Author Topic: 0869.HK - Playmates Toys  (Read 3665 times)

RVP

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Re: 0869.HK - Playmates Toys
« Reply #10 on: August 24, 2020, 06:12:08 AM »
Interim results released:

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0821/2020082100829.pdf

Still sitting on $969M in cash (vs $280M mkt cap). Made a small investment in Disney shares.

One noteworthy development: parent company (playmates holdings) revealed in their own interim report that on January 3, 2020, they received a conditional approval from the government to convert their factory building in Hong Kong to commercial use. Given that the parent company has an ample amount of debt already, and most of the cash resides at Playmates Toys, I smell a meaningful dividend payment to upstream cash to the parent in the not too distant future.


Cicero

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Re: 0869.HK - Playmates Toys
« Reply #11 on: August 26, 2020, 12:52:43 AM »

Still sitting on $969M in cash (vs $280M mkt cap). Made a small investment in Disney shares.


This is a really interesting situation esp. at the current price. Just want to point out one thing: according to footnote 25 of the 2019 annual report deferred tax liabilities relating to undistributed profits of HKD 640 MM relating to a subsidiary have NOT been recognized.  Company only has three subsidiaries. One in Hong Kong, two in the US.
Not a tax expert, but my read is that HKD 640 MM of the HKD 969 MM of cash sit in the US, which would make sense because a lot of the sales are there. And in order to get it to Hong Kong they would have to pay dividend withholding tax (at 30% because there is no tax treaty if I am not mistaken).
If my interpretation is correct this reduces the upside a little bit (though still interesting) and would partially explain why they carry such a large cash balance and do things like buying Disney shares. Maybe there is some smart way to avoid paying the withholding tax, but probably safer to haircut the cash.

Again not a tax guy at all, so quite possible that my read is miles off. Thoughts welcome!

Cicero

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Re: 0869.HK - Playmates Toys
« Reply #12 on: August 26, 2020, 02:59:40 AM »
Sorry one more: Thomas Chan is the key shareholder of Playmates Holdings and used to be the Chairman as well. In 2003, he was defendant in a lawsuit brought by a minority shareholder (his brother :) ). Allegation was that Thomas engaged in self dealing and essentially fraud. There is a long list of transactions covered in the lawsuit (including the Apple Store RVP mentioned; looks like Playmates Holdings bought it from an entity controlled by Thomas). This lawsuit wound its way through the courts until 2015. Most of the transactions were judged to have been legally ok (including the Canton Road one) apparently on the basis that the put to a shareholder vote etc. but in one case Thomas was found to have violated his fiduciary duty.

Some of the transactions covered in the lawsuit are fairly complex and maybe they were legal but not sure it is the kind of stuff I would be happy about as a minority shareholder. Thomas seems still to be involved in Playmates Holdings and I think one has to also allow for the potential that he steals some of the value from Playmates Toys' minority shareholders, which he would be incentivized to do.

Below the judgement in the original case, the last judgement I could find from 2015 and a summary in a law journal (only summarizes until 2013, but I think you get the idea).

https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=45787&currpage=T

https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=98914

http://www.onc.hk/en_US/what-can-the-minority-shareholder-of-a-parent-company-do-if-its-subsidiary-is-being-defrauded-lessons-from-the-long-running-saga-of-the-waddington-case/


RVP

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Re: 0869.HK - Playmates Toys
« Reply #13 on: August 26, 2020, 08:19:48 AM »
Cicero, thank you for pointing out the tax footnotes, I did not catch that. Also not a tax person, but I think that your read is correct. Though margin of safety and upside remains attractive, I sincerely apologize for not picking up on this.

Regarding corporate governance risk from Thomas Chan, I would not flag the 1993 lawsuit as an indicator of potential minority shareholder abuse. This was a classic case of internal family power struggle dynamics that has since been resolved. The below articles provide a general overview of what happened during that time, and the ensuing family drama that made for some juicy tycoon tabloids:

https://www.scmp.com/article/426791/gloves-again-playmates-brothers-re-enter-ring
https://www.scmp.com/article/173140/battle-ends-court-not-so-friendly-playmates

dbm

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Re: 0869.HK - Playmates Toys
« Reply #14 on: August 26, 2020, 10:51:31 AM »
Never thought I would be back to it (I was a shareholder for a brief period em 2015/16), but at this level it makes total sense to me. Thanks for bringing this up.

At the operating level, what really matters is TNMT. The remaining brands are not enough to make the company break even.
On one hand, Playmates Toys doesn't have control over the management of the IP. If Viacom decides to not invest in this brand for let's say a decade, there is nothing Playmates can do about it.
On the other hand, major costs to develop the brand are not on their shoulders either. I think that is the main reason its cost structure is so variable, in addition to the outsourced production. 

There are multiple sources (just google ninja turtles seth rogen) mentioning a reimagination of TNMT on the works, to be led by Seth Rogen, so we might have news soon enough.
If it works poorly, well, you still have the pile of cash as a margin of safety. If not by some extreme necessity, I don't see them bringing it to HK and paying such large taxes though.
However, if it works... in the last rebirth of TNMT (2013-2017), the company generated more than HKD 1,500mm in cash, having distributed almost HKD 700mm in dividends. The cash generated in these five years was more than 5x current market cap alone. I like this kind of optionality.

You may get robbed at some level by the management in the meanwhile, for sure. 

Curiously, Seth Klarman's Baupost was a shareholder for some time during the nineties. From the 1995 letter to shareholders: "Our Playmates Toys position declined on the heels of disappointing first half 1995 results. We believe this decline will be more than fully reversed in the future based on improved business performance. At the current level, the shares trade at a price approximately equal to net current assets; the company is involved in a number of projects that could very positively impact results in the second half of 1995 and beyond."

Cicero

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Re: 0869.HK - Playmates Toys
« Reply #15 on: August 26, 2020, 11:00:01 PM »
Thanks RVP. Unfortunately SCMP has a paywall now, so I can't access those articles.
Just to clarify, I wasn't talking about the 1993 lawsuit, but the subsequent lawsuit that was brought in 2003 (the first one was brought by Thomas' brother personally, the second one by his vehicle I think). I agree that the first one reads relatively harmless and more like a family squabble, the second on has the allegations of self dealing and that is the one I find more concerning and that second lawsuit is also the one that ultimately led to Thomas being found guilty in one instance.

I am sure you have seen all of this, but thought I'd point it out to avoid a misunderstanding.

@ dbm: great point on Seth Rogen. Was not aware and might indeed make a difference.

RVP

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Re: 0869.HK - Playmates Toys
« Reply #16 on: August 27, 2020, 03:07:04 AM »
Cicero, thanks for your clarification. Without knowing what was going on behind the scenes, the 2003 lawsuit reads to me as a shuffling of assets from private to public and vice versa. The optics are certainly strange, but I hesitate to label it as self dealing outright. My 2 main reasons are that minority shareholders had a chance to block the transaction (as you alluded to), and Thomas was always the majority shareholder of Playmates (by far) and stood to lose the most. Yes, one could argue that he loses nothing if the transaction(s) are from the right pocket to left pocket. But he doesn't really "gain" anything either (his private wealth goes up, his public wealth goes down). I think this whole charade is really more a matter of internal family drama as opposed to trying to defraud minority interests.

I would be more concerned if he utilized different tactics like issuing shares to management at dirt cheap prices, get Playmates to pay a management fee to his private company, or pay himself super high compensation. I didn't see any red flags on these matters, and regarding compensation, Thomas does not even receive a salary or bonus anymore from Playmates. His ownership % is even higher today than it was in 2003, so I think that should be some indication as to where his incentives lie. 

I also revisited the taxation issue. Does anyone know if US dividend withholding tax applies to corporations that are domiciled in Bermuda (of which Playmates is)?

Cicero

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Re: 0869.HK - Playmates Toys
« Reply #17 on: August 27, 2020, 09:21:34 PM »
Good point on the domicile. The tax treaty for Bermuda would indeed be the relevant one (not Hong Kong as I assumed incorrectly). Seems like there is a tax treaty with Bermuda, but does not seem to cover withholding taxes.

http://www.bermudalaws.bm/laws/Consolidated%20Laws/U.S.A.%20-%20Bermuda%20Tax%20Convention%20Act%201986.pdf

Another point is that, it seems like Bermuda does not tax dividends. With a few exceptions countries that don't tax dividends, also don't benefit from US withholding tax relief. So from that perspective it is not surprising that the tax treaty does not cover it.

I would not totally rule out that there is a way to get a least some of the cash back to Hong Kong without paying the full tax (using it for a share buyback maybe), but probably pretty tough to figure this out esp. outside-in.