Source: Financial Magazine
Author: Wang Ying

Overseas markets have become Pop Mart's new growth driver.

On October 22nd, $POP MART (09992.HK)$ The disclosed announcement stated that in the third quarter of 2024, the overall revenue (unaudited) increased by 120%-125% year-on-year. Among them, the revenue from Mainland China increased by 55%-60% year-on-year, while the revenue from Hong Kong, Macau, Taiwan, and overseas increased by 440%-445% year-on-year.

The growth of overseas markets exceeding fourfold has far exceeded market expectations. The improvement in performance has also led to continuous increase in stock price. On October 23rd, Pop Mart's Hong Kong shares soared 18.52% in a single day, with a total market cap rising to 101 billion Hong Kong dollars. The stock price closed at 75.85 Hong Kong dollars per share on October 24th, up by 0.86%. The cumulative increase in stock price since the beginning of the year has reached 278%.

Within more than three years after its listing, Pop Mart once experienced a decline in performance and stock price. After reaching a high stock price of 105 Hong Kong dollars per share in February 2021, its stock price has been on a downward trend, dropping to around 10 Hong Kong dollars per share at the lowest point, evaporating nearly a hundred billion in market cap, and this year it has started a strong rebound.

At the performance briefing for the first half of 2024, Wang Ning, Chairman and CEO of Pop Mart, stated that the company is confident in achieving a full-year revenue of 10 billion yuan this year, with an expected annual growth of not less than 60%, and overseas growth of not less than 200%. In 2023, the company's revenue was 6.345 billion yuan.

Multiple investment banks have high expectations for Pop Mart's performance. Nomura Securities has raised Pop Mart's target price from 54 Hong Kong dollars per share by 38.9% to 75 Hong Kong dollars per share, rating it as a "buy". They believe that the company's performance in the third quarter of 2024 far exceeded the already high sales performance expectations for the domestic and international markets, and they believe there is enormous potential to surpass the sales growth guidance for the entire 2024 fiscal year (annual growth of over 60%).

In fact, Pop Mart's performance so far this year has shown a high-growth trend overall, with revenue of 4.56 billion yuan in the first half of the year, a 62% year-on-year increase; and adjusted net income of 1.02 billion yuan, a 90% year-on-year increase.

Such growth is also attributed to its overseas contributions. In 2023, Pop Mart's revenue from China, Hong Kong, Macau, Taiwan, and overseas business exceeded 1 billion yuan for the first time. In the first half of this year, this figure increased by 260% year-on-year to 1.35 billion yuan, surpassing the full-year level in 2023.

Pop Mart began its globalization layout in 2018, with true overseas expansion starting approximately four years ago. In September 2020, Pop Mart's first overseas store opened in Seoul, South Korea. By the end of 2021, the number of stores in China, Hong Kong, Macau, Taiwan, and overseas reached 7. In 2022, the company started to focus on the overseas market, increasing the number of stores to 43, and by 2023, it had increased to 80, now exceeding one hundred stores.

Strategically, Pop Mart adopts a strategy of starting from nearby markets with small cultural differences, such as Japan, South Korea, and Southeast Asia, then gradually expanding into Europe, America, and other regions. Presently, Southeast Asia has surpassed Japan and South Korea, becoming the company's largest overseas market, accounting for over 40%.

Wang Ning has high expectations for overseas development, aiming to "create another Pop Mart" overseas. At a sharing session in October this year, he frankly stated, "The global market is indeed a market full of imagination. We have focused on globalization in recent years and have been well received by many consumers overseas. A colleague jokingly said, the level of popularity I have in Thailand now is like when Jobs came to China back then. This month, our overseas business accounts for over 45%, and I believe we are one of the few genuinely internationally recognized brands from China."

The relevant person in charge of Pop Mart told "Finance", "We still have a long way to go on the road to going overseas, however, considering the expansion of international trendy IP and China's position in the world, going overseas is an inevitable path. For this industry, the overseas trendy market is relatively mature and still has a large room for growth, which is why we choose to go overseas."

Trendy toys' overseas performance has greatly increased.

The financial report shows that in the third quarter of this year, Pop Mart's mainland China revenue increased by 55%-60% year-on-year, but overseas revenue grew faster, with mainland China, Hong Kong, Macao, Taiwan, and overseas revenue increasing by 440%-445% year-on-year.

Looking at the revenue from various channels in mainland China, retail store revenue increased by 30%-35% year-on-year, robot store revenue increased by 20%-25% year-on-year, Pop Mart's blind box revenue increased by 55%-60% year-on-year, e-commerce platforms and other online platforms revenue increased by 135%-140% year-on-year, wholesale and other channels revenue increased by 45%-50% year-on-year.

Online performance has been impressive, with revenue from Douyin platform increasing by 115%-120% year-on-year, and revenue from Tmall flagship store increasing by 155%-160% year-on-year.

In this year's semi-annual report, Pop Mart disclosed the performance of major regions and their revenue proportions for the first time. The top region is Southeast Asia, where Pop Mart achieved a revenue of 0.56 billion yuan, a 478% year-on-year increase, accounting for 40%; East Asia and Greater China region achieved a revenue of 0.48 billion yuan, a 154% year-on-year increase, accounting for 35%; North American market achieved a revenue of 0.18 billion yuan, a 378% year-on-year increase; European, Australian, and other regions revenue of 0.14 billion yuan, a 159% year-on-year increase.

Wang Ning previously stated that all the company's overseas offline stores are direct-operated and established by local teams. The aforementioned responsible person from Pop Mart mentioned that currently, all overseas stores are profitable. "To adapt and coordinate with the development strategy of overseas business, the current overseas team size has doubled compared to 2023. At this stage, overseas expansion mainly adopts the model of establishing overseas subsidiaries and building localized teams to adapt to cultural differences."

The head of Pop Mart's overseas market is the company's International Business Director Wen Deyi, who is from South Korea. In 2018, Wang Ning found Wen Deyi and invited him to jointly develop the overseas market. Therefore, Pop Mart's first overseas location was chosen to be in Wen Deyi's hometown - Seoul, South Korea.

Originally, Pop Mart mainly engaged in To B (business-to-business) overseas supply business. Since establishing a joint venture company in South Korea in 2019, it has accelerated the layout of To C (consumer-facing), shifting to a Direct-to-Consumer (DTC) model where the brand directly sells products or services to consumers.

In 2021, Pop Mart began to focus on Southeast Asia, entering Singapore and opening stores in the commercial landmark FUNAN mall.

In recent years, Pop Mart's popularity has been rising in Thailand. In September 2023, Pop Mart opened its first store in Thailand in Bangkok, with IPs including Labubu becoming popular in Thailand. In July this year, the Tourism Authority of Thailand officially appointed Labubu as the 'Magical Thailand Experience Ambassador,' sparking the 'Labubu fever' in Thailand.

To rapidly enter local markets, Pop Mart chose to collaborate with local artists or license IP for co-branded products.

The CRYBABY series created in collaboration with Thai artist Molly by Pop Mart has been well-received. In February this year, Pop Mart opened its third offline store in Bangkok, Thailand. On the opening day, Molly's on-site signing event drove the store's sales to over 5 million yuan, setting a new single-day sales record for Pop Mart outlets globally.

"The success of the first store in Thailand and the enthusiastic response are indeed remarkable, but this success is not accidental. It is the result of Pop Mart's international strategy, local market cultivation, and various efforts. The enthusiastic response of the Thai market to trendy culture represents the widespread demand for innovative products in Southeast Asia. In Thailand, we have collaborated with social media and local influential figures to pre-establish a market presence and generate high consumer expectations. Additionally, we have taken into account the local business environment and consumer preferences, introducing products that align with the local culture," said a Pop Mart spokesperson.

In July, Pop Mart opened its 100th overseas store in Jakarta, the capital of Indonesia, and the Pop Mart store at the Louvre in France officially opened, bringing Chinese trendy toys to a world-class museum.

During the interim earnings conference this year, Wende revealed that the company plans to further expand its footprint in the overseas market, expecting to add 30 to 40 stores in the second half of the year. Especially in high-growth potential markets like North America and Southeast Asia, the company will increase its investment.

On the supply chain side, Yuan Junjie, President of Pop Mart Supply Chain Center, has previously stated that this year the plan is to increase the production supply proportion of the Vietnamese cooperation factory to around 10%. "In the future, it is not limited to Southeast Asia, and the layout of North American warehousing has always been under consideration, but this needs to be pushed forward in conjunction with the development planning of the business."

However, it's not just Pop Mart that is going global in the toy industry. Another toy brand, 52TOYS, opened its first store in Thailand at the end of 2023 and announced the launch of an overseas chain store plan earlier this year. In August this year, at Miniso's flagship store in Jakarta, Indonesia, the trendy toy brand TOP TOY began operating in the form of a shop-in-shop. In October, the first store in Bangkok, Thailand opened.

Can it become the Chinese version of Disney?

Wang Ning does not hide his ambition to benchmark Disney, once stating that Pop Mart should be like Disney.

He once said publicly, "At one point, the company I liked the most, and wanted to learn from and surpass the most, was Lego. Although Lego is a toy company, its greatness lies in creating a language and system, everyone who cooperates with Lego has to write again in Lego's language, which is the essence of a brand with cultural significance. After gradually forming its own language, we found that we are not quite like Lego, because we have also created IP, so we realized that we shouldn't just be like Lego, we should be like Disney."

However, Disney builds its IP network through movies and content, with most of its IP having vivid stories behind them. One common critique faced by Pop Mart, as a company benchmarking Disney, is that its IP products lack compelling stories and appear thin.

"Not all IP characters have stories. For example, the popularity of Ling Na BeiEr was a cultural communication completed in the era of mobile internet, utilizing unique marketing strategies, as well as the common participation of fans. Therefore, the key still lies in IP incubation and operation," as some analysts told 'Caijing'.

Looking at the semi-annual report, Pop Mart seems to have moved away from its reliance on a single IP, with seven IP including MOLLY, SKULLPANDA, THE MONSTERS, HIRONO XiaoYe, Zsiga, all generating revenue exceeding a billion.

MOLLY is the first explosive IP that made Pop Mart famous, and now its revenue still maintains a growth rate of 90%, reaching 0.782 billion yuan, accounting for 17%. In addition, classic IPs like THE MONSTERS and SKULPANDA achieved revenues of 0.63 billion yuan and 570 million yuan respectively. The new IP Hirono Ono and Zsiga's revenues increased by 124% and 170% respectively.

When classified by product, the categories of Pop Mart are gradually expanding. In this year's semi-annual report, the company first divided its products into four major parts: figurines, MEGA (commonly known as large dolls), plush toys, derivatives, and others. The figurine business still accounts for the majority, but the proportion has dropped from 73% in the same period of 2023 to 58%. The category with the highest growth rate is plush toys, with revenue increasing by 994% to 0.446 billion yuan, accounting for 9.8%. MEGA's revenue increased by 142% to 0.586 billion yuan year-on-year, accounting for 13%.

Sinolink Securities research reports believe that with limited expansion of mainland Chinese stores, the continuous introduction and rapid growth of diversified product categories outside blind boxes support and enrich the Pop Mart IP matrix and head IPs' lifecycle; at the same time, the layout of new product categories enables more IPs to find appropriate growth points, such as plush toys that became popular this year.

However, some Pop Mart players told 'Caijing' that they have collected blind boxes from four different series purely attracted by the good-looking designs, but some products have questionable quality, 'one doll can't stand properly.' She believes that Pop Mart's business model still mainly relies on IP design, 'if there is a continuous stream of design innovation capability, growth can be maintained.'

Analysts stated that there are three types of IPs for Pop Mart: first, self-developed IPs; second, cooperation with Disney, Smiley to introduce internationally renowned IPs; third, signing with artists or designers for IPs. The company will package IPs, develop different series, combine them with blind box commodity forms, followed by fan operation, and finally commercialization, arranging its IPs for advertisements, such as Labubu endorsing Luckin Coffee Coconut Latte, etc.

Currently, Pop Mart is also exploring in multiple areas such as urban parks, film and television, and mobile games. For example, collaborating with Honor of Kings, Cosmic Explorer Office, and many other well-known film and game IPs. At the end of September 2023, the Pop Mart Urban Park officially opened in Chaoyang Park, Beijing. In April this year, the Beijing International Trendy Play Festival opened at the Pop Mart Urban Park. However, compared to brands like Disney, Lego, and Bandai that have cultivated for many years, there is still a significant gap.

"Pop Mart's core competitiveness lies in IP incubation and operation, as well as the uncertainty of blind box gameplay, which easily stimulates consumers' desire to shop. But one of the characteristics of the trendy play market is driven by novelty. Pop Mart needs to innovate constantly to maintain the vitality of its IPs, otherwise consumers are very likely to experience aesthetic fatigue," the aforementioned analyst stated.

Editor/rice