Recently, the decline in resale prices of the popular toy Labubu has raised market concerns, with POP MART dropping about 9% over three trading days from December 23 to 27. Today, POP MART's stock price in Hong Kong fell over 6% again. However, Morgan Stanley believes that the market's concerns regarding the drop in resale prices are overly exaggerated, and the active restocking and global expansion will help the company's performance continue to grow significantly next year.

Morgan Stanley noted in a report on January 5 that this wave of fluctuations was mainly caused by market concerns about the decline in resale prices of Labubu plush toys in China, as well as profit-taking behavior at the end of the year, while the market's reaction to the drop in resale prices was excessively sensitive.

Morgan Stanley's latest analysis pointed out that the decline in resale prices is driven by an increase in supply rather than a decrease in demand. The company's recent restocking strategy may drive sales growth in the fourth quarter of 2024 (4Q24) and the first half of 2025 (1H25), while reducing resale activities, thereby improving the consumer experience.

Furthermore, Morgan Stanley stated that global expansion has prolonged popularity, and the IP product flywheel effect remains intact, expecting POP MART's sales to grow by 35% in 2025, achieving the fastest sales growth among large consumer brands. With overseas sales and revenue mix possibly exceeding 50% in 2025, its valuation premium is justified, and the target price has been raised to 113 Hong Kong dollars, representing a 27% upside from the current stock price.

The market is overly concerned about the decline in resale prices.

It is worth mentioning that due to the popularity of POP MART's IP, many scalpers have been hoarding scarce products, forcing some consumers to pay a premium to buy them, which weakens the experience for loyal fans. At the same time, there may be counterfeit products in the resale market.

POP MART's strategy has always been to try to meet 70-80% of the 'actual demand' for its most popular products, with IP products requiring a 'slight shortage' to maintain growth in popularity. However, months of severe shortages made the management realize that supply was far below the ideal level, which is why the company started to restock more aggressively since the end of October. The increase in supply has led to a decrease in the resale price of Labubu plush toys in the resale market, and now resellers are eager to clear their stock, with resale prices approaching the original listing price.

Morgan Stanley believes the market is too worried about the decline in resale prices:

1. Increase in supply rather than a decrease in demand: The drop in resale prices of Labubu plush toys is mainly due to increased supply, rather than a decrease in demand.

2. Consumer preference: Consumers are more inclined to purchase directly from official channels rather than from resellers.

3. Product attributes: These products are 'non-limited editions', so resale prices should not have a significant premium, unlike high-end Baijiu.

Morgan Stanley believes that POP MART's measures may bring the following benefits:

Sales growth in the fourth quarter of 2024 may exceed the model's forecast of a 120-125% year-on-year increase, which could curb resellers' future stockpiling behavior and reduce the risk of inventory backlog.

In addition, to prevent oversupply, POP MART is thoughtful in managing restocking and uses online indicators to monitor supply-demand balance. For example, the sales velocity after product restocking and the trend of customer pre-orders.

Currently, popular IP (Intellectual Property) products are still in high demand, such as Labubu, Skullpanda, and Crybaby. Morgan Stanley believes that the demand for POP MART's top IP products far exceeds supply. To take a step back, POP MART's international market accounts for about 50% of total sales, which means that trends in China should not be overly extrapolated to the overall performance.

Sales growth remains strong next year.

Morgan Stanley believes that POP MART will achieve the fastest sales growth, predicting a 35% increase in sales by 2025, with China growing by 12% and overseas growing by 69%. The main growth drivers include:

1. Global expansion remains a key driver of growth, with international sales expected to account for more than 50% of total revenue by 2025. Continuous global expansion, especially in the Southeast Asia and USA markets.

Southeast Asia: By the end of 2024, there will be 10-12 stores in Southeast Asia (excluding Singapore), and this is expected to increase to about 20 stores by 2025, with store productivity remaining high. USA: The number of stores in the USA will be 20 by 2024, expected to exceed 40 by 2025. The productivity of stores in the USA will increase from 2 million RMB per store in 2023 to 2.5-3 million RMB per store in the third quarter of 2024.

2. Popular products will continue to be restocked in the first half of 2025.

3. Strategically delaying some product launches in 2024 to make way for the Labubu series, with Skullpanda, Crybaby, Twinkle Twinkle, and Chaka potentially bringing positive surprises.

4. The pace of launching new categories (such as Pop Blocks, bakery, jewelry, and trading cards) will be slowed to ensure that new product quality exceeds consumer expectations.

Overall, Morgan Stanley believes that POP MART has the potential to become one of the fastest-growing companies in the Consumer Industry due to its global expansion, IP ecosystem, and active inventory management. Morgan Stanley expects POP MART's Net income in 2025 to be 4.091 billion yuan, which is a 37.4% increase from 2024. The expected EPS is 3.06 yuan, corresponding to a PE of 29.9 times. The Target Price is 113 HKD, which indicates a 27% upside potential from the current stock price of 88.4 HKD.

Want to enter the market but find timing difficult."Monthly Payment Zone"The feature helps you to invest regularly and steadily, capturing investment opportunities!

Editor/lambor