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Dream International – a dream investment?

Summary

Dream International is a Hong Kong listed plastic and plush stuffed toy manufacturer, with factories based in China and Vietnam. Most of the factories today are based out of Vietnam, which gives a cost advantage on China based producers. The company supplies toys to a limit number of larger companies, such as Disney, Oriental Land, Funko and Spin Master. The company has been growing revenue last 10 years with a CAGR of 12%. This has accelerated last 3 years to a CAGR of 21% for revenue and 38% for EBITDA. Although profits have been accelerating, the company is trading at a trailing P/E of about 6.8. Usually when something is trading so cheap, there is some catch, or is this the holy grail of Growth At a Reasonable Price (GARP)? I will try to give my views of what I have been able to find.

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+ Fast growing company trading below 7x P/E.

+ Exposure to segment of toys with high growth (Marvel superheros, Star Wars, Disney figures etc).

+ As one of the worlds largest plush stuffed toy producers, Dream has a long track record with large customers like Disney.

+ Recently expanded the customer relationships to plastic toy sales which has given explosive growth and earnings.

– Poor liquidity in the stock.

– Old (69 years) majority shareholder and CEO, unknown what his plans for the future are.

– Probable margin deterioration due to higher material costs (mostly related to oil price).

– Recently bought it’s office premises in Hong Kong for 200m HKD instead of continuing to rent.

Background / History

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Huhtamäki – A food packaging company

+ Large player in food packaging niche, riding on global tailwind of “on-the-go” food and drinks.

+ Good track-record of growth through acquisitions.

+ Exposed to emerging markets, where the competition is more fragmented and expectation is for significant growth.

+ Food packaging is a sensitive product in terms of food safety. This creates a moat for a companies like Huhtamäki compared to smaller competitors. This also explains why many of the worlds largest food producers is a customers to Huhtamäki.

– Currently trading at fairly high multiples. Valuation demands continued growth with at least stable profit margins.

– Capex heavy business, a lot of capital is needed to scale the business and keep a high growth rate.

– Pulp prices have been rising, at the same time consumer staples companies are facing headwinds. Short-term some questions around companies pricing power, might be squeezed in both ends.

– Some countries, like UK, are fighting back against the trend of increased usage of disposable food containers. Threatening to ban or put taxes on usage of for example disposable paper cups.

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Background and history

Huhtamäki is a Finish global food packaging company. It started out in 1920 in Finland and has through organic growth and a long line of acquisitions grown into a global player. Some 5-6 years ago the decision was taken to focus on becoming the global leader in food packaging and consequently started to dispose of business units which were not in line with that agenda. The company has some 17 000 employees worldwide. It’s Indian unit (owned to 66%) Huhtamaki PPL is listed in India with a MCAP of about 300m EUR, compared to Huhtamäki’s 3.7bn EUR.

The business is today divided in the following segments:

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