The Vietnamese NFO game was officially launched in Ho Chi Minh City two days ago. While we are positive on a new source of income, the new venture is likely to have an immaterial impact to BJTOTO given that BGTI’s returns is in the form of a formulated commission based on ticket sales, which should be less attractive as compared to Malaysian operations. Furthermore, BJTOTO only owns a 10% effective stake in the operations and it will only account for investment income in the form of dividends. Despite this positive-bias news, we downgrade the stock to MARKET PERFORM while maintaining price target at RM3.40/DCF as share price has risen 14% in the past one month in the run-up to this new launching.

Vietnam NFO operation launched. We witnessed the official launching of the NFO operations with its first lotto game of Mega 6/45 in Ho Chi Minh City (HCMC), Vietnam on Monday. The game is only available in HCMC initially to be extended nationwide within the next five years. The operations which have an exclusive operating license of 18 years, is carried out by Berjaya Gia Thinh Investment Technology Joint Stock Company (Berjaya GTI) which is 51% owned by Berjaya Lottery Vietnam Ltd (BLV) while Vietnamese investors owning the remaining 49% stake. BLV is 80% owned by BJCORP (Not Rated) and 20% by BJTOTO.

RM12b market size. Potential in Vietnam is huge given the population size which is triple that of Malaysia at 94m. It was reported that the industry size for the paper lottery in Vietnam was USD3b in 2015 while the illegal market could be three times higher. Of this, 88% of the sales are from the southern region where HCMC is located. This is the main reason that this computerised game is introduced first in HCMC. Under the regulations, each game is allowed to draw three days a week, hence, it could have drawn every day when more games are introduced in the future. Meanwhile, the draw days for Mega 6/45 are Wednesday, Friday and Sunday. Berjaya GTI expects to launch a digit game in four months’ time and another jackpot lotto game in the next 12 months.

Fee-based operator. Berjaya GTI operates the computerised games through terminals, which include dedicated and non-dedicated outlets, telephones and the internet online. For a start, 800 terminals will be up within the first month of operations, to reach 3,600 terminals by the first year and eventually 10,000 terminals in five years with a total capex of USD210.6m. Unlike Sports Toto Malaysia which takes the risk of prize pay-out, Berjaya GTI will be paid based on: (i) percentage of sales, (ii) reimbursement of certain opex, and (iii) capex. Management did not disclose their service fees; we understand that prize pay-out is 55% by law, 15% consumption tax, 10% VAT and 8% agent commission while the corporate tax is 20%.

Cut to MARKET PERFORM. In our view, impact to BJTOTO from this new venture is immaterial given its 10% effective stake while margin from this business should be lower than in Malaysia as it is being paid for fees of managing the operations. Assuming: (i) 7.5% fee, (ii) 2% ticket sales growth, (iii) 75% market share when it has 10,000 terminals, and (iv) earnings payout of 75%, investment income based on dividend to BJTOTO would be c.RM50m a year from 5th year onwards, and would add RM0.44/SoP share to BJTOTO’s valuation. Meanwhile, we keep our estimates and RM3.40/SoP per share target price unchanged for now given it is too early to gauge Berjaya GTI earnings. On the other hand, with the share price rising 14% in the past one month, we believe it is reflective of this new venture. Hence, we downgrade the stock to MARKET PERFORM from OUTPERFORM. Risk to our downgrading is stronger-than-expected returns from Berjaya GTI.

Source: Kenanga Research - 20 Jul 2016