Dynam Japan, the operator of Japan's largest pachinko game arcade, held an analyst meeting on Friday and provided details on business developments related to financial results for the 2016 fiscal year (ending March 31).
Revenue returned to positive growth in the second half of FY2016, mainly aided by mergers and acquisitions and low base effects. In the second half of FY2016, the company's total revenue increased 8% to 80,068 billion yen, and operating profit and net profit increased 229% and 155%, respectively, reversing the 6% year-on-year decline in revenue in the first half of FY2016. The return to revenue growth was mainly due to the company's merger and acquisition of YumeCorporation in November 2015. The target of the acquisition was a pachinko game store operator with 39 game stores. The acquisition method was a share replacement (1 share of Yume Corporation for every 3.5 common shares, for a total of 38.8 million common shares, equivalent to HK$370 million).
Overall, there has been no significant recovery in the pachinko industry. However, the company benefited from the low base effect of net profit in the second half of FY2015. The low base for the second half of FY2015 was mainly due to one-time renovation costs.
There is no new information regarding the application for a Japanese gaming license. Since the Senate election will be held in July, management estimates that the bill relating to integrated resorts (legalizing casinos in resort areas) will not be reviewed until September. Management mentioned that the company's land reserves in Yamaguchi Prefecture will focus on developing a resort project targeting Chinese, Thai and Korean tourists. Details of the development plan will not be announced until next year.
Management's tone is more conservative about potential business development in the Macau market. They aren't sure about the future of the Macau gaming market because the number of VIP customers is declining.
For the first time since 2012, dividends have been reduced. Due to the sharp drop in the company's net profit in 2014 and 2015, for the first time, the company did not follow the stable dividend policy it has been pursuing since listing (7 yen per share is paid every six months). However, after the company cut its dividend per share by 1 yen to 6 yen in FY2016, the payout ratio is still at a high level of 95.5%. The company's CEO, Kohei Sato, expects that overall, stable dividends will be maintained in the short term.
Expansion was carried out through the opening of new stores; merger and acquisition plans remained unchanged. As of March 31, 2016, the company had 442 pachinko game stores in Japan, 14 of which were opened in the previous fiscal year (4 were closed), 39 of which were acquired from Yume Corporation. This is the first time Dynam Japan has acquired a competitor through an equity swap; the company's CEO said it is not ruled out that the company will make similar mergers and acquisitions in the future.
Valuation: The company's price-earnings ratio for FY2016 was 11.4 times, and the price-earnings ratio for FY2016 was 0.92 times. Although the company's dividend was cut to 6.00 yen per share, the dividend yield was still as high as 7.7%. For the main stock price catalyst, the company's progress in obtaining a gaming license in Japan remains critical.
Risk factors: (1) The market size will gradually decline due to the decline in Japan's population; (2) the company faces competition from other low-cost entertainment (such as mobile games).