--hk broker visit by directors

HK broker commences coverage

"Company Visit: Sino Securities Int’l – An Alternative Mainland Lottery Play

1. We have met with management of Sino Strategic International (SSI AU) yesterday. The Australia listed company is involved in the lucrative lottery industry in China through the provision of venue to house the Keno/Lotto machines.

2. Permits issued by the Shanghai China Welfare Lottery Issuance and Administration Centre have been secured so that they can operate up to 750 Keno and 750 Lotto centres (out of a total 1,000 for each) in Shanghai.

3. About 50 out of the existing 80 SSI’s outlets belongs to cooperative shops, while the rest are self-owned betting shops. 1% of the revenue (out of 7%) will be shared by the venue owner for cooperative shops, while SSI will bare RMB4,500 rental / staff cost for self-owned shops.

4. They are expanding the proportion of self-owned shops, so that the split among self-owned shops, cooperative shops and multifunction shops will become 75:5:20. Management expects the network to reach 1,000 shops by the end of 2006.

5. Based on RMB10,000 revenue per shop per day, we estimate total revenue to exceed RMB3bn a year. Subtracting RMB51m rental / staff cost and RMB1.5m shared by venue owners from a net revenue of RMB210m, the full year EBITDA should be RMB157.5m.

6. Investing in venue providers like SSI is an alternative way to participate in the highly profitable China lottery industry. It will be a boost to their share price, in case SSI manages to secure permits to operate shops in other cities, which is what they are working on. The success in Shanghai makes their fight for permits in other cities much easier.

7. Entry barrier is high, since only the local China Welfare Lottery Issuance and Administration Centre can issue permits for the outlets, while the number of outlets is fixed as well. However, the initial capital outlay will be high, RMB50,000 deposit will be required for each shop. (already done).

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