Author Topic: 0869.HK - Playmates Toys  (Read 1787 times)

RVP

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0869.HK - Playmates Toys
« on: January 21, 2020, 12:40:45 PM »
Global toy marketer with a number of rights to certain brands, the most famous being Teenage Mutant Ninja Turtles.

Thesis is simple: Net-net trading at ~50% of NCAV (of which ~90% is cash). Cash burn to the tune of ~HKD$30M/ year, so with HKD$1B of cash on the balance sheet and minimal liabilities, you have roughly 30 years for the discount to narrow. Management is shareholder friendly and aligned.

The worst loss in any given year during the past decade was in 2008 when they lost HKD$191M. This was due to poor cost structure and management admitting they made a mistake in speculating on an unproven toy property. They've learned their lesson and since then have contained costs very well even amidst drastic revenue declines. The business is not very capital intensive and has a somewhat variable cost structure.

I have no views on the strength/ prospects of their toy properties (toy business is unpredictable IMO), but some smarter/ more informed individuals can probably make the case of a turnaround. When the business is humming, the profitability is ridiculously attractive. When the business is struggling, the costs are contained. Quite a good dynamic.

Whether you see this as a net-net or potential turnaround/ multi-bagger, your choice. But at these levels, the downside looks limited.


thepupil

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Re: 0869.HK - Playmates Toys
« Reply #1 on: January 21, 2020, 01:37:20 PM »
there's of course also the HKD$5.9 billion of property on the balance sheet too LOL.

some management teams just don't care about stock prices. cash and stock porfolio > market cap, 5x the market cap in property (if I'm spitballing correctly)

I'll probably buy a 0.5%-1% position and sell in 10 years when they've done nothing about it or sell for a giant profit if they do something about it

thanks for the idea.


the above is all wrong. I was looking at the reports of Playmates Holdings and the market cap of Playmates Toys. I should do more work before posting
« Last Edit: January 21, 2020, 01:45:23 PM by thepupil »

writser

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Re: 0869.HK - Playmates Toys
« Reply #2 on: January 21, 2020, 01:46:18 PM »
Yes, it is cheap. I own a tiny look-through position through my position in the parent company, Playmates Holding (0635:HK). You might also find that one interesting. I don't have too much to say about the subsidiary, I should probably look into it at some point. AFAIK the company has very specific licences and their recent good years were almost completely due to two 'Teenage Mutant Ninja Turtles' movies. That's something to keep an eye on. I don't understand / like why they keep hoarding all this cash on the balance sheet. Also, there is a possible risk of a timely take-over by the parent company just when the business turns a corner.

ThePupil, I think the holding is still cheap on its own and has a decent (recent) history of returning capital to shareholders. Effectively you buy a (mainly) Hong Kong real estate portfolio at a 50+% discount and a decent yield? Timing might also be decent as there is literally blood in the streets there .. You can buy holdings with cheap real estate all over the place in Hong Kong though.
« Last Edit: January 21, 2020, 01:51:11 PM by writser »
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@thewritser

RVP

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Re: 0869.HK - Playmates Toys
« Reply #3 on: January 21, 2020, 01:50:18 PM »
there's of course also the HKD$5.9 billion of property on the balance sheet too LOL.

some management teams just don't care about stock prices. cash and stock porfolio > market cap, 5x the market cap in property (if I'm spitballing correctly)

I'll probably buy a 0.5%-1% position and sell in 10 years when they've done nothing about it or sell for a giant profit if they do something about it

thanks for the idea.


the above is all wrong. I was looking at the reports of Playmates Holdings and the market cap of Playmates Toys. I should do more work before posting

Playmates Holdings (0635.HK) is also interesting/ well-run, and they own ~50% of Playmates Toys. But their properties are overvalued and over-earning currently, IMO. Most of the cash resides on the subsidiary level (Playmates Toys). Nothing against Holdings (635), but just isolating the net-net area.

writser

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Re: 0869.HK - Playmates Toys
« Reply #4 on: January 21, 2020, 01:52:48 PM »
But their properties are overvalued and over-earning currently, IMO.
In the sense that all HK property is overvalued and that short-term rental income will be affected by all the shit going on there? Or do you have more specific insights. Curious what your thoughts are here.
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@thewritser

RVP

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Re: 0869.HK - Playmates Toys
« Reply #5 on: January 21, 2020, 02:11:44 PM »
But their properties are overvalued and over-earning currently, IMO.
In the sense that all HK property is overvalued and that short-term rental income will be affected by all the shit going on there? Or do you have more specific insights. Curious what your thoughts are here.

They do not breakdown their rental income, but I am quite certain a meaningful chunk is from the Apple Store on their ground level. This naturally props up the rental they can command for the rest of the building (mix of offices and retail). They also do not reveal the details/ length of their Apple contract, which would be incredibly useful to know.

I have been to the building (The Toy House) in person - great location in the most prime retail hub in Tsim Sha Tsui. But it is also the area most dependent on Mainland China tourists. This area has probably been among the worst hit with the protests (especially since they were charging astronomical psf rent, second only to Central, Hong Kong).

The building itself is mediocre/ small/ tight. This is where my concern lies. If you use the book value and divide it by the estimated square footage they own (again, not disclosed but can cross-check with public records), it is something to the tune of HKD$60k/ sq ft (or USD 7,700 psf). There have been transactions in the past that commanded such values, but I would not bet on it as sustainable.

HK real estate is pricey (as is well known), but this is among the priciest of the priciest.

Again, nothing against the company. Management picked up that property for about HKD$500M about decade ago, and it now generates roughly HKD$200M in gross rental, so obviously a home run.   
« Last Edit: January 21, 2020, 03:37:02 PM by RVP »

thepupil

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Re: 0869.HK - Playmates Toys
« Reply #6 on: January 21, 2020, 02:40:11 PM »
Okay, so do I have this right?

Playmates Toys trades for about $60 million USD market cap. just taking the cash ($136 million) and subtracting liabilities ($25mm), I get $111mm US dollars of net cash. So its a cash box trading for 54 cents on the dollar assuming all other non-cash assets are worthless and that there are no hidden liabilities.  the company generated like $200mm of cash in between 2013-2017 and otherwise hasn't really made money.

Playmates Holdings trades for $321 million USD.

They own 51% of Toys (worth $30 million at market, $55 million of net cash to them). Holdings owns $760mm US of HK property and has $136mm of total liabilities for net property of $630 million. they also have some holdco held cash and stocks. all in there's $838 milloion of equtiy trading for $321 million so Holdings trades for 38% of book. if you haircut the HK property that multiple will increase.

With respect to Holdings, I think there are ways to create large scale hong kong properties for very cheap multiples these days, so 38% of book isn't special to me (I own Jardine Strategic and Mandarin Oriental for example, where I think I'm creating HK property for 20-30% of NAV along with other non HK RE assets). IE: Jardine Strategic trades for 1/2 of public NAV and part of NAV is HK Land which trades for 40%-50% of NAV so 0.5*0.4-0.5 = buying a scale portfolio of Asian (mostly HK but not all) for 20%-30% of NAV via double discount.

With respect to the cash box Toys, it's tough to get excited unless you think they can generate cash again.

Any reason to believe they will?



« Last Edit: January 21, 2020, 02:44:42 PM by thepupil »

RVP

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Re: 0869.HK - Playmates Toys
« Reply #7 on: January 21, 2020, 04:38:55 PM »
@thepupil:

Yes, you have Holdings calculated correctly. As you mentioned, large discounts to reported book are quite common in HK. Whether or not this is warranted is another discussion, but personally I rarely use it to assess fair value in HK. I prefer to use underlying recurring income instead and applying a conservative multiple (will end up looking foolish if management liquidates the property at market value).

By that measure, Holdings does roughly HKD$145M (~USD$19M) in net recurring income (net of taxes, interest expense, and one-time gains) in trailing 12 months. That's on an EV of roughly HKD$2.1B (USD$271M), so ~7% yield, or 14.5x P/E. Is that cheap? Perhaps. But if there's any meaningful contraction in rental income, that multiple could expand in a hurry.

With respect to Toys, my base case is they will not generate cash again. I'm not informed enough to assume otherwise. But based on my research of management's capital allocation/ historical track record, I think there is a good chance the cash eventually gets distributed to Holdings (and therefore minority shareholders as well). Management understands that Toys is extremely volatile (the reason they spun off Toys in the first place). Their playbook has been to keep costs tight during the tough years, so that they can survive and reap the benefits of the potential great years. And when possible, deploy excess cash to more stable income producing assets. The creation of Holdings was made possible largely due to the success and good fortune of Toys in the past. Toys was their roots/DNA, and Holdings has become their core. There is no reason to believe they will simply incinerate their mountain of cash when they have every incentive to further grow the core empire (that is majority family controlled). 
« Last Edit: January 21, 2020, 05:10:03 PM by RVP »

writser

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Re: 0869.HK - Playmates Toys
« Reply #8 on: February 11, 2020, 01:46:27 PM »
Okay, so do I have this right?

Yes, I think you do. I more or less agree with both of your assessments that while the discount to book looks good, in terms of yield / comparables it isn't super special. The current share price implies a ballpark ~7.5% pretax yield on the real estate.

What I do like about the whole complex is that they, in recent years, have been returning very significant amounts of money to shareholders through both buybacks and dividends. The holding paid out $0.145 / share in dividends both in 2018 and 2019 (vs. a current price of HK$1.13) and bought back HK$138m shares in 2017 and HK$49m in 2018. The toys sub also has a history of paying dividends and buying back shares. So, when compared with peers capital allocation seems slightly better than average. Not perfect of course, the cash balance still seems excessive. Also note that the holding has been paying out a scrip / cash election dividend the past few years and that insiders have always gone for the share election. The (recently retired) chairman is steadily increasing his stake this way. Will this lead to an endgame?

The share price of the holding is holding up reasonably well given the protests and now the Corona scare. I agree with RVP that near-term financials might disappoint given all the shenanigans going on in Hong Kong and I trimmed my position. It wasn't my highest conviction pick anyway.

I haven't been following Playmates Toys too closely but yeah, it is down ~60% the past 12 months and looks pretty cheap right now (ok, to be fair they did issue a profit warning). There is a huge cash buffer and shares might be a coiled spring if something like a good Turtles movies comes out. No position, but I've been pondering about it.

It is also pretty cool to own something that is correlated to the popularity of the Turtles. Compare this with the share price. I don't know if that's actionable information somehow, but it is interesting nonetheless.
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@thewritser

nostradamus

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Re: 0869.HK - Playmates Toys
« Reply #9 on: February 14, 2020, 01:28:38 AM »
Thanks RVP for this post, this is my kind of stock - a pile of cash trading at a huge discount to its value. It has the added excitement that some of its brands could take off, plus the longer they don't, the more pressure there will be to return the cash pile to the parent. I've taken a position.

Cowabunga dude!

N.