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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.

Dreamstockchart

+ 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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Portfolio changes and Value Investing

SAS Pref – Slicing position

So my biggest position in the portfolio is the SAS Preference shares, this is somewhat of a high yield bond position and therefore has a different kind of characteristics than the rest of the portfolio. For instance the position would lose in value if/when the Swedish Riksbank decided to hike interest rates. I think the position has performed tremendously well, +6% since investment and even more (+7.5%) since I recommended buying the SAS Pref in one of my first posts on the blog. Given the strong performance I decided to slice my position in half as of today and I will soon allocate my money elsewhere. Although I don’t mind keeping a bit in cash after a good run over the last couple of weeks.

Another observation, SAS ordinary is trading at P/E of about 6.5 and Lufthansa P/E is below 5. Either profits are going to come down or valuations up in a not too distant future. If I look at ticket pricing the last 12 months, I’m guessing we as customers are getting a lot of the oil-price decrease. So another reason to stay a bit cautious on the SAS Prefs.

Poor Value investors

An Article has been hitting headlines the last few days talking about Growth vs Value investing:

“Using a formula created by Ned Davis Research that tracks changes in the relative performance between the two styles, growth has been in an uptrend versus value since July 2006, a stretch of dominance that outlasts virtually every other feature in the American stock market. At present, growth’s edge has gone on about three times what it normally has since 1932 and is the longest in history.

In other words, it’s been pretty shitty being a Value investor over the last 10 years. But the bigger point is, maybe now it is time to shine? I for one believe that is the case, and I should try to shift my portfolio more towards Value than it currently is, a deeper dive into this is definitely needed as soon as I can find time.

 

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