Mandarake (2652.T): Profiting from the manga collectibles explosion

Mandarake sells second hand goods mostly related with manga and anime. Its stock has gone up almost 400% in the last few years, and still goes strong. Let's see why.

Half pawn-shop, half geek emporium, Mandarake is not a very typical business. In the last couple of years, its market cap has exploded (multiplying by more than 4¹), but it is still tiny, at about ¥20B ($130M, give or take). That explosion comes from its profits exploding 3.5x, and a modest increase in multiple.

That increase comes mostly from operating leverage, as sales have only gone up by about 33% in the same period. But the multiple is still undemanding (16x last year, less than 14x LTM), sales are still growing (15% YoY in the last quarter) and operating leverage is still working (profits went up 26% in the last quarter!). And I think that is going to continue for a while because of two sources:

• Opening of new stores: Mandarake opened 2 new stores in FY2020², right when the pandemic was about to happen. That made them take a hit and they had to wait until Japan was fully open to first recover breath (2022) and then leverage on those stores (2023) to increase sales. A new one has just opened last Q and seems to be going well.

• Increase in sales to international clients: Mandarake was already selling internationally, and numbers were slowly going up, before the pandemic. But as with many other things, the pandemic catalyzed a huge increase, and sales overseas doubled between 2019 & 2022. In 2023 they remained mostly flat. 2022 still growing and 2023 flat are actually impressive if we take into account shipping issues and costs and that most pandemic-beneficiaries have seen backlash.

All that supported by the manga collectibles market still having tailwinds, I think, as we can see in the results of Bandai Namco with toys & hobby sales doubling since 2018³.

So let’s dive into it!

The Manga-adjacent pawn-shop

Mandarake is a second-hand shop of manga & related collectibles. While it started as a second-hand manga shop, right now its main business (56%) is selling toys and figures related to manga and anime (obviously second-hand as well). This transformation is recent and happened during the 2010s mostly. During the 2000s, the share of toys in sales raised little by little, but only moved from 20% at the beginning to 25% in the end. By 2016 it was already 43%, and it is still increasing (if only slightly).

In any case, this is still a second-hand business. And that means high gross margins⁴, but also a huge inventory load. Because inventory is by far the biggest capital investment in this business. Mandarake has typically carried more than 150% of their inventory costs in their balance sheet⁵, and that is key. Their stores are an entertainment place and a tourist attraction⁶, and their biggest claim to fame is that it is one of the best places (if probably not the cheapest) to find the collectible that you want. By becoming a hobby center, they also are top of mind when otakus sell second-hand stuff⁷ (and likely receptors of the money as well).

Mandarake is a mainstay feature in many tours and tourist guides. This one, for example (where this picture of the manga section is from)

But that brings a relevant financing issue. This is a retail business, capital intensive by definition, and that’s why it carries ¥5.4B in PPE in its balance sheet. But normal retail businesses have suppliers they can push around to finance the inventory, and they move it relatively quickly. Mandarake doesn’t have any of those characteristics, as a carrier of mostly illiquid stuff that buys piecemeal. And that means debt. Atypically for a Japanese business, Mandarake is leveraged to the tune of about 2 times EBITDA. Which is not much really, compared with about 7 times in 2017!

Mandarake has always used some debt, but the reality is their use really ramped up in the 00’s. From a 60% equity ratio at the beginning of the decade, it ended it at 32%. Risky, very risky… but it allowed them to grow volumes as they needed. During much of the decade, they were not even profitable, and that could have trapped them in a death spiral. Being subscale, they would be selling less and less, as they had less equity to finance their inventory. But the cheap-debt-fueled volume growth got them out of it and they became profitable again. They are now reducing its weight, but that won’t contribute to the improved profitability (given they are paying below 1%).

New stores (and new model)

Part of what they did in the 2000’s to increase their volume was, perhaps counterintuitively, open new stores. For a subscale player increasing fixed costs is usually not the way to go. But Mandarake faced another problem: second-hand manga in physical format was steadily losing popularity, and there were other places where it could be found. So they had to adapt to selling other merchandise, largely figures and collectibles (what they group under toys). And that requires a different model of store, mostly with more space (remember we are going for large SKU count instead of few references here, due to the nature of the store, and not expecting to sell fast).

They ended up that process with 11 stores⁸ including one dedicated to mail order only (read: online), a number they maintained until fairly recently, in 2019, when they opened 2 new ones in the last few months of the year. Obviously, that didn't go well after the first few months. Mandarake does not disclose what percentage of sales comes comes from physical stores vs. mail order, but sales in Japan were up to 17% lower (2021) than in 2019, despite the new stores, recovering only partially in 2022 and finally booming in 2023.

A 14th store was added in October 2023 (that is, first month of FY2024), which should help increase sales further. And has, so far! Mandarake has a very transparent IR policy⁹ and they publish their sales evolution monthly. So far, it is pretty encouraging.

Tailwinds

Despite their growth and operating leverage in recent years, Mandarake is still a niche player, and only works with pre-owned material. It is relatively big for the niche, but also it moves a tiny part of the pre-owned volume, which I expect to grow a bit faster than the new ones.

The reason is, basically, mass. Little by little, the amount of figures out there increases, which increases the base of pre-owned sellers, and also the combinations of collections that people will want to complete. Collectibles are not like manga (mostly fungible, although there are of course collectors as well), so I do expect the increased volume of new toys and collectibles to be reflected (in higher percentage due to stock accumulation) in the preowned one.

Another tailwind is the rise of foreign collectors. Manga/anime related collections are no longer exclusive to Japan, and had not been for a while, but they have increased in prevalence. Still, most of the collectibles are made and published in Japan, which makes them less accessible (specially if you want an old one). Mandarake is a gateway for those buyers, though not the only one.

Before 2017, the information was not published as Japan’s sales were more than 90% of the total. In 2017 they were already 15%, and now 22%, after a pandemic maximum of almost 30%. Importantly, that decrease has come as domestic buying surged.

And last but not least, their increase in LFL sales in the last year is encouraging, and the opening of the Kyoto store seems to have gone decently well, which might mean they still have some potential to grow in Japan’s retail.

Why bet on them?

When you start to research this area, a few other names will pop up.

• Collectibles manufacturers: Some are already part of conglomerates (Megahouse¹⁰), others are private (Amakuni, GSC, Myethos) and others… might be interesting¹¹. That said, I suspect in this domain distributors have more permanence than brands. The driver behind the sale of figures is the IP, and it is very rarely exclusive. Sure, different brands have different reputations in different sub-segments, and that is an asset, but not sure it is enough.

• Other specialized sellers: AmiAmi is the one that pops up the most, but also Mercari¹². I suspect AmiAmi is one of the big winners here. They have a much better online storefront and mix pre-owned and new. Sadly, it is private. Mandarake is also a bit more specialized in rare collectibles. But yeah, I would buy AmiAmi if I could.

Mandarake’s web could use a small revamp

Valuation

Well, once we have gone over the business, let’s talk valuation.

As you can see, I have taken a very simple approach, considering they will convert to FCF in a similar way to the last few years, and using a 15x multiple on FCF (because I think it will still be a growing business by then, and why would they pay less). Share count is different than you would get in most places, I got it directly from the filings¹³

Even considering debt (and I have my doubts we should), the NPV of present cash flows + terminal value is way above its current price (using a 10% discount rate). As you can see, I still expect significant operating leverage the next couple of years, but beyond that it should be much smaller. I have also considered moderate sales growth, as the past year had the benefit of coming from the pandemic lows.

While this is not investing advice, I do own the company as I think it should do well in the future. But there are some open questions.

• Capital allocation: Other than a repurchase in february for about 121 million yen, the cash flow has gone to debt reduction (the dividend is negligible). I think they will start to increase the dividend or increase repurchases now that the debt is more under control and earnings are healthier, but we will see! There is also a relevant amount of money destined to shareholder gifts¹⁴ (essentially store vouchers) that foreigners are not eligible for.

• Investor relations: Look, this is a tiny Japanese company, so expect terrible IR for foreigners.

Those might prevent full realization of the value I think it has. We will have to wait ans see! And if you have a different opinion on the company, I would love to hear from you in the comments!

1. From November 2021.

2. Mandarake's fiscal year starts in October, and I will be mostly referring to their fiscal years throughout the article. If I mean calendar years, I will specify.

3. The global toys market has grown as well, but much less, about 20% since then according to Statista, and industry associations regularly talk about 1-4% yearly increases. A big part of Bandai Namco’s segment is collectibles, which has also enabled them to expand operating margins in the segment from 6.5% to 13%.

4. 50-55%, in line with their 50% stated objective.

5. Currently at 163%, a fairly typical figure for them. It went up temporarily in 2020-2022

6. It is, for example, quite popular among the Gunpla (Gundam models) community.

7. Well, illiquid stuff. If you have something liquid (meaning currently very popular) the optimal way to sell it is to do it yourself. Mandarake doesn’t pay particularly well (see note 3). But they are a quick way of selling things that would take a long time to sell.

8. They also tried other things, like expanding internationally, with stores in California, Bologna and Beijing. None of them worked out. I suspect they would have better luck nowadays if they opened, at least in Europe, but the late 90's-early 00's were too early.

9. If you are able to read Japanese. All of their filings are in Japanese only, and half of them have bad OCR, meaning you cannot even copy from them to translate unless you run your own OCR first. That’s why you won’t see updated information in many stock information sources (TIKR, Investing). Yahoo Finance does have them and they seem correct, to their credit.

10. SEGA also has a tiny line of these products through its SEGA goods brand. Not particularly popular. Persona 3 & Persona 5 lines from other brands are hugely popular though!

11. Kotobukiya maybe, but I still want to get to know it better!

12. Not really specialized though, it is an e-commerce company, but they do have a sizable amount of people using it from overseas for this type of purchases.

13. 7.24 million shares in total, 0.66 treasury shares, including the last repurchase of 50k in february.

14. Going on 27 million a year, which will increase this year as they have increased the benefits. Not huge, but still a pity it is not for those outside Japan.