For important disclosures regarding Quam Research, including with respect to any issuers mentioned herein, please refer to the disclaimers at the back of the report.

11 April 2017

QR DeCode

Playmates Toys – A new generation

Playmates Toys, the global master toy partner for four famous

animations which include Teenage Mutant Ninja Turtles (TMNT) and

Voltron, is expected to witness a new up cycle as soon as 2018. Three

brand new toy lines are coming out successively in 2017, and with the

new generation of Ninja Turtle expected to be launched in Fall 2018,

the company might be able to repeat its glorious history again.

Promising toy pipeline – Playmates is principally engaged in the design,

development, marketing and distribution of toys and made making its name

with the TMNT series since 2012. The company is expecting to launch a

new generation of TMNT toys to tie in with the brand new TV series of

TMNT in Fall 2018. Besides, an initial success has been scored with

Voltron, a highly rated animation developed by DreamWorks and is currently

showing on Netflix. Playmates is also the global master toy partner of two

new cartoons, namely Ben 10 and Mysticons, and the toys for both

animation are expected to be launched in 2H17.

Healthy financial position with stable dividend payment – As at the end

of 2016, the company had net cash of about HKD1bn, equivalent to

HKD0.826/share or about 58.6% of the current share price. The

management believes that the company’s sound financial position would

help it to obtain new toy license IPs in the future. Since 2H13, the company

has maintained a basic dividend payment of 5 HK cents every six months,

while a special dividend of 10 and 5 HK cents were declared in FY13 and

14 respectively due to the outstanding performances in those years. Given

its ample cash reserve, it is expected to maintain stable dividend payments

in the near future.

Limited downside risk – We attribute the strong support in share price of

Playmates to its dividend yield which currently stands at about 7.1%.

Furthermore, the company has bought back shares from the market in Nov

2016 at a price range of HK$1.18-1.20 and another round at a price range

of HK$1.38-1.43 in Jan 2017. We consider these are strong signals from

the management that the current price level is under-rated by the market.

As such, we believe that the expected yield, share repurchase, as well as

the cash backing combine for decent downside protection at the current

price level.

Share Information

Stock Code 869 HK

Quam’s Rating Not Rated

Last Closing (HK$) HK$1.41

52-week range (HK$) 1.15 – 2.15

3-mth ADT (HK$’mn) 5

Market Cap. (HK$’mn) 1,706

Shares outstanding (‘mn) 1,210

Free float 48.8%

SH-HK Stock Connect No

SZ-HK Stock Connect No

Substantial Shareholders

Chan Chun Hoo, Thomas 49.49%

FIL Limited 6.41%

Share Price Performance

Source: Bloomberg

Key Financials – FY DEC

HKD’mn FY14 FY15 FY16

Revenue 2,160 1,551 993

EBITDA 652 401 na

Net profit 491 276 110

EPS (HKD) 0.414 0.228 0.091

Growth na (0.449) (0.602)

DPS (HKD) 0.100 0.100 0.100

BVPS (HKD) 0.859 0.937 0.931

PER (x) 4.2 8.6 15.7

PBR (x) 2.0 2.1 1.5

EV/EBITDA (x) 2.0 3.7 na

Dividend Yield (%) 5.7 5.1 7.0

Source: Bloomberg

Poon Tsz Wang

: +852 2971 5432

: edwin.poon@quamgroup.com

Playmates Toys (869 HK) 2

Comprehensive product portfolio Currently, Playmates is the global master toy partner of four cartoons, namely Voltron, Teenage Mutant Ninja Turtles (TMNT), Ben 10 and Mysticons. Previously, the company had mainly targeted 3-6 year-old boys as it only produced TMNT toys. With the addition of a brand new product, Voltron, the potential customers of the company is likely to be extended to boys below the age of 12. In addition, Playmates intends to use the Mysticons toys to break into the girls’ market. Voltron Figure 1: Voltron

Source: IMDb, Playmates Toys, Amazon.com

With the launch of the new DreamWorks animated series Voltron: Legendary Defender as a Netflix Original Series in Jun 2016, the global master toy licensee, Playmates, has launched a brand new line of Voltron toys in 1H17. The retail price of these robot lions are selling for between US$10 and US$50 for different sizes and materials. Players could forge those 5 lions into a large human-type robot. Thus the actual spending per player is expected to be more than US$50 on this product in order to complete the transformation. Furthermore, Netflix had released Season 2 in Jan 2017 after receiving positive response from viewers in Season 1. Currently, Voltron is rated at 100% tomato with 93% likes at Rotten Tomatoes. We have looked up the Voltron toys on some famous toy retailers online, and there are only a few left on Amazon, while all of the them are out of stock in Toys ’R’ us. It seems that Playmates is benefiting from the huge popularity of Voltron. It is our understanding that a feature film version of Voltron is likely to be made as soon as 2018. Figure 2: Voltron’s rating on Rotten Tomatoes

Screen captured on 3 Apr 2017

Source: Rotten Tomatoes

Playmates Toys (869 HK) 3

Figure 3: Voltron toys on online stores

Screens captured on 3 Apr 201

Source: Toys"R"Us, Amazon.com

Teenage Mutant Ninja Turtles (TMNT)

Figure 4: TMNT

Source: IMDb, Playmates Toys

The current generation of TMNT TV series on Nickelodeon started back in Sep, 2012. Two feature films were made in Aug 2014 and Jun 2016. As Playmates had been selling only TMNT toys in the past few years, its revenue was highly driven by the popularity of TMNT. However, as these toys target 3-6 years old boys, the lifecycle of a generation of TMNT is estimated to be around 5 years. Figure 5: Playmates’ half-yearly revenue between 2012 and 2016

Source: Company Data, Quam Securities

Going forward, Nickelodeon will re-imagine the TMNT franchise in an all-new animated series, Rise of the TMNT. The new series is expected to be launched in Fall 2018, while Nickelodeon will take the characters in a different direction, with more humor, a younger and lighter feel and

Playmates Toys (869 HK) 4

all-new dimensions to explore. Playmates is now developing a whole new line of TMNT products to be introduced in tandem with the new TV series. In preparation of the new generation of TMNT toys in 2018, the management hopes to sell out all the older generation TMNT toys within 2017 in order to give a fresh image of the new generation to its customers. As a result, the sales of its TMNT toys are likely to be lower in FY17 compare to FY16.

Ben 10 & Mysticons

Figure 6: Ben 10 & Mysticons

Source: IMDb

Playmates Toys is also the global master toy partner for Cartoon Network’s re-launch of Ben 10. The new series will introduce a new generation of fans to the story of Ben, a 10 year old kid who can transform into 10 alien heroes with a mysterious watch. The new Ben 10 animated TV series has already been on-air in selected markets since Oct 2016 and will premiere across North America in Apr 2017. Playmates’ Ben 10 toy line is expected to reach the market in 2H17. To further strengthened its product portfolio, Playmates has secured the global master license for Mysticons, a brand new animated action TV series targeting the girls’ market. The IP is developed by Nelvana Studio, in partnership with Nickelodeon and The Topps Company. Mysticons, which tells the epic tale of four girls who transform into legendary warriors, will debut globally in 2017. Products from Playmates are also expected to be in stores as soon as 2H17.

Playmates Toys (869 HK) 5

Valuation Taking into consideration its product range, we have selected some toy developers listed in Hong Kong for comparison purpose. Figure 4 shows that Playmates Toys has the highest dividend yield compared to its peers, while having a very competitive gross profit margin. Figure 7: Peers comparison

Source: Bloomberg, Quam Securities

Risk factors

New toys or existing toys might not be popular in the future, which would adversely affect

the profitability of the company;

The company could be adversely affected by any unauthorised copying or imitation of its products;

The company might reduce the dividend payment in the future.

Company overview

Figure 8: Shareholding Structure

As of 29 Mar 2017

Source: Company data, HKEX, Quam Securities

Hist Current Next P/B T/O

Net

Profit ROE ROA

Company Name Ticker (HK$) (HK$'bn) (x) (x) (x) (x) (%) ('mn) ('mn) (x) (%) (%) (%) (%) (%) Currency

PLAYMATES TOY 869 HK 1.41 1.71 15.5 N/A N/A 1.46 7.1 993 110 2.2 61.6 11.1 -60.2 19.4 22.7 HKD

Toy company

SOUTH CHINA HOLD 413 HK 0.35 4.63 25.3 N/A N/A 0.50 0.0 3,731 152 52.1 14.8 4.1 (21.3) -3.4 0.3 HKD

DREAM INTL LTD 1126 HK 2.90 1.96 6.6 11.6 10.7 1.76 0.3 2,151 296 2.5 23.5 13.7 96.0 18.1 17.9 HKD

KADER HLDGS CO 180 HK 0.74 0.70 5.7 N/A N/A 0.41 4.1 754 123 4.6 N/A 16.3 (1.1) 7.0 7.2 HKD

CMON LTD 8278 HK 0.24 0.43 43.4 N/A N/A N/A N/A 21 1 N/A 51.3 4.9 N/A 31.3 19.4 USD

Simple average 20.3 11.6 10.7 0.89 1.5 29.9 9.7 24.5

Last Price

Trailing 12 mthP/E EPS

Growth

EV /

EBITDA GPM

Net

Margin

Div

Yield

Market

Cap

53.20%

49.49% 6.41% 44.10%

Stock code: 869 HK

Chan Chun Hoo, Thomas

Playmates Holdings (635 HK) FIL Limited Public

Playmates Toys (869 HK) 6

Appendix: Financial Statements & Ratios Income Statement (HKD mn) 2014 2015 2016

Revenue 2,160 1,551 993

Cost of goods sold (824) (595) (397)

Gross profit 1,336 956 596

Other income and gains, net 3 0 0

Selling and distribution expenses (529) (415) (289)

Administration expenses (159) (144) (132)

Other operating expenses (0) 3 0

Operating profit 651 399 175

Finance costs 0 0 (5)

Other gains/ (expenses) (15) (9) 6

Profit before tax 636 390 176

Income tax expense (145) (113) (66)

Profit after tax 491 276 110

Attributable profit to shareholders 491 276 110

Minority interest na na na

Key Ratios 2014 2015 2016

Debt to equity (%) 0.0 0.0 0.0

Net debt to equity (%) (75.8) (80.1) (91.5)

SG&A to revenue (%) 31.9 36.1 42.3

Current ratio (x) 3.44 5.32 6.55

Quick ratio (x) 3.28 4.84 6.15

Interest coverage (x) na na na

Days inventory (days) 18 22 8

Days receivable (days) 80 99 89

Days payable (days) 30 40 12

Cash conversion cycle (days) 67 81 85

Ratio Analysis 2014 2015 2016

Growth (YoY%)

Revenue 30.2 (28.2) (36.0)

EBITDA 19.1 (38.5) na

Net profit (8.0) (43.7) (60.1)

Diluted EPS (8.8) (44.5) (60.1)

Margins (%)

Gross profit margin 61.9 61.6 60.0

EBIT margin 30.2 25.8 na

Net profit margin 22.7 17.8 11.1

Other ratios (%)

Return on average assets 39.5 19.6 na

Return on average equity 54.9 25.5 na

Dividend payout ratio 36.9 43.8 110.0

Balance Sheet (HKD mn) 2014 2015 2016

Non-current assets

PPE 4 6 5

Intangible assets 0 0 0

LT investments & receivables 0 0 0

Others 54 40 34

Total non-current assets 58 46 39

Current assets

Inventories 44 28 15

Account receivables 530 311 175

Others 20 122 87

Bank balances and cash 786 877 1,007

Total current assets 1,379 1,339 1,283

Total assets 1,437 1,385 1,322

Current liabilities

Account payables 78 49 16

ST borrowings 0 0 0

Others 323 203 180

Total current liabilities 401 252 196

Non-current liabilities

LT borrowings 0 0 0

Other non-current liabilities 0 0 0

Total non-current liabilities 0 0 0

Total liabilities 401 252 196

Shareholders’ equity

Share capital 20 23 12

Reserves 1,016 1,111 1,114

Total shareholders’ equity 1,036 1,134 1,126

Minority interest 0 0 0

Total equity 1,036 1,134 1,126

Net Cash / (Debt) 786 909 1,030

Cash Flow Statement (HKD'mn) 2014 2015 2016

Operating cash in/(out) flow 494 308 na

Investing cash in/(out) flow (4) (34) na

Financing cash in/(out) flow (223) (182) na

Net change in cash 266 92 129

Per Share (HKD) 2014 2015 2016

EPS 0.414 0.228 0.091

Diluted EPS 0.408 0.226 0.090

DPS 0.100 0.100 0.100

BVPS 0.859 0.937 0.931

Source: Bloomberg

Playmates Toys (869 HK) 7

Disclaimer and Risk Statement This document is published by Quam Securities Company Limited ("Quam Securities"), a licensed corporation (CE number AAC577) regulated by the Securities and Futures Commission in Hong Kong. Quam Securities is an affiliate of Quam Limited (0952.hk) and its group of companies (collectively "Quam Group"). This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. In particular but without limitation, neither this document nor any copy hereof may be taken or transmitted into Japan, Canada or the United States or distributed, directly or indirectly, into the United States or to any U.S person (within the meaning of Regulation S under the U.S. Securities Act of 1933) or general public located in Mainland China (but not including people in Hong Kong, Macau and Taiwan). This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The opinions and/or recommendations of this document do not take into account the recipients' own investment objectives, investment experience, financial situation and other personal circumstances. The recipients of this document shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this document. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. This document is for informational purpose only and should not be treated as a recommendation on any particular securities, financial instrument, investment portfolio or trading strategy. Opinions and/or recommendations expressed in this document are subject to change without prior notice to all recipients. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shal l consider seeking separate legal or financial advice before making investment decisions. The following analyst hereby certify that their views about the issuer and its securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Tsz Wang POON (CE No. BIB419) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.