Slot maker sees jackpot in China

By Liz Benston (contact)

Thursday, May 10, 2007 | 7:25 a.m.

Las Vegas casino companies are salivating over profits their new resorts are raking in on the Chinese pen insula of Macau, which rivals the Strip in money flow.

But as emerging gambling markets go, that's just the tip of the iceberg.

A Nevada manufacturer of slot machines, hoping to tap the ultimate mother lode of gamblers, has signed a deal that could lead to installing gambling devices throughout mainland China, where casino-style gambling is illegal but state-sponsored lotteries are not.

Reno-based International Game Technology is investing $103 million in a publicly traded company in Hong Kong with exclusive rights to install lottery-based slot machines in China.

The investment in China LotSynergy's games, now in more than 500 gambling halls across the country, could open the door for IGT to partner with the company to design and manufacture machines for distribution in China, at a cost much lower than making them in the United States.

The partnership positions IGT - the nation's largest slot machine maker - to be the largest U.S. gaming company to connect with the $10 billion - and exploding - mainland Chinese gambling market.

"The return on investment could be phenomenal," stock analyst Bill Lerner of Deutsche Bank said.

The Chinese devices resemble slot machines but, rather than using their own chips to independently generate numbers or symbols, are linked to a computer network that spits out the same winning numbers to all the connected devices. Players select numbers ahead of the computerized drawings - which occur every few moments - and then hope for a match.

Such devices, called video lottery terminals, are similar to those widely used by state lotteries and tribal casinos in this country.

In China, the so-called Welfare Lottery, launched in 1987 to raise money for social programs, used paper tickets, but over the past year has begun converting to more than 10,000 machines. The Welfare Lottery racks up more than $6 billion in annual sales.

The rate of future growth in the fledgling lottery industry is a matter of speculation, in part because the Chinese have been cool toward electronic gambling devices, gamblers have relatively little money to spend, and regulatory concerns have kept some key investors at bay.

Still, the Chinese culture embraces a strong belief in luck.

The IGT deal presents "a disproportionate reward for the amount of risk of that loan," Lerner said.

IGT says the welfare lottery may be in the market for 300,000 or so machines within a decade and well over 1 million devices longer-term, eclipsing the 900,000 or so slot machines across the United States and Canada, analysts say.

With China's population more than three times that of the United States and Canada, "the potential opportunity is immense," said Pat Kavanaugh, IGT's executive director of investor relations.

Shortfalls in government budgets coupled with a strong desire to snuff out underground gambling operations prompted the Chinese to reconsider long-standing gambling bans and set up a lottery trade that, at least in the minds of Chinese officials, isn't as morally problematic as the prospect of widespread casino gambling.

And with increasing numbers of Chinese flocking to Macau's flashy, Las Vegas-style slots, the government believes it can capture the discretionary dollars of China's growing middle and upper classes without hurting the country's poor.

"To keep out illegal gambling they're going to have to replace it with something that's legal," Kavanaugh said. "It's difficult to just outlaw it when it becomes ingrained in local economies."

Smaller companies from many countries have already bet on the mainland.

They include Win Win Gaming, a Las Vegas company that also produces a show tied to the multistate Powerball lottery. The company created a format in Shanghai allowing holders of its instant tickets to receive cash prizes and a chance to compete on a TV show.

The slot industry is seeking more deals outside the U.S. , where, with the spread of gambling, there is a declining number of new market prospects.

Although 80 percent of IGT's revenue stems from slots and slot systems in North America, only about half of the 92,000 machines IGT sold in the past year were distributed in North America, a percentage that will decline as countries in Europe and especially Asia open their doors to legalized gambling.

"The attractiveness of Asia is that gambling is part of their blood and culture," Kavanaugh said. "You don't have some of the moral and ethical hang-ups like you have in other parts of the world."