Idea: 100% Payout Ratio And Still Growing? – TYO: 7865 People Co

Thinking Points

  • People Co (TYO: 7865) is a toy company that consistently pays out nearly 100% of its income.
  • Company strategy is similar to Apple & Keyence (TYO: 6861), focusing on design and outsourcing manufacturing.
  • Explosive US growth provides larger non-Japanese revenue exposure.

Overview

Recently, I wrote about Keyence (TYO: 6861) over on Seeking Alpha. To summarize Keyence, here are a few key notes:

  • Factory automation leader with 50+% operating margins.
  • Only does sales and design, production is outsourced.
  • 70% of new products are “industry’s first” or “world’s first”, which means no price comparisons, which means high margin.

Keyence’s (TYO: 6861) strategy resembles that of Apple’s, but with a B2B twist. In doing my daily reading, I stumbled across People Co (TYO: 7865), which appears to share a few characteristics with Apple and Keyence.

People Co is a toy company based in Tokyo. You guessed it – they design toys and get other people to manufacture it. Unlike Keyence, which typically has a sub-10% payout ratio and an enormous pile of cash, People Co paid out about 100% of its net income in dividends since 2011.

Growth

People Co grew revenues at 6.6% CAGR and operating income at 12.4% CAGR over the past 9 years.

In 2016, the company launched People Toy Company in the US. The company website ought to give you an idea of what toys People Co produces. To be clear, People Toy Company only contributes a very small amount of People Co’s US revenues. Taking a quick look at People Co financials between FY2013 – FY2016 shows that sales to Valtech LLC is equal to sales in the US. For FY2017, I presume People Toy Company accounted for 19 Million of the 1.5 Billion Yen of US revenues and the rest came from Valtech.

People Co’s US revenues have tripled in 5 years – near exclusively through Valtech. Overall, Japan revenues account for 67% of total revenues. This is a rapid change considering Japan revenues accoutned for 83% of total revenues just 5 years ago.

Valtech’s US presence was established through the “Magna Tile” line of products, which is a long-time seller in Japan under the “Pythagoras” brand/product name. People Toy Company started selling other product lines in the US (like Brain Builder and Mochi series) starting November of 2016.

Unclear value proposition with positive signs

Keep in mind that my benchmark here is Keyence. Keyence’s factory automation B2B focus tends to provide for a clear value proposition. It’s easier for Keyence customers to say “we can pay $X for Y product because Y product saves us X + 1 dollars”. This is because Keyence’s products tend to have measurable results – like decreasing defects by x% or improving sorting efficiency by y%.

People Co deals with the soft side. This isn’t necessarily a bad thing. Apple customers seem willing to pay top dollar for intuitive products, branding, and other iStuff. People Co sells everything from bicycles, dolls, and chairs to jungle gyms, brain teasers, and… rice blocks. As far as I can tell, there isn’t one mega-hit product – yet the company continues to grow revenues.To be fair, the Pythagoras (or Magna-Tile), Popo dolls, and Mochi series have become a brand, and I think that’s better than having a one hit wonder.

It’s also important to note here that Bandai Namco (TYO: 7832) owns 20% of People Co. In case you’re wondering, Bandai Namco is a well known entertainment company in Japan, primarily for arcade, mobile, and console game publishing. You may have heard of the game Pac-man before. They own that along with video games like Tekken, Dark Souls, and many other IP licensed video games.

Financials & Valuation

People Co’s financials are as healthy as they come. The asset-light business model allows for the consistent near-100% payout ratio. At its current price of 1,735 yen per share, People Co yields 4.7%.

Between the high dividend payout and consistently improving business performance, it shouldn’t come as a surprise that People Co stock has gone up handsomely over the past 5 years:

It seems the market has cooled down a bit at the end of 2015. Current EV/EBIT is at 13x, which would be on the high end for a small cap in Japan.

So far, People Co has successfully taken market share in a Japan market that has remained more or less flat. Nevertheless, a toy company with 67% of revenues generated in a baby-less Japan is intimidating. That said, growth in the US has been impressive; especially since it really only happened through one product line. It’ll be interesting to see how the People Toy Company fares in the US market as it introduces new product lines.

It’s hard to say whether People Co is worth buying at today’s price. I love the business model, but I don’t understand toys enough to have an idea of what the future holds.

Author: Clayton Young

Hi! I’m Clayton. My value investing journey began in 2012 during my college days. It was not until recently (2016!) that I decided to leverage my Japanese language skills to research Japanese equities. I hope to provide valuable insight on Japanese companies to the English-speaking world through this blog!

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