Complete Divestment of Playmate Holdings; Rethinking my approach

I have divested my shares in Playmates Holdings (HKEX: 635). Over the months since Jan, I am slightly worried about a few points of this company:
a) Lower occupancy of investment property. It is noted that the company seems to have an attraction to Savills, having it being the property manager and the property surveyor. AFAIK, their method of valuation is level 3, which is worrying because the increase in value of its properties looks like a bubble in itself.

b) Reducing earning ability of its main toy business. I am not enamored of the quality of its upcoming toys as well. 

c) Slight increase in non-current loans for no reason despite its reasonably high cash position. I note that interest coverage this half is still a safe 20 times or so-- but why incur unnecessary debt?

d) Share buy backs using company's fund is encouraging but I rather the directors buy it using their own pocket and try to improve business.

e) I noted that the investment portfolio has increased by 40-50m or so, but there is no explanation for how they pick stocks, or who is managing their investments. Active investing is not easy-- especially with large money.

Overall gain in investment for Playmates, inclusive of the recent special dividends, is only 10%. This means I sold at break even price.

Moving on, I would like to share some opinions on retail investing.

Walter Schloss is my idol and I still find investing in his way the easiest. His returns might not be the highest, but investing is not about topping the class-- it is about getting decent returns over long period of time. I do think that if you end up in the top 25% of the investing community every year over long period of time (10 years), the results would be lovely. 

However, buying a small position over many companies requires a full time job. After reading The Dhandho Investor, I feel the practical method is to buy when you have ascertain a huge opportunity, and bet heavily. I think 8 is enough for diversification. 

In addition, the age-old belief in value investing is that you either buy a so-so company at a cheap price, or a great company at a fair price. Over time, I do think that the latter approach is easier. It is definitely easier to spot a company when it is cheap. If I have a sizable (400k-1m) amount of money to work with, leaving 50% of it for cheap companies is plausible. With the amount of money I have, I do need to rethink my approach to compound it efficiently.

Short Analysis: Playmates Holdings (00635, HKEX)

Playmates Holdings, the parent company of a listed company called Playmates Toys, is one of the companies that registered within the 52 weeks low of my stock screener in Stocks.cafe.

Although it is in my 52week low list, it isn't technically at 52 weeks low-- the price is brought down due to a 1-to-10 share split. Current price is at a high for this stock.

I didn't spend too much time on this company, probably an hour's work. Playmates Toys key products lies in selling Teenage Mutant Ninja Turtles, Voltron and Ben 10. The first got plenty of boost from movies last year, but this year sales is terrible-- a drop of 36%. There is no illusion that this is a declining business. Playmate Holdings, besides its toy business, consist of investments and F&B. F&B contributions are insignificant. The toys business is Playmate Holding's bread and butter business.

My investment philosophy is simple: let the market bring the deals to you, make an evaluation and if the market is underpricing the company significantly, buy it.

From looking at its cashflow statement last year, it is clear that the company bought back a lot of shares. Adjusted for splits, it had 2.2billion shares on 1st Jan 2016, but now it has 2.08B. That is 120 million shares bought back by this company, representing a staggering 5.4% reduction in shares.

This is facilitated by the company's strong free cash flow despite a declining business.
It is still able to pay out dividends in recent years, a yield of about 2.8-3%.

The cash makes a difference in a couple of ways.
1)
The cash position is significant; based on its interim annual report, 1.48B worth of cash. It has a total liabilities of about 930m, so we talking about 547m in net cash (minus all liabilities!).

Take that 547m of cash, deduct by 2.08b of total shares, you get 0.263 HKD per share.
The current share price is 1.04 HKD. This means you are paying about 0.77 HKD per share.
The earnings for this interim 2017 report (means first half) is 0.328 HKD per share. Year-on-year, the income statements has been showing a decline, from 0.5 in 2013 to -0.05 last year. However, the loss was due to a 300+m downward revaluation of its properties. Without it, they should be earning 0.15 HKD per share. So this is a PE of about 7-8 on today's price.

I am assuming that business is so bad this year that we are getting maybe 0.6 HKD for the whole of this year (remember, it is 0.328 for first half). So based on the revised price of 0.77 HKD (due to its cash position), we are looking at a PE of about 13. This is fair.

It generated about 400m of free cash flow last year. This cashflow should reduce drastically since the breadwinner is from the toys (and it is bad business). Let say it will reduce to 300m this year (we are at 150m FCF this first half), and since market is giving a price tag of (2080m x 1.04HKD) = 2163m HKD, you getting a cash yield of 13.8%. This is very, very high cash yield. But take note that this is a declining business. Even at 200m, it is about 10%.

2)
It has about 500m of bank loans to pay this year. It can do it with its cash position, or refinance. I have no idea what they going to do, but it isn't going to be a problem. The interest is about 2.8%, but it is variable (float).

Price-to-Book is low, but it is just 1 aspect of valuation
I won't go through how I discount various portions of the assets, but a remarkable amount is reduced from receivables and inventories (mark down 50%). This gives me net asset of 5.373B, or about 2.58 HKD per share. The market is offering us this company at 2.163B or 1.04 HKD a share.

Off-balance sheet, it has licensing commitments to pay for about 150m in the next 5 years. I think it is manageable.

Summary
This is another example of a cheap company with a declining business, with a small amount of dividend. Again, business needs to turnover, but I think buying a small amount of shares for this company is quite safe.

Update as of 21-March-2018
Playmate Holdings reported earnings per share of 13.54 cents. As of now, the market price is HKD $1.07, which means our PE is 7.9. If we were to discount net cash (of all liabilities) worth HKD 0.25, we talking about (1.07-0.25)/0.1354 = PE of 6.06.

Free cashflow comes to 290.423-34= 256m. Market Cap is 2.14B. Cash net of all liabilities is 1423.625m - 766.739 - 134.273 = 522.613m.

This means we are actually paying 1617.387m for the business. Since we are getting 256m cash from this business, this means the price to cash flow is 6.32 times. EV/EBITDA is 1388.58/372.857 is about 3.57. This company is ridiculously cheap and I will be looking to accumulate more on price weakness.