Dynam Japan: Pachinko Hall Operator with Land Development Upside

Shawn Kravetz presented his in-depth investment thesis on Dynam Japan Holdings (Hong Kong: 6889) at Wide-Moat Investing Summit 2017.

Dynam Japan Holdings is a U.S.-style regional casino in ninja’s clothing. If you like suburban Ohio slot halls with a uniquely Japanese twist, you will take notice of Dynam, which owns and operates the largest portfolio of pachinko halls throughout Japan. If Dynam traded on a U.S. exchange, it would be benchmarked to regional casino operators such as PENN, PNK, BYD, and RRR, which trade at 8-11x EBITDA. However, Dynam trades in Hong Kong, operates solely in Japan, and remains largely ignored by the sell- and buy-side, trading at ~4.2x EBITDA. Despite operating in a market offering superior scale, similar customer focus, modest growth, and similar margins, Dynam trades at a steep discount while paying a ~6.6% dividend yield. Recent regulatory tightening of “high volatility” machines has created temporary disruption to industry fundamentals and has provided an attractive entry point for Dynam investors. The market recently valued Dynam as secularly declining (despite relatively stable results). Investors completely ignore the potential Integrated Resort (IR) opportunity. After years of failed proposals, Japan’s Diet finally passed the Casino Promotion Bill in December 2016. Equipped with ample land in Yamaguchi and one of the largest gaming customer databases in Japan, Dynam is positioned well to attract high-profile international IR development partners and to secure a license in the upcoming RFPs. With a 6.6% dividend yield, durable core pachinko operations, and a potentially transformational Japan IR opportunity, Shawn sees Dynam as worth ~HK$29 or >125% upside in his base case and ~HK$44 or ~240% in his high case.

Shawn W. Kravetz is the Founder, Chief Investment Officer, President and Portfolio Manager at Esplanade Capital. Prior to founding Esplanade Capital, Mr. Kravetz was a Principal at the Parthenon Group. Prior to Parthenon, Mr. Kravetz was the Director of Strategic Planning and Corporate Development at CML Group. His experience also includes work at Monitor Company and the Sara Lee Corporation. Mr. Kravetz serves as a Member of Advisory Board at Torque Partners LLC. He has been a Director of Nevada Gold & Casinos Inc. since October 13, 2016. He holds an M.B.A. with high distinction from Harvard Business School, where he received the following honors: Baker Scholar, The Thomas M. and Edna E. Wolfe Award for “Scholastic Excellence and Attainment”, and “The Henry Ford II Scholar Award” for “The Student with the Best First Year Record”. Mr. Kravetz holds a B.A. in Economics from Harvard College, where he graduated magna cum laude.

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