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The Quick and Dirty
Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More
- We believe REXLot has made materially false representations to the market. Our analysis of third-party documents, SAIC filings, and market share data shows that REXLot generates only a fraction of the revenue it publicly reports.
- REXLot’s de minimis interest income suggests its publicly reported cash balance is grossly exaggerated.
- Since 2010, REXLot has been cumulatively free cash flow negative. REXLot has used convertible bond offerings to finance dividends and acquire suspect companies with no discernable assets or operations.
REXLot Holdings: Betting On A Pipe Dream - Introduction
REXLot Holdings (“REXLot” or “the Company”) is a Hong Kong-listed company engaged in the lottery business in China, trading under the ticker 555.HK.
REXLot operates both an online and an offline business. The online business consists of website and mobile platforms, and the offline business includes lottery machines and scratch cards. REXLot has promoted the online business as a growth opportunity, and promoted the traditional offline business as a stable, recurring source of revenue that funds dividend payouts.
However, our review and analysis shows that the scale of both these businesses are a mere fraction of what REXLot claims, demonstrating to us that REXLot has committed securities fraud by making repeated false and misleading representations regarding its financial and operational performance to the market.
Based on our detailed analysis of publicly available information including REXLot’s HK filings, third-party documentation, SAIC filings, and market research, we believe that REXLot has been wildly overstating revenue and profits, and that the cash balance REXLot reports is likely also grossly exaggerated.
Furthermore, REXLot has been issuing substantial amounts of debt to finance dividend payments and make questionable acquisitions. Based on the evidence, we believe REXLot will be cut off from the capital markets. Without the ability to raise funds, we expect REXLot will struggle to maintain its dividends and will likely collapse under the weight of its debt.
Ironically, we see investing in REXLot as a lot like playing the jackpot lottery – shareholders are betting on a pipe dream.
Lisa: Who’s Professor Pigskin?
Homer: He’s a pig who can predict football winners in advance.
Lisa: How is that possible?
Homer: Because he’s got something no gambler’s ever had. A system!
- The Simpsons
REXLot operates both an online and offline lottery business in China.
Online business: the online business consists primarily of the lottery website www.okooo.com. For 2014, Okooo represented 100% of REXLot’s web operations, and 36% of total reported revenue. Our research shows that Okooo’s true revenue is a fraction of what REXLot reports to investors. Okooo is operated as a joint-venture between REXLot and an SOE partner. Both of these JV partners provide public disclosures on Okooo’s operations. However, these disclosures differ significantly, with the SOE partner reporting revenue figures for Okooo that are approximately 1/3 of those reported by REXLot.
Independent market share data also supports the lower revenue figures reported by the SOE partner.
Offline business: We believe that REXLot is inflating its offline business by overstating commission revenue from provincial customers. Government tender bids show that numerous provinces choose to purchase lottery machines as one-time buyouts rather than pay REXLot annual commission fees. These buyout contracts are significantly less lucrative, and generate a fraction of the revenue REXLot’s financial statements suggest.
SAIC filings further support our view that REXLot is overstating its offline business revenue by at least 2x.
Cash Games: REXLot’s reported interest income on its cash balance is between 0.12% to 0.27%. Meanwhile, a one-day call deposit in China offers at least an annualized rate of 0.8%. REXLot’s de minimis interest income suggests that the cash balance it reports is grossly exaggerated.
Dividends: Since 2012, REXLot has paid out HK$583 million in dividends. However, in the last five years, REXLot has been free cash flow negative to the tune of approximately HK$1.9 billion. Accordingly, dividend payouts have been financed through the issuance of HK$3.3 billion in convertible bonds, which means investors have been financing their own dividends.
Mystery acquisition: Much of the funds from the convertible bonds have been used to acquire businesses with no assets or operations. We believe that these nebulous acquisitions are nothing more than a corrupt management team perpetuating a capex fraud to funnel a combination of fake profits and real money out of REXLot.
Captive Auditor: REXLot uses an obscure auditor who only has five Hong Kong-listed companies as clients, most of which are microcaps. This choice of auditor is unusual for a Company with a +US$600 million market cap.
Valuation: Based on the evidence and our analysis, we value REXLot at HK$0.12 per share, implying 75% downside from their current price of HK$0.49.
REXLot’s online business consists primarily of the lottery website www.okooo.com (“Okooo”), and to a lesser extent, its mobile platform where individuals can buy lottery tickets through texts or apps. Okooo is the crown jewel of the online business, representing 100% of all web operations, 1 and 36% of total reported revenue in 2014 (another 10% of revenue comes from the online mobile platform):
Between 2009 and 2014, the online business has been REXLot’s only growing segment. But despite Okooo’s significance, REXLot has never discussed the operation. Except for a vague disclosure regarding the acquisition of Okooo in 2011,2 there are no other mentions of the business in any of the 2011, 2012, or 2013 annual reports.
As we determined through our investigation and analysis, REXLot’s unusual silence likely has to do with the fact that Okooo’s reported numbers are vastly overstated.
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