PacificNet Acquires Guangdong Poly -- A Leading Legal Lottery Operator in China

GUANGZHOU, China, Sep. 5 /Xinhua-PRNewswire/ -- PacificNet, Inc. (Nasdaq: PACT - News), a leading provider of gaming technology, e-commerce, and Customer Relationship Management (CRM) in China, announced today that its Chinese subsidiaries, PacificNet Technology (Shenzhen) Limited and PacificNet Games Limited, have entered into an agreement to acquire 51% equity interest in Guangdong Poly Blue Express Communications Co., Ltd. (Guangdong Poly). The acquisition is expected to enable PacificNet, through its operating subsidiaries in China, to participate in China's rapidly growing state- sponsored legalized gaming and electronic lottery operations. Guangdong Poly is a leading operator approved by China's Welfare Lottery Center to develop and operate real-time electronic paperless lottery services in China, in accordance to the rules and regulations set by China's Welfare Lottery Center. The Company expects this acquisition to be accretive to 2008 earnings.

According to the agreement, PacificNet Technology (Shenzhen) Limited and PacificNet Games Limited will acquire 34% and 17% of Guangdong Poly Blue Express Communications Co., Ltd, respectively. The investment in Guangdong Poly is structured dependent on the achievement of certain profit milestones. The investment by PacificNet is subject to the successful completion of customary due diligence and final documentation. The financial terms of the deal were not disclosed.

In China, the central government has granted the rights to issue only two types of lottery: China Welfare Lottery (CWL) and Sports Lottery. The China Welfare Lottery Issuance Center (CWLC) was authorized to issue lottery since 1987 and the China Sports Lottery Administration Center (CSLC) since 1994. Other lotteries issued outside these two government bodies are illegal and are prohibited by the government. Lottery in China is run by the government for welfare purposes. China's lottery market surpassed US$10 billion in 2006 and is expected to continue growing according to the Chinese Ministry of Finance, which oversees all of China's lottery sales. Of the US$10 billion spent on lotteries in China, over US billion was generated via the China Welfare Lottery (CWL) system, representing a 20% increase over 2005.

"We are very pleased with this acquisition," said Victor Tong, President of PacificNet. "Paperless e-Lottery is an area where we see potential for growth in the Chinese market. As player returns are increased from the current 55% payout to the planned 65%, we feel the market for legalized lottery in China will increase substantially and the market for new video lottery terminals will blossom. This acquisition is in line with PacificNet's gaming focus and will enjoy a synergy with our other subsidiary companies in the areas of software development, hardware, distribution, etc. We see this acquisition adding to our bottom line and to our shareholder value."

"We are delighted to successfully complete this acquisition with PacificNet," said Mr. Gu Hao, General Manager of Guangdong. "With the rapid development of the domestic market and the gradual opening of the lottery market, more and more companies will rush to take a piece. As a member of PacificNet, we will be well positioned to make the most of market resources and foster better online lottery services and relevant value-added services as to attract more customers and promote the company's competitiveness in the market."

According to reports by China's Ministry of Finance, China's total lottery sales revenue has been enjoying rapid growth in recent years and reached a record high of 81.93 billion Yuan (US.5 billion) in 2006, an increase of 10.54 billion Yuan from 2005's RMB 71 billion (US$8.6 billion). Analysts predict that China's lottery market will reach RMB 200 billion (US$25 billion) in 2008. About 229 million Yuan (US$29.5 million) in lottery tickets were sold every day in China in 2006 (excluding the eight days around the Chinese New Year holiday when lottery sales were suspended). Of the total, sales from China Welfare Lottery, the only national lottery approved by the Chinese government, hit 49.5 billion Yuan (US$6.2 billion) in 2006, up 20 percent from 2005. The sales of the Sports Lottery increased 2.1 billion Yuan to 32.3 billion Yuan (US$4.15 billion). In 2006, China raised 27.76 billion Yuan (US$3.57 billion) in public welfare funds from lottery sales, 12.3 percent more than in 2005. The ministry said the funds were equally shared by the central government and the local governments, which will be mainly used for social welfare such as the development of public sports facilities, education and health care for the handicapped. A large part also went to the social security fund to fill its deficit. China launched its first lottery in June 1987. Lottery ticket sales are one of the major sources of funds for building community sports facilities and financing the country's social welfare programs. Other than the two government sponsored lotteries (Welfare Lottery and Sports Lottery), all other forms of gambling are illegal in mainland China. China's lottery market has expanded quickly over the last two decades but the China Welfare Lottery Management Center still describes the penetration of lottery in China as low. As in 2006, China's per capita lottery sale accounts for only 0.663 percent of the per capita net income, which is equivalent to only 1-2 percent of the world average.

China lottery experts project China's lottery market to grow by CAGR of 31% to US$34.5 billion by 2010 to become the world's second-largest lottery market after the US, which turned over US$54.2 billion in 2005. In per capita terms this would equate to US$26 for China's lottery, among the lowest in the world.

The potential to generate a strong tax revenue source and fight illegal gambling should drive government support for China's lottery, and lead to the introduction of new games, better distribution channels and, potentially, increased payouts. Just as the boom in Macau gaming was driven largely by the Chinese government's commitment to transform Macau into an entertainment destination of Greater China, it is believed that a boom in the China lottery market is a likely consequence of government's commitment to crack down on illegal gambling. It is predicted that new lottery products, such as high frequency Keno, scratch instant lottery and Video Lottery Terminals (VLTs) are likely to be especially effective in stimulating the market, given their higher frequencies, simplicity and greater variety. By 2008, it is projected that instant lottery and Video Lottery Terminals will make up 21% of the market, up from 2% in 2005.

About PacificNet

PacificNet, Inc. (http://www.PacificNet.com) is a leading provider of gaming technology, e-commerce, and Customer Relationship Management (CRM) in China. PacificNet's gaming products are specially designed for Chinese and Asian gamers with focus on integrating localized Chinese and Asian themes and content, advanced graphics, digital sound effects and popular domestic music, with secondary bonus games and jackpots. PacificNet gaming products include: Multi-player Electronic Table Games, Server-Based Games (SBG) with multiple client betting stations, slot and bingo machines, Video Lottery Terminals (VLTs), Amusement With Prizes (AWP) machines, gaming cabinet and client/server system designs, online i-gaming software design, and multimedia entertainment kiosks. PacificNet's gaming clients include the leading hotels, casinos, and gaming operators in Macau, Asia, and Europe, while e-commerce and CRM clients include the leading telecom companies, banks, insurance, travel, marketing and business services companies and telecom consumers in Greater China such as China Telecom, China Mobile, Unicom, PCCW, Hutchison Telecom, Bell24, Motorola, Nokia, SONY, TCL, Huawei, American Express, Citibank, HSBC, Bank of China, Bank of East Asia, DBS, TNT, China and Hong Kong government. PacificNet employs about 1,200 staff in its various subsidiaries throughout China with offices in Hong Kong, Beijing, Shanghai, Shenzhen, Guangzhou, Macau and Zhuhai China, USA, and the Philippines.