Asian Dividend Gems: Dream International
Based in Hong Kong, Dream International is one of the largest toy manufacturers in the world. It specializes on plush stuffed toys and plastic figures.
Despite the global toys markets going into destocking cycle, the company has generated significant growth in operating profit in the past year driven by strong demand for plush stuffed toys.
If we assume a moderate 20% YoY increase in dividends in 2023, this would imply DPS of HKD 0.48 and this would suggest a dividend yield of 12.6% current prices.
Conclusion First
Dream International is one of the most efficient toy manufacturers in the world. Its share price has significantly outperformed Hang Seng index and other major toy manufacturing competitors in the past year. Its estimated dividend yield is nearly 12-13% this year. Despite challenges facing the global toys markets going into destocking cycle, the company has managed to generate significant growth in operating profit in the past year driven by strong demand for the company's plush stuffed toys.
A big concern with investing in Dream International has been the lack of shares trading liquidity but this has been improving with rising share prices. Valuations remain cheap (P/E of 2.7x and EV/EBITDA of 1.4x based on 2022 figures).
Dream International DPS, Dividend Yield, & Dividend Payout
Dream International's dividend yield averaged 5.7% annually from 2018 to 2022. Its annual dividend payout averaged 29.5% in the same period. The company's DPS ranged from HKD 0.09 to HKD 0.40 in the past five years.
Assuming DPS of HKD 0.40 (same as last year), this would suggest a dividend yield of 10.5%. Dream International had a net profit was HKD 333.8 million in 1H 2023, up 66% YoY. Therefore, if we assume a moderate 20% YoY increase in dividends in 2023, this would imply DPS of HKD 0.48 and this would suggest a dividend yield of 12.6% current prices.
Dream International Earnings & Dividends (Source: Smartkarma)
Dream International Company Background
Based in Hong Kong, Dream International is one of the largest toy manufacturers in the world. It specializes on plush stuffed toys and plastic figures. It also makes tarpaulin and die casting products. Dream International (1126 HK) currently has a market cap of HKD 2.6 billion (USD 327 million). Founder Kyoo-Yoon Choi (age 74) first established a toy manufacturing business called C&H Co. in Korea in 1984, after working in the plush toys unit of Daewoo Group for several years. Choi moved the business to Hong Kong in 1992, aiming to capitalize on the lower taxes and proximity to China.
About 20 years ago, after listing on the HK exchange, the company expanded its business into toys ODM (original design manufacturing) of plush stuffed toys. This included the company designing and manufacturing the plush stuffed toys but distribution would be done by others such as Costco and Walmart.
One of the leading global providers of plush stuffed toys - The company specializes in designing and manufacturing plush stuffed toys. The company manufactures products in accordance with the designs of its customers, the majority of which are license holders of well-known brands, cartoon and animal characters. Most of the company's OEM products are for exports, principally to the US, Japan and Europe.
Plastic figure toys - The company is also a major producer of plastic figure toys. The company has strong relationships with major customers such as Disney in this business. However, the company has been trying to broaden its customer mix globally.
Tarpaulin business - Dream International also provides tarpaulin, although it now represents only a small percentage of total sales (9.7% of total sales in 1H 2023). The company originally started as one of the leading providers of tarpaulin industry in Korea in the field of polyvinyl chloride (“PVC”) laminated/coated, mesh industrial fabric and polyethylene (“PE”) tarpaulin.
Vietnam is most important manufacturing base - The company has numerous toy manufacturing factories including in Vietnam and China. Most of them are now in Vietnam. As of 30 June 2023, Dream International operated 27 plants in total, seven in China and 20 in Vietnam, with average utilisation rate at around 87%.
Major customers - The company's major customers include Oriental Land (4661 JP), Funko Inc (FNKO US), The Walt Disney Co (DIS US), Walmart (WMT US), Costco Wholesale (COST US), and Spin Master (TOY CN). Among the various toy segments, the company is one of the largest producers of plush stuffed toys.
Dream International Plush stuffed toys (Source: Company data)
Examples of plush stuffed toys (Source: Google images)
Dream International plastic figure toys (Source: Company data)
Dream International tarpaulin (Source: Company data)
Dream International 1H 2023 Earnings Comparison
The company had excellent results in 1H 2023. It had sales of HKD 2.5 billion (down 12.4% YoY), operating profit profit of HKD 420.6 million (up 59.4% YoY), and net profit of HKD 333.9 million (up 65.7% YoY) in 1H 2023. Operating margin improved significantly from 9.3% in 1H 2022 to 16.9% in 1H 2023. Overall, the company did an excellent job in controlling its costs in 1H 2023 despite lower sales.
In 1H 2023, the global toys manufacturing sector faced challenges from conservative consumption sentiment resulting in the many sectors of the global toy markets going into destocking cycle, which negatively impacted the company's plastic figure toys business. Nonetheless, the company's market diversification strategies, persistent cost control efforts and flexible planning of capacities helped to lift higher profit margins albeit resulting in lower sales on year on year basis.
Strong demand for plush stuffed toys in 1H 2023 - The company's plush stuffed toys segment continued to generate strong results, and along with more stable raw material prices and stringent cost control measures, they contributed to higher profit growth in 1H 2023. The strong results of the plush stuffed toys business in 1H 2023 were mainly attributed to the strong demand from theme parks in the US, Japan, and the PRC. Although there have been some weaker data coming from Disney's theme parks in the US, it appears that the sales of plush stuffed toys remained solid for the company in the US, Japan, and China in 1H 2023.
Interim dividends - To reward the shareholders, the company paid an interim dividend of HK20 cents per ordinary share for shareholders for period ending June 2023 (which is up nearly double from the interim dividend of HK10 cents for period ending June 2022).
Sales Breakdown
Sales Breakdown by Products - Plush stuffed toys accounted for 49.8% of total sales, followed by plastic figures (36.6%), tarpaulin (9.7%), and die casting products (3.8%). Plush stuff toys sales increased by 45.7% YoY whereas plastic figures, tarpaulin, and die casting products sales declined by 42.2% YoY, 20.4% YoY, and 13.2% YoY in 1H 2023.
Sales Breakdown by Geography - North America accounted for 48% of total sales, followed by Japan (26.3%), PRC (15.8%), and Hong Kong & Europe (6.4%) in 1H 2023. The company's sales in Japan and China increased materially in 1H 2023 on a YoY basis whereas its sales declined in North America in this period.
Dream International Major Shareholders
Founder Kyoo-Yoon Choi is the largest shareholder of Dream International with a 68.2% stake. Other major shareholders include FIL Investment Mgmt )9.1%), Arisaig Partners (6.6%), Min Jung Lee (3.5%), and APG Asset Mgmt (2.9%).
Major Risk Factors
Low shares liquidity - The low shares liquidity remains one of the biggest risk factors on investing in this stock. ADTV averaged about USD 0.1 million in the past five trading days. Low liquidity makes it difficult for institutional investors to invest in this company. However, despite this problem, there are numerous institutional investors including FIL Investment Mgmt, Arisaig, and APG Asset Management that have invested in this company.
Uncertain recent outlook among its major customers - Some of its major customers including Disney and Walmart has recently been facing increasing business difficulties. For Disney, it has been facing increasing criticism among millions of conservative leaning parents that are upset about Disney pushing woke ideologies especially on young children. As a result, millions of parents are refusing to go to Disney theme parks or watch Disney movies.
Uncertainty on ownership of company with post founder Choi - Chairman Kyoo Yoon Choi is 74 years old and it remains uncertain how the controlling ownership of the company would change in 3-5 years. Founder Choi is Korean. Typically, there is a large amount of inheritance taxes that needs to be paid (often 50-55% plus) when the owner transfers the controlling ownership to his spouse/children in Korea. Remember the case of Nexon (3659 JP). Although Nexon is not based in Korea, after the founder of Nexon passed away, the daughters of Nexon were required to pay high amounts of inheritance taxes to the Korean government because they maintained their Korean citizenships.
Concerns about worsening economy in China/US/Japan - After a short period of COVID-19 pandemic induced recession and a sharp economic rebound, there have been increasing signs of worsening economy in major countries including China, US, and Japan. This could result on greater pressures on disposable income and tighter household budgets which could reduce spending on toys.
Continued pressure on labor costs - As a result of rising inflation rates, there have been continued pressured to raise labor costs. As of 30 June 2023, the company had 28,362 employees in Hong Kong, the PRC, Korea, the US, Japan, Vietnam and Singapore (down 2% from 28,924 employees at end of 2022). Total labor costs were HKD 670.6 million in 1H 2023 (27% of sales), down 7% from HKD 721.4 million in 1H 2022 (25.4% of sales). Although the company was able to reduce the overall labor costs in 1H 2023, its ability to retain labor and control labor costs continues to remain challenging.
Key Financials
Dream International Revenue, Net Income, & Net Margin (Source: Smartkarma)
Dream International Gross Profit & EBITDA (Source: Smartkarma)
Balance Sheet Analysis - The company has a strong balance sheet. It had a debt ratio of 31% and net cash position at the end of 1H 2023. Current ratio was 292% at the end of 1H 2023. The company had HKD 673 million in net cash at the end of 1H 2023, representing 26% of its market cap.
Dream International Key Balance Sheet Items (Source: Smartkarma)
Cash Flow Statement Analysis - Dream International has a consistent record of generating positive cash flow from operations. However, its free cash flow generation has been more inconsistent. The company had a best year in generating cash flow from operations and free cash flow in 2022. The company had cash flow from operations of HKD 621 million and free cash flow of HKD 421 million in 2022. The company had cash flow from operations of HKD 363.7 million in 1H 2023, up sharply from HKD 4.3 million in 1H 2022.
Dream International Key Cash Flow Statement Items (Source: Smartkarma)
Valuations
Dream International has cheap valuation multiples. Its P/E averaged 6.7x and EV/EBITDA averaged 3.4x from 2018 to 2022. The P/E and EV/EBITDA ratios were 2.7x and 1.4x in 2022, respectively. There are no sell side that covers this stock. The company had EPS of HKD 0.49 in 1H 2023 and the full year EPS would be HKD 0.98 (annualized) in 2023. Given current share price of HKD 3.77, this would suggest a P/E of 3.8x, which is 43% lower than the average P/E multiple from 2018 to 2022.
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