When it comes to Chinese companies going global, we may think of companies like DJI and Huawei, which have outstanding manufacturing capabilities combined with hard technology. In fact, in recent times, there are two other brands that have been gaining popularity in domestic and international markets through IP cultural exports - one is the gaming science company that created 'Black Myth: Wukong,' and the other is currently making waves in Southeast Asia. $POP MART (09992.HK)$.

On October 22, Pop Mart released an overview of its third-quarter performance: in Q3 2024, overall revenue growth reached 120%-125%, with domestic growth at 55%-60%, and a staggering 440%-445% year-on-year growth in Hong Kong, Macau, Taiwan, and overseas income.

Compared to the straightforward financial performance, for the public, the stories of trendy toys and IP may seem somewhat obscure and difficult to understand. This has accompanied Pop Mart with controversy for a long time. The core of the debate revolves around whether trendy toys and IP truly possess clear growth-oriented business models - after all, there have been many stories of being the 'second Disney' over the past half-century, but realistic success stories have never materialized.

In fact, all business narratives can find fitting references in history. From our comparative research perspective, Pop Mart today is far from Disney, but closely resembles another well-known Chinese IP brand popular among 80s generations - that is Hello Kitty, and the story behind it. $Sanrio (8136.JP)$.

From Japan's Sanrio, the product structure and business model, licensing business and theme park business, lightly or abandoning the film strategy, as well as the orientation of overseas strategy, all resemble a cautionary tale for Pop Mart.

In a sense, understanding the past of Hello Kitty is to understand the future of pop mart.

01 Sanrio's "Third Resurgence"

For the Chinese public, the name Sanrio may be slightly unfamiliar. But under Sanrio's IP portfolio, characters like My Melody, Kuromi, and Cinnamoroll are all well-known cartoon characters, among which My Melody and Kuromi frequently appear on screens, and Cinnamoroll has become one of the most popular co-branded characters today.

Of course, what truly made Sanrio a household name is still the iconic big-headed little cat that emerged in the 1970s: Hello Kitty! (凯蒂猫).

In the global statistics of the most profitable single IPs, Hello Kitty's total revenue has exceeded $86 billion, ranking second only to Pokemon, higher than ****, Mickey Mouse & Donald Duck, and Star Wars.

With the evergreen performance of Hello Kitty, Sanrio has firmly secured a spot in the top 20 global IP licensors. According to License-Global's "2024 Top Global Licensors Ranking," Sanrio ranks 14th, even rising two places against the trend compared to the same period last year without the emergence of a new phenomenally popular IP.

Companies ahead of Sanrio are either IPs with relatively short cycles (such as One Piece) still in their peak period, or IPs that have been frequently adapted into movies and games in recent years (such as Harry Potter, Barbie, and others), making it hard to find a long-lasting IP like Hello Kitty that solely relies on licensing business.

Hello Kitty's development history has not been plain sailing, yet it continues to navigate the ebbs and flows, thanks to the brand's ability to adapt and innovate amidst challenging times. This highlights the key essence of building a sustainable IP: semantic core, environmental adaptation, and aligned management.

(1) The Rise of Kitty Cat: Value of Language

In the book 'Decoding the Secrets of Hello Kitty,' author Ken Belson tells an interesting story:

Pop idols and sports stars have honed their interview skills, and entrepreneurs are no exception, but some questions can indeed make Tsuji Nobutaro (founder of Sanrio, father of Hello Kitty) feel embarrassed.

For example, "Why is Hello Kitty so popular?" is like asking why kids like Snoopy and Mickey, Tsuji Nobutaro also doesn't understand why a small cat with a big head and a small body can have a net worth of over $5 billion.

Therefore, whenever faced with this challenging question, Tsuji Nobutaro would bring up the theory of "social communication." Kitty's harmless and cute image turns into a social magnet that can eliminate friction and enhance excellence, making it the first choice for gifting.

Discerning individuals understand that without commercial operations, relying solely on a cute image is not enough to support an IP worth hundreds of millions. Tsuji Nobutaro naturally understands this principle, as out of the 500 characters created by Sanrio, only one, Kitty, has truly succeeded.

But Tsuji Nobutaro did not lie. "Social communication" was the key factor that turned Kitty cat's crisis into an opportunity under his understanding. When the first Kitty cat craze hit in 1977, the original illustrator, Yuko Shimizu, had already chosen to return to her family. Two years later, the Hello Kitty craze subsided. Replacing Yuko Shimizu and Satoshi Mikiwa (Yuko Shimizu's assistant), art student Yuko Yamaguchi did not like the disproportionate design, leading the design team to consider abandoning Kitty cat's original design.

At this time, Tsuji Nobutaro stepped in. Although he initially did not see much potential in Kitty cat, he still believed that Hello Kitty had become a language that symbolized friendship, and giving up on a language made no sense. For this reason, Tsuji Nobutaro held an internal competition for the new concept design of Kitty cat and created new scenes for Kitty cat.

In order to match the design language and understand the market, despite Japan's society being in a bubble period and easing gender segregation in the workforce, which was still male-dominated at the time, Sanrio recruited more than 70% female employees to pursue a language unique to 'little girls.'

According to Yuko Yamaguchi's recollection, until the 1990s, Japanese women gradually became fashion leaders, willingly accepting girlish and childlike fashion expressions, considering them as symbols of independence and power, using Sanrio products as a silent code and forming a tacit understanding.

This is the power of language systems, as well as the core logic behind Hello Kitty's first breakthrough and rise across boundaries.

(2) Resurgence in Going Global: Times Create Heroes.

Although in the 1970s and 1980s, Sanrio and Hello Kitty had already gained an absolute ace position in shaping trends in some areas of Japan, it was still Tsuji Nobutaro's higher-dimensional vision that truly gave Kitty a 'second life'.

At that time, Japan was at the tail end of an economic bubble, also a decade when Japan's overseas expansion surged. The number of government investment agreements and various tax treaty agreements increased significantly (Japanese ODA). The government provided funds, and Japanese companies went to underdeveloped countries to carry out infrastructure construction and popularize industrial products. The country helped companies bear the initial risks of opening up in underdeveloped markets and share future objective investment returns.

It was not until the decade following the signing of the Plaza Accord that Japan became the largest donor country in terms of global ODA, leading to substantial foreign exchange reserves. From the formation of a trade surplus in 1981 to turning into a deficit by 2010, Japan's cumulative trade surplus exceeded 270 trillion yen.

Even during the overconfident bubble period, Tsuji Nobutaro still recognized the importance of cultural grounding: 'Japan made unprecedented large sums of money during the bubble economy era, but could not win hearts worldwide.'

Therefore, Tsuji Nobutaro decided to use the substantial money earned to win hearts. As early as 1974, the company set up a branch in the USA and ventured into filmmaking and distribution. The first animated film was released in 1975, and the following year the original character licensing business officially began. Basically, in the 1970s, Sanrio had already established major businesses like 'direct sales of brands', 'overseas markets', 'content production', 'character licensing'.

But it was not until the beginning of this century that Sanrio's overseas business did not receive strong feedback at the data level. In 2001, Sanrio's total sales reached 114 billion yen, with only 13% in the overseas market (by comparison, as of 2024H, Pop Mart's overseas sales accounted for 9.6%). The real rise of the overseas business came from the so-called "no manufacturing process."

Similar to Fast Retailing (Uniqlo), in the late 1990s, China's light manufacturing rose, and the quality and price of OEM products "nurtured" a large number of enterprises that had early layouts for overseas expansion. Sanrio was no exception: because of nearly 20 years of trade surplus, a large amount of currency capital accumulated in the hands of Japanese companies, and using money to exchange for scale reduced the difficulty of global supply.

At the same time, direct authorization also crossed numerous tariff barriers, from large industrial machine external design to Parker pens, all filled with Sanrio elements. However, none of these products are manufactured by Sanrio, but they can still get profit sharing. Nowadays, Sanrio stores are also filled with various non-manufacturing process products, such as multinational cosmetics, suitcases, etc.

At the same time, Sanrio seized the implementation of Japan's "ACGN culture" (cartoons, animation, games, novels) diplomatic strategy at the turn of the century, with a large number of character prototypes potentially drawing on Western cultural prototypes (such as the appearance of animated characters), and the construction of cultural channels also paved the way for Sanrio's future external output.

Currently, Sanrio's overseas income accounts for nearly 40%, and this 40% of income is inseparable from Japan's cultural industry going global, the rise of East Asian manufacturing, and Sanrio's keen perception of the timing of industrial transformation - circumstances make heroes.

(3) New Business Model Revolution: Shaping the Future

Similar to the predicament faced by most consumer brands, in recent years, Sanrio has also been significantly affected by the epidemic, with overall sales plummeting by nearly 30% in 2021.

But Sanrio's speed of recovery far surpasses its peers. Just one year later, in 2021Q4, Sanrio recorded revenue of 14.8 billion yen, and operating profit quickly turned around to 1.75 billion yen, filling the losses during the epidemic cycle.

The reason for this is that since Shintaro Tsuji took over as CEO, Sanrio has abandoned the traditional centralized control of overseas markets by Japanese companies and has extensively employed external management talents. This is not common in traditional family-style Japanese companies. According to survey data from 2014, the localization rate of talent in Japanese companies in China is 50%, while the same data shows a localization rate of 64% in Europe and other regions, and 81% in the United States.

Shintaro Tsuji's cutting-edge management thinking and localization strategy have worked wonders, setting aside the elusive talent management system. During the pandemic, overseas market localization talents provided Sanrio with two valuable pieces of advice: reducing directly operated stores in the United States and increasing e-commerce investments in China.

The former cleverly helped Sanrio avoid the risk of inflationary pressure and a possible deficit situation in North American market revenue decline.

The latter hit the jackpot during the mobile internet boom. With partners like Alibaba, Sanrio's sales in mainland China reached 6.13 billion yen in the first half of this year, a 30.0% year-on-year growth. This has become the new engine driving the third resurgence of Hello Kitty.

Under good management, the capital markets have generously rewarded Sanrio. Since 2018, Sanrio's market value has more than quintupled. For a company that has been listed for over 40 years, has a leading IP for 50 years, and has been established for nearly 60 years, this is no easy feat.

02 Mapping the Future of Pop Mart

Returning to the most concerning question for the Chinese public and investors: Does Pop Mart have the ability to grow into a sustainable IP?

After sorting out the growth history of the Sanrio IP, we can roughly outline the three core factors of a sustainable IP: whether the IP has a unique language system, whether the external environment aligns with the company's development, and whether the company's management capabilities have growth potential.

In our view, Pop Mart already has at least two advantages: the IP has a unique language system, and the external environment and cultural outlook also align with the trend of toys and trendy play.

In terms of the language system: good design always has a similar tune. In the book 'Trendy Play: Joy is Justice', a small anecdote behind the popular IP - Molly's design at Pop Mart was published. Wang Ning hoped that Kenny Wong (Molly's designer) would make the character's smile a bit more, cuter, or lower it a bit, more stubborn, but all were vetoed by Kenny Wong.

Kenny believes that when users are happy to see her, they are happy, and when they are upset, they see her as upset. Emotional empathy is both the character's language and the character's meaning. This is quite similar to the earliest version designed by Yuko Shimizu, with Kitty cat having no mouth.

In an interview shared by Wang Ning at Meridian Capital, he also emphasized his understanding of the IP language system. In his view: If you cover up a brand's logo and you don't know who it is, then it may not be a true brand. Although Lego is a toy company, its greatness lies in creating a language and system. Everyone who collaborates with Lego has to rewrite it in Lego's language, which is a brand with cultural significance.

This is consistent with Toshitaro Tsuji's determination not to give up on Hello Kitty, but to build it into a culture of friendship, cuteness, and independence. Therefore, Pop Mart has the cognitive and creative ability to shape IP like Sanrio, which is the premise of creating popular IPs.

In terms of the external environment: the current domestic market and Japan's economic development at that time are quite similar, accumulating a large amount of original assets during the rapid development period, enough to build a more competitive brand horizontally.

However, there are differences in both positive and negative aspects:

The positive aspect is that our country's domestic market development is more independent, with a relatively larger independent single market. Therefore, the good condition is that our domestic incremental growth is still sufficient, and there is no urgent need to expand overseas like Sanrio faced back then.

Referring to the characteristics of the Japanese market at the end of the last century for benefits, Miura Ten presented the concept of the "Three Low Society" in the preface of the "Fifth Consumption Era", seemingly indicating a relatively sluggish consumer market.

However, Takeo Doi concluded in his study of the humanistic consumer market at the turn of the century in his theory of "The Economics of a Person": networked, declining birth rates, and aging populations will promote the consumption ceiling of a single economic entity, and the consumption of value satisfaction will not decline.

The derived changes in social structure imply that self-fulfilling consumerism is likely to be one of the opportunities for the next generation.

The concern is that whether it is so-called trendy toys, IPs themselves do not have productive value, they are cultural accessories. Compared to Japan's "ACGN culture" diplomatic strategy, the influence of our cultural exports in the past 30 years is not as strong as Japan's at the beginning of the 21st century. Therefore, cultural expansion still faces many barriers.

Although the financial report of Pop Mart shows a very fast growth rate in overseas sales, the main growth still comes from the pan-East Asian cultural circle such as Southeast Asia, Hong Kong, Macau, Taiwan, and South Korea. The European and American markets only account for 23% of the overseas market, around 7% of the overall revenue. Europe and America are not only larger single consumer markets overseas but also the main strongholds for cultural value output.

Perhaps Pop Mart can also learn from the experience of Sanrio, not insisting on self-operated or a single game domestically and internationally, but breaking through cultural barriers with a low-cost licensing business cooperation model.

Given the current intrinsic value and external environment of Pop Mart, in our view, it can demonstrate its long-term value, and whether it can grow into a long-lasting enterprise like Sanrio in the future mainly depends on the yet-to-be-confirmed management capabilities.

Management is the ability developed over long periods of several generations, and for the young Pop Mart at this stage, the journey ahead is long and challenging.

Just as Japan turned the scary and ugly Godzilla into the cute and adorable Hello Kitty through Hello Kitty, we also hope that Pop Mart can reshape the image of a cold manufacturing powerhouse by adding the cute Molly image, showcasing China's unique cultural strength.

Editor/Somer