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UPDATE - DJI Holdings moves into profit in June

Published: 12:07 25 Sep 2014 BST

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Recently listed Chinese lottery products firm DJI Holdings (LON:DJI) saw a sharp acceleration in top line growth in the second quarter of 2014.

The group achieved its first month of profitability in June and has continued to be profitable since, helped by a 347% month-on-month increase in gross sales in June during the football World Cup.

“The World Cup was great for us, as it introduced us to a whole new audience,” chief financial officer Rodney David told Proactive Investors.

“As we expected, our cost base is pretty much set,” DJI’s chief number-cruncher said. “It is now scaling exercise for us, adding servers and processing power, rather than headcount,” he added.

As chief executive Darren Mercer explained to Proactive, the Chinese gaming industry is undergoing a dramatic change, with a move away from old-fashioned “Saturday night lottery draws” to a “gaming on the move” model.

“There has been a big change in the demographic, towards a younger, middle-class audience,” he said.

Although technically gambling is illegal in China, gambling type games can be enjoyed through the two state-controlled lotteries: the Welfare Lottery and the Sports Lottery.

DJI has a foot in both camps, and serves both the business-to-consumer (B2C) and business-to-business (B2B) markets. It has well-established relationships with key participants within the industry.

“We haven’t just arrived overnight. We have done the hard yards and we are the safe pair of hands for anyone looking to address the Chinese lottery market,” chief executive Darren Mercer told Proactive.

Gross sales in the first half of 2014 totalled £134.2mln, up from £5.7mln the year before.

The loss before tax was cut to £2.26mln from £3.59mln the year before, as revenue grew to £3.37mln from £517,710.

“It has been pleasing to see this momentum in growth and profitability continue into the third quarter,” Mercer said in a stock exchange statement.

"Our strong licence position and robust technology provide us with an ideal base to grow across both our B2C and B2B platforms. Additionally we continue to work on a number of new developments which we are confident will make a significant contribution in 2015,” he added.

As in most of the developed world, Chinese punters are increasingly turning to the Internet to have a flutter, particularly via mobile communications devices.

“We are well-positioned to benefit from this trend in the second half of 2014, into 2015 and beyond," Mercer said.

House broker Canaccord Genuity said DJI represents a unique UK opportunity to invest in the fast-growing regulated Chinese lottery market.

“DJI’s historic revenue run rate is modest, but through a series of acquisitions and partnerships with leading Chinese internet groups it is now well positioned to penetrate a market with high barriers to entry and material growth drivers,” the broker said, as it issued a research note on the firm.

Canaccord Genuity’s recommendation is ‘hold’ with a target price of 152p.

Based on the broker’s forecast earnings for fiscal 2015, that puts the shares on an earnings multiple of around 22.1, with that multiple falling to around 16.8 in 2016, using the broker's forecasts.

To put that into context, UK bookie William Hill is trading on a forward multiple of around 12.7, and is operating in a mature market, whereas, Canaccord points out, the regulated online lottery market is growing fast in China.

Mercer observes that with illegal gambling having 80% of the market – some observers have suggested it is even higher at 90% – the potential market is enormous.

Shares were virtually unchanged at 145p at noon, and are up 45% since floating two months ago.

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