The leading commercial platform for Chaowan IP in China was covered for the first time to give it a “buy” rating

With the pioneering gameplay of Chaowan Blind Box, the company set off a boom in domestic consumption and built a mature commercial operation system for Chaowan IP. Upstream IP incubation, midstream efficient supply chain, downstream omnichannel, and member operation systems all form a “flywheel effect” to form a competitive advantage. Looking ahead to 24-26, the company's performance will be driven by four aspects: 1) channel expansion in the Chinese overseas market; 2) store location selection, area and flow line display optimization to improve average store efficiency; 3) trendy game category innovation and diversified monetization broaden revenue sources; 4) refined operation and scale effects drive increased profitability. The adjusted net profit is estimated at $2.21/2.82/3.42 billion on 24/25/26. We selected two types of comparable companies based on trendy games, consumer goods, and IP operations. The median PE value for 25 years was 17.8x/27.7x, respectively. Considering the company's strong competitive barriers and scarce brand ability and platform attributes, the target price was HK$65.0 (HKD/RMB exchange rate 0.91), with a “buy” rating for the first time.

Both supply and demand are driving the trend game industry to continue to thrive. The brand has gone overseas to become a new and successful domestic consumer category with its fashion aesthetics, rich gameplay, and social currency attributes. Thanks to the concept of self-pleasure, the consumption power of “her economy”, and the accelerated spread of social media sharing, trendy games have continued to prosper. According to Insight Consulting, the domestic pan-entertainment product market is expected to reach 71 billion yuan in 2023, and is expected to increase to 128.9 billion yuan in 2027, with a compound growth rate of 16%. Industry CR3 is 31.0% in 2023, and leading platform players that can cover the entire industry chain are expected to become stronger. In addition, the global trendy toy market was about $57.1 billion in 2023, while toy company CR10 was only 27% in 2022. Leading domestic trendy toys are expected to quickly open up a broad space for brands to go overseas with high-quality products and an efficient supply chain.

The development strategy has entered the “era of big fun”, and internationalization, category innovation, and fine operation drive future growth together. The company proposed a “work upward, look outward” development strategy. On the one hand, the regional layout is becoming increasingly international, and there may be room to double the number of retail stores in mainland China and overseas. Upgrading the product structure, refinement of store operations, and deepening membership operations are expected to drive improvements in store efficiency. On the other hand, the company is also leaping towards a “big wave play” ecosystem with diverse categories and collaboration. Along with continuous innovation in product lines, vinyl plush has sparked a boom in explosive products since 2H23. 1H24's revenue share has reached 10%. New categories such as cards and building blocks have been launched one after another, and non-toy businesses such as dessert shops and jewelry stores are planned to be launched before the end of the year. The company is based on high-quality IP, continuously refines and digs deeper into IP value, broadens fans' experience scenarios, and continues to open up new commercial space.

Brands go overseas to create world-class consumer goods, and diversified business exploration prospects are broad. After more than two years of rapid expansion, 1H24 accounts for 30% of overseas revenue, and the company is expected to increase 200% + throughout the year. Looking ahead to the future, the current number of overseas stores is still in its early stages. With channel expansion, it is expected that growth momentum will continue to be unleashed as location optimization, brand marketing, and refined operations show results. Looking at the medium to long term, we are optimistic that the company will grow into a trendy cultural and entertainment platform with IP as the core and global influence. Diverse businesses such as trendy games, playgrounds, and games have broad prospects.

Risk warning: Macro consumer demand is weak, overseas expansion falls short of expectations, and new business development falls short of expectations.