500.com(WBAI.US):2Q rev evaporation due to moratorium;uncertainty persists

2Q15 business grinds to a halt

    500.com reported nil GMV/rev for 2Q15 given the govt moratorium on onlinelottery distribution. Non-GAAP op loss was RMB46m (vs RMB67m income2Q14 /RMB15m loss 1Q15), vs DBe op income of RMB19m. Non-GAAP netloss came in at RMB31m (vs RMB83m income 2Q14 /RMB13m loss 1Q15), vsDBe net income of RMB25m. 500.com provided no 3Q guidance given a lackof clarity around lottery sales resumption. With the national system testingclose to completion, we envision system debut and business resumptiontowards the end of 3Q. Maintain Sell on a lack of visibility.

    Investment by Tsinghua Unigroup; New Chairman appointment

    The company gained a US$124m investment from Tsinghua Unigroup on 9June. Tsinghua Unigroup is now the largest shareholder with a 15.2%shareholding. The cash injection will help to maintain 500.com’s businessoperation. As such we note a total net cash of US$250m as of 2Q15 end,sufficient to support operations for a while. 500.com appointed Mr. WeiguoZhao, the chairman of the board of Tsinghua Unigroup as a director of500.com pursuant to the investment agreement.

    Reducing TP by 2% to US$13.5; Maintaining Sell

    We cut our FY15/16/17E GMV forecast by 27%/21%/24% to reflect the laterthan-expected business resumption, and cut non-GAAP net income by70%/38%/34% to factor in minimum operating costs for FY15E and possiblemarketing spending needed after business resumption for FY16/17E. Our TP ofUS$13.5 is based on a 0.8x PEG ratio on non-GAAP EPS FY15E of US$0.19 (vsprior US$0.62) and EPADS CAGR FY15-17E of 91% (vs prior 27.8%). Our CAGRassumption becomes higher because of a low FY15 EPS base. Risks: fasterbusiness resumption, success in connecting the national system, fewer licenseapprovals to peers.