treated as a great buying opportunity.
AGTech management played an important role in helping Alibaba-Ant Financial obtain a banking license in Macau last year. Last week, Ant Financial celebrated the grand opening of Xinghui Bank. Xinghui Bank will specialize and promote Internet-banking by using remote technologies as well as applications on mobile phones for customers to conduct banking transactions online. For their effort, AGTech received a 10% stake in Xinghui Bank which will grow in value over time. There is zero value of Xinghui bank embedded in AGTech share price.
India Mobile Gaming Platform
In India, AGTech has a 45% stake in GamePind. One of India's biggest mobile game platform developed in conjunction with PayTM, India's biggest e-commerce, and payment processing company with 350 million registered mobile phone carrying customers. The parent company of PayTM is One97 which Berkshire Hathaway took a strategic stake recently to value the company at $10 Billion. AGTech has been slowly building the mobile game business, and now the app made it to PayTM's front page (see waving mobile phone on top) GamePind's Fantasy Cricket Game has become one of the most popular games in India.
We are not hearing anything about GamePind yet because AGTech is minority stakeholder, so they are following the lead from One97. One97 will tout GamePind's success when they are ready to take advantage of the publicity.
None of these three fantastic opportunities Block Chain Technology, Macau Bank, and GamePind is being reflected in the share price of AGTech, but I sense that this will change.
These are my past reports on Alibaba-AGTech for more background information.
Disclosure: I am/we are long baba. AGTEF.