Incident description

2024Q3 achieved revenue of about 4.523 billion yuan, up 19.3% year on year; profit for the period was about 0.648 billion yuan, up 4.9% year on year; adjusted net profit was 0.686 billion yuan, up 6.9% year on year. The adjusted net profit margin was 15.2%, compared to 16.9% for the same period in 2023.

Incident Reviews

Revenue side: Domestic growth is in line with expectations, and high growth in overseas franchise business is driving high growth in overseas business. In terms of store opening, the number of domestic famous innovation companies increased by a net of 135 to 4,250, and the net increase of TOP TOY to 234 in a single quarter; the overseas direct sales market increased net by 79 to 422, and the overseas agency market increased by 104 to 2,514. Implemented on the revenue side, domestic business: Mainland China's overall year-on-year increase in the third quarter of 2024, with Mainland Mingchuang up 5.7% and TOP TOY up 50.4% year on year; Overseas business: Overseas market overall increased 39.8% year on year. Among them, overseas direct market revenue increased 55.4% on a comparable basis, and overseas agency market revenue increased 26.5% on a comparable basis.

Profit side: Gross profit continued to improve, and the share of direct management increased to phased profit margin dilution. The gross margin for the third quarter of the single quarter was 44.9%, up 3.1 percentage points year on month. It is expected to be mainly due to an increase in the share of overseas direct sales, product portfolio optimization, and improvement in TOP TOY gross profit; sales expenses increased 55.5% year over year, and sales expenses increased 5.1 percentage points year over year, mainly due to the number of direct stores opened in mainland China and overseas, especially in the US; the general and administrative expenses ratio was 5.2 percent for the quarter, up 0.7 percentage points year on year. 2024Q3's adjusted net profit was 15.2%, compared to 16.9% in the same period last year. We believe that the narrowing of the phased net profit margin was mainly due to a sharp increase in operating expenses related to phased stores due to the opening of new domestic direct-run stores and overseas direct-managed stores.

While continuously improving product strength, the company is also committed to innovating store formats, especially domestic business formats, making breakthroughs.

The company's “seven-tier store matrix strategy” is progressing in an orderly manner. The representative store type of the former is the IP Land store and the representative store type of the latter is the theme store. The company will build a number of 600-800 square meter category theme stores around the four major categories of plush, blind box, pet, and two-dimensional categories, focusing on young consumers and emerging consumer trends. In the future, the company is expected to better meet the needs of consumers in diverse consumption scenarios through a combination of product differentiation and store differentiation.

Investment advice: We believe that the company's current investment highlights are: 1) the domestic business is developing more refined operations through an innovative store matrix; 2) the outstanding performance and strong IP driving effect of overseas direct stores; 3) the accelerated opening of domestic and foreign direct stores since this year has led to a phased convergence of profitability, which will subsequently be accompanied by a recovery in the profitability of new stores and sub-new stores, as well as the scale effect and effective fee control of overseas direct sales markets, which is expected to usher in a recovery in profitability. The adjusted net profit for 2024-2026 is expected to be 2.8 billion, 3.5 billion, and 4.3 billion, maintaining a “buy” rating.

Risk Alerts

1. The brand upgrade and transformation effect falls short of expectations;

2. Increased industry competition;

3. Store expansion fell short of expectations.