500.com shares slump over legality claims of online lottery business

New York-listed Chinese sports lottery operator 500.com has maintained that it has the relevant approvals from China’s Ministry of Finance relating to its online lottery business, after shares in the company slumped in New York yesterday following reports in China that had questioned its legality.

Shares in the company fell by more than 15 per cent in trading Wednesday, despite the company posting better-than-expected results for the first quarter of 2014.

This followed reports in Chinese media earlier that day which questioned the legality of its Chinese online sports lottery business, and had claimed that the China Sports Lottery Administration Center had not authorised any sports lottery websites.

In an earnings call following the release of its Q1 results, 500.com chief financial officer Zhengming Pan said that the country’s Ministry of Finance was the ultimate regulator of China's lottery industry and confirmed that the company had obtained “relevant approval” from the Ministry relating to its online lottery business.

Pan said that the company had entered into “commercial contact” with a number of provincial sports lottery offenders which “clearly laid out our roles and the responsibilities”. He added that the legitimacy of its business has been indorsed by the company’s legal counsels.

In its results for Q1, 500.com reported a 127 per cent increase in net revenue to RMB89.8m ($14.4m), with total purchase amount rising 95 per cent to RMB1,054.9m, due to increased marketing efforts.

It was down 2 per cent quarter-on-quarter however due to the regular eight-day suspension of sales of lottery products during the Chinese New Year holiday. Active customers increased by 28 per cent to 1,144,000 compared to the previous quarter.

“I am pleased to report another strong quarter as we begin 2014 on a solid footing,” said Man San Law, founder, chairman and CEO of 500.com. “With mobile purchases now approaching one third of total purchases, we will continue to invest in R&D, marketing and our innovative mobile services as we reach out to a new user base to reinforce our leadership position.”

Operating expenses increased by 38 per cent to RMB60.5m during the quarter, with cost of services up 60 per cent to RMB8.5m. Sales and marketing expenses rose 31 per cent to RMB20.9m following increased and cost controls and data analysis of user activity in more efficient marketing efforts.

General and administrative expenses climbed 43 per cent to RMB23.9m, mainly as a result of the increase in share-based compensation expenses associated with the share options granted to the company’s employees. Service development expenses rose 18 per cent to RMB7.1m following an increase in the number of employees since Q2 2013.

500.com reported an operating profit of RMB31.7m for the quarter, with net income of RMB27.5m compared to a loss of RMB3.6m a year ago. This included a one-off income tax benefit of RMB94.7m.

For the second quarter, the company expects total purchase amount to be between RMB1,330.0m and RMB1,380.0m, representing an increase of 91 to 97 per cent year-on-year.

In an earnings call following the release of its Q1 results, Law said that the company is in the final preparation stages for its world cup marketing campaign and a series of promotional on TVs. The campaign and promotional activities will include products such as interactive games to track more users.

“I am confident that our strategy and partnership will help to sustain our leadership position and create bigger value for the shareholders in the long run,” he said. “We are excited about the market opportunity and are confident that we have put the right people needed to ensure future success.”

As at March 31st the company held cash and cash equivalents of RMB271.6m compared to RMB544.3m a year ago.

Shares in 500.com Limited (NASDAQ:WBAI) fell by 15.05 per cent to close at $28.61 per share in New York yesterday.