Dynam Japan Holdings Co. Ltd.

Dynam (‘Company’) is incorporated in Japan but listed in Hong Kong. It is Japan’s largest ‘Pachinko’ game operator with 445 halls. Incongruously, it recently entered the aircraft leasing business.

Pachinko halls offer two types of gaming machines: Pachinko and Pachislot. Pachinko is similar to pinball, and Pachislot is similar to slot machines. The company earns 20% revenue margins on average (gross pay-ins minus payouts) before expenses.

The company had to shut down 97% of its halls during Covid-19 from April to June resulting in revenue declines of 40% and operating profit declines of 80%. Although it reopened in June, it has only been operating at 70-80% of its normal capacity.

It entered the aircraft leasing business in 2018 and currently owns three narrow-body aircrafts (Airbus A320). The average age of the fleet is under two years and operating leases are for five years. Its annualized surface yield is 8.8%.

Covid-19 practically decimated the aircraft leasing business – the company, however, leased out one aircraft to Indigo Airlines of India in December 2019.

The company reported TTM sales (to September) of $8.2b (2019: $10.2b), ebitda of $1.7b (2019: $2.6b), and net profits of $341m (2019: $916m). Cash generation has been better with recent operating cash flows exceeding $2b/year, and free cash flows exceeding $1.1b/year.

The balance sheet was strong with net cash of $313m (in excess of working capital requirements). The liquid asset ratio was adequate at 1.3x.

The stock currently sells for $6b ($7.94/share), which is just 3x operating cash flows, 6x free cash flows, and 7x 2019 (pre-pandemic) earnings.

Furthermore, management have been generous with dividend payouts of over $650m/year yielding almost 11% at market. They have also bought back shares in recent months as high as $9/share.

Despite the entry into the unrelated aircraft leasing business, we are inclined to partner with this management because: a) the stock is very cheap for such a lucrative Pachinko operation, b) Management has been generous with payouts, and c) the aircraft leasing business still yields almost 9% on investment.

There isn’t much reason to believe the Pachinko business won’t return to pre-pandemic volumes due to Japan’s fondness for it. The aircraft leasing business is currently very small, and management is likely to use their judgment on further expansion depending on that industry’s environment.

At current prices, we consider this stock to offer good value for money for the prospective investor.