China's party culture industry is expected to exceed $10 billion by 2025E. Currently, the consumption of anime costumes in China is not popular. Cosplay costumes are mainly used for various costume parties, commercial performances, and anime costume enthusiasts. As the domestic animation industry enters a period of rapid growth and the rise of the middle class, there is huge room for future growth in the industry. In 2017E, domestic two-dimensional users will reach 308 million, far exceeding the population of the US and Japan at 324 million and 126 million, while the size of the US party cultural goods market and the output value of animation derivatives in Japan have reached US$10 billion and US$6.5 billion respectively. In 2015, the output value of domestic party culture was only about 1 billion US dollars. Referring to the development of the animation and party culture industry in the US and Japan, and the two-dimensional consumer population comparison, we conservatively estimate that the relevant domestic market size is expected to exceed 10 billion US dollars in 2025. There is huge room for future development. We believe that a party culture product retail giant covering the entire industry chain like Party City in North America is expected to rise in China.
Party City, an American party cultural goods giant, is already on the rise. Party City (PRTY.US) currently has a market capitalization of more than 2 billion US dollars. It is the largest retailer of party culture products in North America, and is also the world's largest vertically integrated supplier of party decoration products (business coverage from manufacturing? Wholesale/distribution? The complete retail chain). The company currently operates about 910 offline retail stores worldwide, of which 730 (80.2%) are self-operated stores and 180 (19.8%) are franchise stores. In addition, the company also operates about 300 seasonal Halloween-themed temporary stores, Halloween City. The company's wholesale business includes the design, manufacture and distribution of party products, which are mainly supplied to various retailers and merchants around the world, covering more than 40,000 retail outlets around the world, providing more than 45,000 SKUs, and selling product brands including Amscan, Designware, Anagram, etc. The company's retail store has an extremely rich product line, offering over 30,000 SKUs, while the online store also offers around 80,000 SKUs. PartyCity management indicates that the 2016 E revenue and net profit will reach US$2.35 billion and US$140 million, respectively.
Precise card market segmentation. We believe Party City's strength lies in its successful entry into the unique retail segment of party culture, with almost no direct national competitors in the North American market. However, we have observed that leading companies in other retail segments of the North American market, such as vitamins and health products, pet products, sporting goods, household goods, handicrafts, etc., usually face two or more competitors. Basically, the competition that Party City faces mainly comes from merchants selling popular goods or daily necessities retailers. We believe that Party City's precise market positioning will enable it to continue to expand its brand awareness and market share in the rapidly growing market for party culture products.
Reiterate the “buy” rating. The company's current 2016/17E dynamic price-earnings ratio is only 11.4/9.9 times, respectively. We believe that i) the pace of development of the domestic IP industry is accelerating; ii) the acquisition process of the IP business is speeding up; and iii) the gradual implementation of the joint venture with Ledom will be a catalyst for rising stock prices. Observing that the company's liquidity has improved recently, we reconfirmed the “buy” rating by raising the target price to HK$1.68 using the 2016 E-18E PEG pricing 1 times (or the 2016 E dynamic price-earnings ratio 15 times).