Shorts pile into 500.com after sector crackdown

500.com Ltd, a Chinese online sports lottery operator goes public on the New York Stock Exchange on Nov 22, 2013. [Photo/IC]

It's been a rough year and a half for 500.com Ltd, the Chinese online sports lottery operator whose revenue has been cut off during an industry crackdown. And short sellers see things getting even worse.

Bearish bets on the company's US-traded stock have surged to the highest levels ever before its second-quarter earnings report due on Wednesday. Sentiment has been souring since April on speculation the company will be left out when the regulators allow certain lottery services to be resumed after they were halted in March 2015.

"It seems like the government is thinking about giving licenses to select players in China," said Henry Guo, an analyst at New York-based M Science LLC who has been covering Chinese ADRs for a decade. "The short-interest rally reflects the probability that 500.com will miss the boat."

China's regulated lottery industry started in the late 1980s and has become one of the world's largest lottery markets by sales volume. Growth came to a halt last year when the government banned online lottery sales as it investigated the State-run industry amid a broader crackdown on government corruption.

While the shutdown has affected a range of companies－from Taobao, an online lottery platform operated by Alibaba Group Holding Ltd, to Sina Corp－it's been particularly difficult for 500.com. The company has been losing money since last year. In March, it sold a 63 percent stake in payment services provider Sumpay.cn, four months after buying it for about $36 million.

As many as 4.2 million of 500.com's US-traded shares were sold short last week, the most on record, according to data from Markit Ltd and Bloomberg. Linda Bergkamp, an external spokeswoman for 500.com, declined to comment.

Founded in 2001, 500.com lets customers buy tickets for government-authorized lotteries and bet on sports events through its website. Its customers are provincial sports lottery administration centers. China will conduct an online lottery sales trial this year, Securities Daily reported in April, citing an unidentified person.

500.com was one of the two entities the Ministry of Finance allowed to provide online lottery sales services on behalf of the China Sports Lottery Administration Center in 2012. The lifting of the lottery sales ban will probably push the stock higher, said Brendan Ahern, the chief investment officer at KraneShares, which owns a stake in the company.

"The government's decision to lift the ban on lottery sales－or not－will be a turning point for the company," Ahern said last week. "A spike in short interest is traders saying, what if 500.com doesn't receive a right to conduct lottery sales, what will happen to the stock?"

Bloomberg