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Dream International (1126 HK) (“Dream”) is one of the world’s largest manufacturers of plush toys. It sells these plush toys to customers such as Disneyland and Toys ‘R Us.
It’s also a producer of plastic toy figures. A large part of Funko Pops are produced by Dream International, as are key plastic toys from Canada’s Spin Master.
Korean Kyoo Yoon Choi founded the company in 1984. After Korean wages started rising in the early 1990s, he moved the business to Hong Kong and China. And in more recent years, Choi has engineered a shift to Vietnam, where most of its factories are today.
There’s no doubt that the toy OEM business is competitive. Plush toy factories are body shops, i.e. highly labour intensive. But despite a stagnant toy market, Dream has been able to gain market share consistently, thanks to strong quality control and a proactive effort to form relationships with new customers. Dream’s growth has been impressive, with 10% yearly top-line growth since 2005.
The plush toy segment has been hurt by COVID-19-related lockdowns, which caused retail shops and theme parks to close. Dream’s factories in Vietnam were also shut down temporarily in 2021. Now that theme park attendance is recovering, there’s a good chance that Dream’s plush toy business will do better as well.
Analysts have been worried about rising oil prices. I think that worry is overdone. The toy OEM industry doesn’t operate on long-term contracts - each order is a contract in itself, and prices tend to adjust quickly to higher raw materials costs.
I believe the most significant risk with Dream International is that Chairman Choi engages in related party transactions. There were several related transactions in the mid-2000s. And more recently, Dream acquired its tarpaulin business from a company controlled by its Chairman.
On the other hand, Chairman Choi has been buying back shares in 2020 and 2021 at around the HK$3.0/share level - above the current share price.
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