0869.HK - Playmates Toys

[RVP]

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]

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

[writser]

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.

[RVP]

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]

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.

 

[RVP]

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.   

[thepupil]

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?

 

 

 

 

[RVP]

@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). 

[writser]

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.

[nostradamus]

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.

 

 

[RVP]

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]

 

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]

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]

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]

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]

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]

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]

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. 

[RVP]

2020 results out. The cash burn continues, and cost controls remain laser disciplined. Current cash levels afford a roughly 20 year lifespan at current burn rate.

 

No big changes on the toys front. Expansion into several new brands to see what sticks, perhaps a turtles movie sometime in 2022.

 

Story has not changed much IMO, but market price has surged. Just your typical, run-of-the-mill narrowing of a substantial net-net discount in action.

[nostradamus]

https://www.licenseglobal.com/industry-news/miraculous-extends-licensing-categories

“The new Miraculous toy line from Playmates Toys and ZAG Labs that launched on March 21 sold out within hours at Target.com, Walmart.com and Kohls.com...”

[RVP]

Market seems to have found a renewed enthusiasm for this name over the past couple weeks. Possibly due to some optimism over their more recent toy lineups (the results of which are TBD). The Godzilla vs. Kong movie plus the Miraculous toy line mentioned by nostradamus above seems to be the spark.

The net-net thesis has likely played out at current prices. Congrats to all who got their couple puffs. 

Going forward, further fundamental gains will likely be dependent on the strength of their toy sales and revival of their profitability.       

[nostradamus]

Agree that the easy money has already been made, but they are still trading at a 30% discount to net assets (nearly all of which is cash) and they are back to making a profit now:

https://doc.irasia.com/listco/hk/playmatestoys/announcement/a247638-e_pwannptlmay2021_1.pdf

Might just keep holding on until the next turtles movie comes out. 

[RVP]

Nice, that’s a pleasant surprise. Certainly much easier to hold for extra icing on the cake when bought at a wide discount to net-net. Great catch on flagging the miraculous toy line success well before the profit alert btw.

[nostradamus]

On 5/28/2021 at 9:04 PM, RVP said:

Great catch on flagging the miraculous toy line success well before the profit alert btw.

Shame I wasn’t smart enough to increase my position on the back of that news! Anyway, many thanks RVP for originally posting on this company. Your posts about David Webb have got me into Lion Rock and Kingmaker Footwear. In a world where almost everything seems overvalued, HK stocks seem to be an exception at the moment.