Both revenue and adjusted net profit for 2023 exceeded our forecasts.
Future growth will largely depend on overseas market expansion, and domestic business growth may slow down.
Maintaining the “hold” rating, the target price was raised to HK$27.39 (corresponding 23.4 times 2024 P/E).
The English version of this Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 6 a.m. on March 22, 2024. The Chinese version was reviewed by Jiang Xuefeng (Securities Analyst Registration Number: S1680519070001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
Revenue/adjusted net profit for the full year of 2023 increased 36.5%/106.3% year over year, exceeding our expectations by 5%/25%, respectively.
Bubble Mart's strong performance in 2023 reflects initial success in overseas markets (revenue up 135% year over year), continued release of suppressed demand in mainland China after the pandemic (especially offline channels), and better-than-expected cost control. Gross margin increased by 380 basis points to 61.3% in 2023, mainly due to supply chain optimization and increased revenue contribution from overseas direct operations (gross margin higher than distribution models). Although Bubble Mart's distribution and sales expenses increased 36.3% year over year (mainly due to increased employee and marketing investment to support overseas expansion), operating margin expansion and operating leverage of administrative expenses drove operating profit margin to increase 6.9 percentage points to 19.5% year over year. Net profit after adjustments to the equity incentive plan in 2023 increased by 106.3% from the low base caused by the 2022 pandemic.
The initial success in overseas markets boosted management confidence. According to our estimates, Bubble Mart achieved revenue of more than 1 billion yuan in overseas markets in 2023, an increase of more than double. This was mainly due to the rapid expansion of the store network (the number of retail/robot stores increased from 28/49 to 70/99 in 2022) and a significant increase in weighted average single-store sales of about 50%. Management pointed out that sales of the company's two local IPs (created by local artists) developed in the US and Thailand were better than expected, and using local artists to develop IP for the local market will be an important product development strategy for the company to further explore overseas business opportunities in the future. Management has set an overseas revenue growth target of 100% in 2024, which in turn will drive the company's overall revenue growth of 30%. Based on our forecast, revenue growth from mainland China may slow to 16.3% in 2024 and fall further below 10% in 2025/26, so we believe that overseas market performance will be the most important driver for Bubble Mart's stock price.
Maintaining the “hold” rating, the target price was raised to HK$27.39. Since the beginning of the year, Bubble Mart's stock price has risen by 41.5% (the Hang Seng Index fell 1.1% during the same period). The current stock price corresponds to 24.5/20.5 times the 2024/25 price-earnings ratio, and the 2024/25 adjusted earnings per share growth forecast is 20.5%/19.3% (1.3 times PEG), so we think the current price is fair and reasonable, reflecting Bubble Mart's current risk-return ratio. We are still using Bloomberg's global average price-earnings ratio as our target multiple. Based on the latest target ratio of 23.4 times the 2024 price-earnings ratio (previously 21.1 times) and our adjusted profit forecast, we arrive at a new target price of HK$27.39 (previously HK$20.30), which corresponds to the current share price with 4.0% downside.
Risk warning: Downside risk — new IP/product launches fall short of expectations; overseas expansion process is slower than expected; competition is fierce; RMB appreciation. Upside risks — customer acquisition/product launch progress exceeded expectations; cost control was effective; overseas expansion was faster than expected; RMB depreciation.