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A visit to shanghai, which included a tour of the ssi gambling assets in that city, and meetings with senior management provides the basis for this overview. a meeting with the director of the shanghai welfare lottery makes it quite clear that all forms of gambling in china are under review with the exception of casino gambling which is to be restricted to macau. there is also a major push to bring all forms of gambling more closely under state control rather than have potential tax income surrendered to illicit gambling operators. the other message that came from this meeting is that any changes will be well considered and carefully planned. china does have legalised gambling at the moment. the china welfare lottery commenced operations in 1987 and the sports lottery in 1995. these lotteries had a revenue base of us.8 billion in 2004 and this is expected to rise to over us.0 billion in 2005. china also has an illegal gaming market believed to be over 15 times the size of the legal gaming market. what is the most effective way to eliminate this gaming activity. introduce legal gaming more widely throughout the community. where is the evidence that this is occurring. keno games were introduced into the beijing and shanghai markets in 2005 and shenzen is following suit in 2006. bear in mind that keno is an online game that lends itself to easy control by the state through licensed operators. as the pool grows then eventually the illegal games should disappear. the keno games were seen operating in lottery outlets, in corporate venues such as a tea house, a poker room and within a convenience store. part of the time in shanghai was spent reviewing new potential sites that ssi plans to lease for its new outlets. gaming machine parlours are being trialled in shanghai and ssi has secured 4 of the 7 licences on issue. this trial was witnessed at a 30 machine parlour. teddy cheng, the ssi chairman, provides the "connections" that appears to be placing ssi in a prominent position to at least participate in the legalisation of gambling in china. evidence of this is apparent in the allocation of keno and lottery licences in shanghai as well as participation in the trial of gaming machine parlours. the visit to shanghai provided the chance to witness the enthusiasm of peter gillooly and his gambling taskforce towards the opportunities that ssi has before it. this is a high-risk investment. ssi has clearly positioned itself to participate in the legalisation of gambling in mainland china. if it can deliver efficiently on the keno roll-out in shanghai and prove its capacity with the gaming machine parlours then it could participate in the much broader roll-out of gambling products in china. this broader roll-out will no doubt require ssi to partner with substantial international gambling businesses that will be interested in china. the value to ssi shareholders will emerge through the ability of cheng, gillooly and others to leverage their "connections" and to negotiate appropriate deals with their future partners. a speculative buy recommendation is offered in what could be a very exciting china investment.
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