Shares of Playmates are down ~8% since my recent write-up. The biggest move in the shares came yesterday, following the release of a profit warning from the company. In my experience, it is not unusual for the share price of a company to decline right after initiating a position – in fact, I almost expect it. I always struggle with the timing game, which is why it helps to build up to a desired portfolio weighting over time. Of course, there is also the risk of getting it completely wrong, which is why overall position sizing is important. 

Anyway, back to the company’s announcement. Management expects 2016 revenue to come in at approximately HK$993m and 2016 net profit to come in at HK$100-115m. Just for comparison, revenue and profit for 2015 were HK$1,551m and HK$276m respectively. So net profit for 2016 is ~36-41% of the previous year. I thought it would be in the range of a 50% drop, so while this is worse than expected, it’s not altogether surprising. 2016 was a pretty bad year for the company.

Based on where the share price closed yesterday, cash now represents ~68% of the company’s market cap and the shares yield ~7.8% calculated on the trailing dividend. The earnings multiple based on the expected 2016 results now works out in the range of 13.5 to 15.5x (6.4% to 7.4% earnings yield from day 1 of investment). As a result, Playmates shares are potentially even more attractive from a risk / reward perspective. My earnings outlook for 2017 (relative to 2016) is positive given less single product concentration risk and the even lower floor set by the results in 2016. Overall, my investment thesis still remains intact but I will post again if I change my mind.