London-based Betex has found a novel -- and legal -- way to exploit the Chinese obsession with gambling.
Its software is installed in a growing number of retail outlets and it allow Chinese punters to bet on European and US sports events -- as well as traditional numbers games. The business is growing rapidly.
Betex has just announced its "Great Leap Forward" -- an expansion into seven more provinces which will add at least 860 stores to its network. It currently operates in six provinces and has around 1,800 stores generating revenue.
The AIM-listed company has an interesting business model. It pays 35% of the gross fees earned from the terminals to the owners of the retail outlets where its software is installed. After deducting operational costs, the net profit is split 70:30 between the company and the software's designer, who now works for the company. Early indications are that net profits will be around 8% to 12% of gross fees.
Betex's first move into Chinese sports betting came a year ago when it won contracts to manage the state sports lottery in the provinces of Hebei and Guizhou. Right from the start, it says the Chinese business has been performing above expectations. It now plans to also offer a lottery service for mobile phone users in three provinces.
Its decision to roll out its products gradually, province by province, has much to do with the way the gambling market is regulated in China. But it has also is a good risk-reduction strategy and other western firms engaging with China should take note.
China's lottery market is worth $8.6bn and in 2004 it was the worlds tenth largest by sales. It has been growing at at a compound annual growth rate of 36%.
Despite strict laws against gambling in any form other than the government-approved lottery, illegal gaming activity in China is estimated to be worth an astonishing $75bn, and the lion's share goes on bets on football matches.
To lure this money back to the regulated market, Chinese authorities began offering football lotteries five years ago, starting with games from Italy's Serie A and the UK's Premier League -- European matches were seen to be "cleaner" than Chinese soccer matches. Ironically, a match-fixing scandal rocked Italy's Serie A this year.
While many of its counterparts in the west have been hard hit by the clampdown on internet gambling -- which Betex also offers -- the company appears to have found a real winner with sports betting in China and it enjoys the much-vaunted "first mover advantage".
