A listed toy doll manufacturer has lost money in the past 3-4 years and has stopped paying dividends, but there are signs that the business will turnaround in 2009. The reasons are:
Macro environment
a) improved industry structure as half of the 8,000 toy manufacturers in China folded in 2008 (so less price competition, etc.)
b) better operating environment (e.g. less RMB appreciation, slower labor rate inflation, lower oil price)
c) inventory re-stocking of US and Europe customers in general after running down their inventories in 2008
d) Chinese government increased export tax rebate from 11% to 14%
Company-specific
e) company received new significant orders received from Disney
f) company streamlined cost structure (e.g. layoffs, moving factories to Vietnam)
In fact, some evidence of business turnaround can be seen in the company's 2H'2008 results, where it managed to achieve a small profit (the first profit-making period in the past 3-4 years). The Chairman also sounded cautiously optimistic in his statement in the 2008 annual report. Interestingly, the Chairman of another listed major toy doll manufacturer said he expected a profit in 2009 (vs. significant loss in 2008) and that 1Q'2009 margins were strong, providing important clues to what is to come in 2009.
Besides normal operations, the company is selling one of its factories in China for HK$60m and will book a gain of HK$20m in 2009. Given all the above, the company will likely report strong results in 2009 (HK$40m+ according to my estimation).
The company has HK$196m in cash and HK$145m in debt as at the end of 2008, and with the HK$60m proceeds from the factory sale and improved business performance, there's a good chance that it will resume dividends in 2009. If the company pays a special dividend totaling its net cash (HK$196m - HK$145m = HK$51m) and the factory disposal proceeds (HK$60m), that HK$111m would represent 67% yield (!!!). I don't actually think the Chairman would do that, but that is just to give you an idea of the extent of the dividend possible. Even if the Chairman dividends out the factory proceeds only, the dividend yield would still be 36%.
Anyway, if both the strong results and the dividends happen, share price could easily go up 150-200% within one year, and more within 3 years as the company fully recovers. I think a sustainable, ongoing dividend level (3-4 years down the road) for this company is HK$0.07-0.09. Assuming a required dividend yield of 6-8% (consistent with historical average for this company and its peers), the theoretical share price should be $0.9-$1.3.
The P/Book and P/Sales ratio for this company are 0.4x and 0.2x respectively.
The caveat is that the trading volume is very thin, and one must be patient about "collecting" shares in the market over a period of several week to avoid "jacking up" the share price unnecessarily. The volume should increase dramatically if the company announces strong results and/or resumes dividends.
One risk for this play is if the strong results and dividends DON'T happen, then your money may get "stuck" until the trading volume comes back (well, if you put in $50k, you should still be able to get out easily, but if you are invest $500k, then it'll be much more difficult). That said, I do very strongly believe that good things will happen in 2009, and weighing the potential risk and return, and assuming that your investment horizon is at least 12 months, I would still highly recommend BUY.
The company is Dream International (德林國際, 1126.HK).
0.08 (+15.38%)
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