High-dividend stock series 1126 Derlin International

Everyone knows I bought stocks 1126 Der Ling International and 1571 Xinbang Holdings. Today, I’ll briefly write about 1126 Der Ling International.

1126 Der Ling International

Der Ling International is an industrial OEM stock with two main businesses: 1. Producing plush toys for Disney, and 2. Plastic prototype models.

Other businesses include waterproof covers and injection-molded products, but their revenue share is too small to elaborate on.

In 2023, the company’s total revenue was HKD 5.48 billion, with plush toys contributing HKD 2.74 billion (50% of revenue) and plastic prototype models HKD 1.93 billion (35%).

From the income statement, revenue was HKD 5.35 billion, gross profit HKD 1.34 billion, and gross margin as high as 25%! This is a 5-percentage-point increase from 19.7% in 2022.

The company has almost no debt, so financial expenses were only HKD 10 million. Annual profit was about HKD 830 million, with a profit margin of 15.5%.

Plush toys were the growth driver in 2023, with revenue up 19.6% to HKD 2.74 billion. The company explained:

"Due to strong orders from theme parks, benefiting from the long-term partnership with character owners and licensors. During the year, the group took multiple measures to attract orders and maintain reasonable utilization rates. For example, by offering competitive prices, it actively sought additional orders from existing clients. At the same time, the group explored new opportunities and received positive responses from new clients."

However, the plastic prototype business saw revenue drop from HKD 3.23 billion in 2022 to HKD 1.93 billion, a 40% decline! The reason was the poor performance of major client Funko, dragged down by the global economic downturn.

Overall, Der Ling International’s strong performance in plush toys and effective cost control offset the decline in plastic prototypes, resulting in growth compared to 2022.

Investment Highlights

Although 2023 revenue fell slightly from 2022, the rise in core business and good cost control led to higher gross and profit margins, boosting overall profit.
For 2024, the company expects continued strong demand from theme parks and upcoming movies in 2025, expressing cautious optimism about business prospects.
The company currently has 27 factories—20 in Vietnam and 7 in China—with a third production base in Indonesia set to begin operations in 2025, effectively mitigating Sino-US political risks.
At the end of 2023, the company had only HKD 73.48 million in debt but HKD 127 million in fixed deposits and HKD 1.26 billion in cash, with net cash reaching HKD 1.3 billion, reflecting very healthy finances.
The interim dividend was HKD 0.20, and the final dividend HKD 0.35, totaling HKD 0.55 for the year. At the current price of HKD 4.50, the dividend yield is 12.2%!
With EPS at HKD 1.226, the payout ratio is about 45%. Given the company’s financial health, there is room to increase the payout ratio.
Valuation-wise, with 2023 EPS at HKD 1.226 and the stock price at HKD 4.50, the P/E is just 3.7x, indicating very low valuation.

Risks

The business heavily relies on major clients, especially Disney. If a client cancels cooperation, the impact on Der Ling International would be disastrous. However, the partnership has lasted over a decade (likely over 20 years), and Disney values the company’s high-quality, reasonably priced products, making sudden termination unlikely.
Plastic prototypes may continue to drag performance. However, the worst is likely over in 2023, and with global interest rate cuts in 2024, the economy should gradually recover. The annual report also suggests the company is seeking new clients, offering some optimism for 2024.
Low liquidity. This is one of the biggest risks in Hong Kong stocks. After the earnings report, the stock surged but faced selling pressure, notably from KGI Securities. CCASS data shows KGI sold ~600k and ~500k shares on March 25 and 26, respectively, and still holds ~9 million shares. If they intend to exit, short-term price action may suffer.

Conclusion

Der Ling International offers high investment value, especially given its healthy financials and cash flow. The current dividend yield is 12%, and I believe it can at least maintain this in 2024, possibly even increasing payouts. The only downside is Hong Kong’s poor liquidity and potential institutional profit-taking. Short-term price action depends on whether major holders continue selling. Investors should be prepared for a long-term hold. Still, given the fundamentals and dividend yield, I’m willing to allocate part of my portfolio for an annual return exceeding 12%.

$DREAM INT'L(01126.HK) $XIN POINT HOLD(01571.HK) $CNOOC(00883.HK)