Pachinko IPO

Dynam Japan raises $202 million from Hong Kong IPO

The prospect of high dividends helps attract investors to the pachinko parlour operator, which will be the second Japanese company to list in Hong Kong.
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A pachinko hall in Akihabara, Tokyo
<div style="text-align: left;"> A pachinko hall in Akihabara, Tokyo </div>

Dynam Japan, a pachinko hall operator in Japan, has raised HK$1.57 billion ($202 million) from its initial public offering in Hong Kong after fixing the price at the bottom of the indicative range.

Instead of listing in Tokyo, the company came to Hong Kong because several gaming companies, such as the Macau casino operators, are already listed in the city. This should make it easier for investors here to understand the stock, said a source.

Pachinko is similar to a vertical pinball machine and is played by firing small metal balls into the playing field of the machine, and into pockets that trigger the release of more pachinko balls.

Dynam sold 112 million new shares at HK$14 each. The deal was marketed at a price between HK$14 and HK$16 per share and could have raised up to $231 million at the upper end of the range. However, it comes with a 15% greenshoe option, which could increase the total proceeds to $232 million if exercised in full.

The deal attracted investors from Asia, including Japan, Europe and the US, and the 90% institutional tranche was fully covered, the source said. The buyers were a mix of corporate investors, long-only funds and hedge funds, the person noted.

The subscription ratio for the 10% retail portion and the final allocation of the deal were not immediately available yesterday. The retail offering started on July 24 and closed on July 30, while the institutional book opened on July 16 and closed sometime before the retail offering ended.

One of the IPO's biggest attractions for investors was the deal's high yield, the source said. Dynam has noted that it intends to distribute about 45% to 50% of its consolidated profit for the year ending March 2013 as dividends.

Assuming a 45% dividend payout ratio and 7% withholding tax, the dividend yield is approximately equal to 6.3%, said Eugene Mak, an analyst at Core Pacific-Yamaichi. The IPO price of HK$14 also equates to a price-to-earnings ratio of 6.6 times for the year to March 2013 if earnings remain unchanged, he said.

Despite Dynam’s desire to list alongside the Macau casino operators, Mak argued that the Macau gaming sector isn’t really a useful sector comparison due to a significant difference in the outlook, growth potential and business model. The most reliable valuation metric for Dynam, he said, is the dividend yield, which suggests that it should be viewed as an alternative to investing in bonds, rather than an alternative to the Macau gaming sector.

But just as a reference, in terms of enterprise value (EV)-to-Ebitda (the key valuation metric for the Macau gaming sector), Dynam is listing at a multiple of about 2.6 times based on fiscal 2012 numbers, which is a significant discount to the average of approximately 12 times for the Macau casino operators for calendar year 2011, Mak said. He added, however, that part of the discount can be justified by the declining growth of the pachinko market and the uncertain outlook and confined market of Dynam itself, as well as its declining earnings during the past three years.

The company booked a net profit of ¥15.9 billion ($203 million) for the year to March 2012, which was down 1.8% from a year earlier, although it said in a statement that net profit would have been slightly higher were it not for last year’s earthquake.

Dynam is the biggest pachinko hall operator in Japan in terms of the number of halls and the second-biggest based on the total value of pachinko balls and pachislot tokens rented in 2010. Pachislot is similar to a casino slot machine. The company has 45 years of experience in the pachinko industry, and a nationwide network of 355 halls.

Dynam will be only the second Japanese company to list in Hong Kong after SBI Holdings, which raised $206 million from a sale of Hong Kong depositary receipts in April last year. Dynam is scheduled to start trading on August 6.

It plans to use a large part of the IPO proceeds to set up 75 new pachinko halls during the three years to March 2015, according to the prospectus. The remainder will be used to pay for the potential acquisition of pachinko halls, to upgrade existing information technology and management systems, as well as for general working capital.

“Dynam aims to maintain its leading market position and further grow its business through strategic expansion of its pachinko operations,” the company said in a statement last week. It also noted that it will consider potential cooperation with gaming operators in other locations throughout Asia and will actively pursue expansion when opportunities arise.

Pachinko is a $250 billion industry in Japan, accounting for about 29% of the country’s entertainment market in 2010, according to the company. It is the biggest revenue contributor in the entertainment sector, followed by dining out.

Piper Jaffray and Shenyin Wanguo Capital are joint sponsors for the deal, as well as joint global coordinators and bookrunners together with Citic Securities.

¬ Haymarket Media Limited. All rights reserved.
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