What's in store for February from Continuous Compounding
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Hey Continuous Compounders,
I am currently doing a deep dive into the pachinko/pachislot industry in Japan.
For those who don’t know what Pachinko or Pachislot is, it is essentially Japan’s version of slots. See the video below for a brief overview:
*Pachinko= pachinko/pachislot in the rest of this post.
I will be looking at the entire supply chain of pachinko producers:
What caught my attention was not pachinko machine producers but pachinko peripheral companies, specifically Gamecard Joyco Holdings (TYO 6249). Pachinko is conventionally played by inserting tiny metal balls into the machine (see video above to see how the game is played). Currently, with the increase in labour costs and difficulty in hiring, Pachinko parlours are embracing the transition to smart Pachinko/Pachislot machines, which do not require balls to be carried around. See the video below to see the labour-intensive aspect of conventional pachinko machines.
As you can see from the above video, to provide superior customer service, labour is required to safeguard pachinko balls, move the balls around, and convert the balls to “prizes.”
Gamecard offers a simple prepaid IC card system that tracks the amount of balls/tokens stored, won, or lost.
The market share for prepaid IC card systems is the following:
Gamecard has the largest market share for prepaid IC card readers and trades at a negative EV. It is the only company that offers a third-party IC card reader system, while others are in-house IC card readers. More on the intricacies in my follow-up posts. All you need to know for now is that Gamecard is cheap, has great margins, but operates in a declining pachinko industry.
*Mamiya is more of a peripherals company that supplies parts to companies like Gamecard. Main competitors in the prepaid IC card space are ranked 1-4.
The market valuation is stipulating that Gamecard and its competitors are value traps due to the decline of the Pachinko industry.
Here lies the opportunity for thorough research. Can I find a unique angle where value can be unlocked?
I believe this can be a great investment opportunity if the following can be determined:
-That the decline in the Pachinko industry will flat line and stabilize, much like the arcade amusement industry
-The Pachinko industry is able to attract younger adult gamblers/players
-Some sort of innovation in the pachinko industry that makes the entertainment value rival that of other entertainment categories.
-Certain companies are able to redirect cash flows from currently attractive margins into other segments. i.e. Tsuburaya Field Corporation produces Pachinko machines, but they also own the IP for Ultraman; hence, they are able to direct cash flows into building the IP of Ultraman and hence generate income through licensing, merchandise (toys, card games), content, and live events.
-Select companies can be attractive acquisition targets that can be integrated within the corporate structure of another firm that can effectively utilize that cash flow in other segments. i.e. Tsuburaya Fields is a vertically integrated Pachinko holding company with the capacity to create its own IP (Ultraman), acquire IP (Evangelion), produce/plan/develop pachinko machines, manufacture pachinko machines, distribute pachinko machines through it’s showrooms and sales distribution channels, and sell pachinko pheriperal equipment. Daikoku Denki 6430 could be acquired by them as they formed a business alliance in Nov 2024 where Fields owns 15% (formerly 20%, sold 5% recently). Actually, this is a bad example, as 6430 is seeking a prime listing, so it likely won’t get acquired. But a company along the pachinko value chain could be acquired.
-Pressure from current governance reform can induce management to repurchase shares or distribute dividends more aggressively
If I determine that the Pachinko industry really is a value trap, then that will be a good takeaway as well, so all my readers can avoid the value trap and opportunity cost on capital invested.
Best,
Alan - Continuous Compounding
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Exiting! Look forward to reading. Gamecard has come up on a number of screens
Sweet, looking forward to the thought process. For now ill just watch the introductionary video you smartly included at the very top ! ;)