INTERNET: HP, Intel Get Strange China Bedfellow In Online Lottery Site

By newsdoug on June 15, 2015

Bottom line: Tsinghua Unigroup’s latest investment in an online lottery ticket seller hints that it may add Internet services to its growing list of high-tech products and services through separate tie-ups with Intel and HP.

A previously little-known company connected with China’s leading science university has made headlines over the last year through major new tie-ups with global tech titans Intel (Nasdaq: INTC) and Hewlett-Packard (NYSE: HP), which makes its latest investment just slightly puzzling. That investment is seeing Tsinghua Unigroup pour a relatively modest but still significant $124 million into 500.com (NYSE: WBAI), a New York-listed Chinese firm that sells lottery tickets over the Internet.

I’m being just slightly whimsical in tying Unigroup’s latest purchase to its much larger recent tie-ups with Intel and HP, which I’ll recap shortly. But that said, Unigroup has rapidly emerged as a player to watch in a China’s underperforming domestic microchip and IT services sectors, and most of its high-profile investments since it first moved into the spotlight have been centered on efforts to assemble a homegrown Chinese giant in those spaces.

We’ll begin with a review of Unigroup’s latest strategic move, which has the company paying the $124 million for 15.2 percent of 500.com. (company announcement; Chinese article) Unigroup purchased 6.35 million of 500.com’s American Depositary Shares (ADSs) for $19.50 each, representing a modest 1.4 percent discount to their average trading price over the last 30 days, and an 18 percent discount to their last close before the deal was announced.

The announcement prominently features the name of Unigroup’s Chairman Zhao Weiguo, 48, indicating that he was the architect of the deal and is the man to watch behind his company’s many recent tie-ups. His name is mentioned 6 times in a single paragraph of the announcement, detailing his many roles at Unigroup and Tsinghua, China’s leading science university. In addition to mentioning his role as the newest board member of 500.com, it also adds that his background is as a electronic engineer, which explains his interest in the earlier Intel and HP tie-ups.

Unigroup first splashed into the headlines in 2013 when it privatized Spreadtrum and RDA Microelectronics, 2 of China’s top telecoms chip designers that were separately listed in New York, and merged them into a single entity. It then made bigger headlines last year when Intel purchased 20 percent of the newly merged company for $1.5 billion. (previous post) Many saw Intel’s move as a play to gain new traction for its sputtering wireless chip division, which has become a squarely second-tier player behind bigger names like ARM Holdings and Qualcomm (Nasdaq: QCOM).

Most recently Unigroup was back in the headlines last month when it emerged as the surprise winner in the bidding for a 51 percent stake of HP’s China-based H3C unit, a networking equipment maker that competes with Cisco (Nasdaq: CSCO). (previous post) In that instance H3C paid up to $2.3 billion for the stake, and observers said the deal could help HP maintain its position as a leading supplier of IT services in the fast-growing Chinese market.

All that brings us back to the latest deal involving 500.com, whose history has been quite checkered since it made a New York listing in late 2013. The company’s shares initially skyrocketed after the IPO on big hopes for its core business of selling lottery tickets online. But then they tanked and fell below their IPO price early this year after Beijing embarked on a clean-up of a broader online ticket-selling sector that had become quite unruly and filled with fraud.

The shares have bounced back since then and jumped 7 percent to nearly double their IPO level after the announcement of Unigroup’s investment. Investors are probably hopeful that Unigroup will ultimately make a buyout offer for 500.com, or perhaps that it will find a place for 500.com in the new company it is assembling through the series of high-profile tie-ups over the last 2 years.

Personally speaking, I don’t really see where 500.com might fit into Unigroup’s new tech plans, which seem more focused on traditional hardware than Internet-based products and services. The announcement only says that 500.com will gain access to Tsinghua University’s strong R&D capabilities through the tie-up, hinting that perhaps Unigroup wants to add an Internet component to the company it is assembling. We’ll have to wait and see what happens next, though I suspect this isn’t the end of Unigroup’s recent buying binge and perhaps its next big purchase could be another Internet services firm.