Initial Memo: Pop Mart International Group Limited, HOLD (Calista CHEW, EIP)
Calista recommends a "HOLD" position as Popmart is venturing into new verticals, it requires high capital expenditure, stock price could take a hit in 2024. However, price will rebound.
Linkedin | Calista Chew
Executive Summary
Pop Mart International Group Limited is a company based in China that specializes in the design, development, and distribution of trendy and innovative toys, collectibles and lifestyle products. They are well-known for their blind box or blind bag products, where customers purchase sealed boxes without knowing the specific item inside, adding an element of surprise to the purchase. Popmart has gained popularity for collaborating with various artists and designers to create unique and visually appealing collectibles. Their products often feature cute or stylized characters, and they have successfully tapped into the global market with a focus on pop culture and art.
Business Segments
Its business model revolves around the creation, distribution, and sale of blind box toys and collectibles. The key elements of their business model are as follows:
Blind Box Concept: Popmart's main product offering involves selling blind boxes or blind bags, where customers purchase sealed packages without knowing the specific item inside. This element of surprise and unpredictability adds a sense of excitement and collectibility to their products.
Collaborations and Licensing: The company often collaborates with popular artists, designers, and intellectual properties to create unique and appealing collectibles. These collaborations enhance the diversity and attractiveness of their product range.
Limited Edition Releases: Popmart often releases limited edition or rare items to drive demand among collectors and enthusiasts.
Marketing and Branding: Popmart invests in marketing and branding to build recognition for its products. They often utilize social media, collaborations, and events to promote their brand and engage with their target audience.
Continuous Innovation: To stay relevant in the fast-paced world of collectibles, Popmart focuses on continuous innovation in design and product development allowing them to attract new customers and retain the interest of existing ones.
Revenue Drivers
1) Retail Stores (40%): Popmart has brick-and-mortar stores in 53 first-tier and second-tier cities across China, mostly located in mainstream commercial areas. These stores aim to offer the fullest stocks and also play a key role in promoting brand images and maintaining relations with consumers. Popmart is also expanding to North America, Europe, Australia, New Zealand and other parts of Asia.
2) Online Sales (41%): Popmart employed online marketing and social media advertising to reach a larger customer base. These customers are directed to online shops, where they can purchase the figurines individually or in bulk.
3) Roboshops (9%): Located in shopping malls, cinemas and metro stations where human traffic is high, Popmart has installed a large number of automatic vending machines. With each machine stocking products worth RMB 50,000, most of them needed to be restocked every one or two days. In the most extreme case, a machine had to be restocked every hour. These machines provide crucial data for Popmart to find the most effective locations for its retail stores.
4) Wholesale (10%): When Popmart decided to enter Asian markets, such as South Korea, Japan and Singapore, the company adopted a wholesale model or operated as a joint venture. Such practices later boosted its confidence in facing consumers directly as a wholly-owned entity in the international market.
5) Theme Park (0%): Recently built in September 2023, Popland is Popmart’s very first theme park that is located in Beijing, China. It resembles a lively carnival and offers visitors a more extensive and immersive retail experience.
6) Mobile Game (0%): In 2024, Popmart intends to release a mobile game that is reminiscent of Animal Crossing. This is a strategic move to diversify its revenue streams and bolster its intellectual properties (IPs) within the consumer market.
As 90% of the revenue has originated from Mainland China, Popmart has increased the number of overseas retail stores from 24 in 2022 to 55 in 2023 and increased the number of roboshops from 98 in 2022 to 143 in 2023.
The SkullPanda, Molly, and Dimoo series are Popmart’s original merchandise, which implies that a significant proportion of the sales are generated from the artworks of global artists. While these characters are highly adaptable, seamlessly integrating into a wide range of designs, they do not have a personal narrative and lack distinct personalities and relatability to the average consumer. In contrast, IPs such as Disney characters are often well-received by the masses as they exhibit distinctive personalities and quirks. Consequently, original Popmart merchandise may have shorter product life spans as consumers tend to chase the next fad whenever a new series is released.
Cost Drivers
The cost of producing the blind box is low, with primarily fixed costs stemming from IP licensing and mold opening expenses. A single mold costs approximately RMB 23 and is sold at a price of RMB 69, resulting in a gross profit rate of around 60%. This allows Popmart to capitalize on economies of scale, benefiting from lower costs and higher profit margins as the sales volume of blind boxes increases. Furthermore, the blind boxes exhibit a high repurchase rate, as consumers eagerly vying for specific characters often anticipate their desired item in the next box. As a result, Pop Mart achieved an impressive 58% repurchase rate in 2019. Furthermore, the prices are marked up significantly in countries where consumers have higher disposable incomes.
To further reduce operating expenses, Popmart has shifted its business model from retail stores to roboshops, particularly in regions where it has successfully established a brand presence, such as in Mainland China. In contrast to traditional retail stores, roboshops entail lower initial investment and maintenance costs while offering broader coverage. Therefore, Popmart has reduced its lease expenses from 2021 to 2022 by 8%.
ESG Considerations
Some of the collaborations that Popmart engages in encourage wastage indirectly. In 2022, commemorating the 35th anniversary of KFC in China, the Beijing-based toy brand introduced a limited series of blind boxes named KFC×DIMOO. This collection comprised 6 regular figurines and 1 special figurine. Despite the odds of obtaining the special figurine being 1 in 72, consumers have demonstrated their eagerness to spend RMB 10,494 to purchase 106 DIMOO, increasing their chances of completing the full set.
While the excitement surrounding this collaboration has positively influenced sales, it has also generated controversy, with certain customers opting to hire others to eat and pay inflated prices to obtain the figurines. This raised concerns from Chinese authorities, who viewed it as an extreme manifestation of hunger marketing, promoting impulsive buying behaviors and contributing to food wastage.
There may not be sufficient minority representation at the management level and stakeholder representation at the board level. All of the management are of Chinese descent, which means that it could be harder to scale into other markets as the difference in preferences of the consumers may not be captured. There is a potential for principal-agent problems since 44.4% of the key board members also hold roles within the management team. This overlap in roles may create conflicts of interest and hinder the board's ability to effectively oversee and hold the management accountable, which could impact the organization's decision-making processes and overall governance structure.
On a more positive note, the fact that 37.5% of the management team consists of females is a positive indicator, particularly for a company whose primary target audience is females under the age of 35. This gender diversity in leadership not only reflects a commitment to inclusivity but also positions the company to better understand and cater to the needs and preferences of its core demographic. 
Competitor Analysis
The toy manufacturing industry operates within a monopolistically competitive market structure, where substitutes are prevalent due to other companies offering similar products at lower prices. Initially drawing inspiration for the blind box concept from Sonny Angel, Popmart enhanced its product variety by collaborating with global artists and international brands, including Sonny Angel, to expand its business. However, this also implies a high susceptibility to substitute products. Rival companies like Funko, Hasbro, and Mattel, all hailing from the US, operate on a comparable scale. While they boast diverse toy figurine collections, they lack the blind box concept favoured by gacha enthusiasts who revel in the uncertainty of which figurine they will receive.
In 2020, China's largest variety store chain Miniso entered the toy market with the same blindbox approach, posing a substantial threat. This budget retailer, renowned for its aesthetically pleasing household and lifestyle products, entered the toy industry with the introduction of the "Toptoy" chain last year, which focuses on innovative pop toy products and introduced blind box collections featuring Disney characters like Mickey Mouse and the Winnie the Pooh franchise. Miniso has priced blind boxes competitively at RMB 40, putting it in direct competition with Popmart as its blind boxes are priced slightly higher at RMB 69. As Miniso experiences rapid growth and plans to open over 100 outlets in China, in addition to its existing 4,200 global stores, Popmart encounters the challenge of retaining the loyalty of its customer base, primarily composed of females below the age of 35, amid shifting market dynamics. Nevertheless, the consideration that toy manufacturing serves as only a subsidiary revenue stream for Miniso Group suggests that Miniso will not allocate its full attention to marketing and improving the variety of toy figurines offered, thereby allowing Popmart to retain its less price sensitive customers.
While Popmart is a part of the toy manufacturing industry, it is venturing into the theme park and mobile game sectors, entering direct competition with industry giants like Disney and Lego that also operate in the toy manufacturing industry and theme park industry. The film industry has undergone a transformation due to Covid-19, where the prevailing notion that Disney-related content would exclusively debut on its streaming service has become widespread. This has somewhat diminished consumer anticipation for the release of Disney movies and diluted its brand in recent years. As such, 12 out of the top 15 most-watched titles on streaming platforms were licensed content from previous years. Instead of entering this saturated film industry to create original characters that resonate with the audiences, Popmart strategically leverages the success of its competitors by closely monitoring consumer reactions to new series and producing collectible figurines accordingly. For example, Popmart has launched a line of toys inspired by Studio Ghibli's renowned movie, Totoro.
Furthermore, the establishment of the theme park serves the dual purpose of making Popmart's original characters more relatable and extending the lifespan of its products, allowing it to compete effectively with iconic figures like Disney characters. Considering the poor macroeconomic sentiments in recent years, this move could easily backfire as luxury goods and entertainment tend to be the first spending that consumers cut back on, making it crucial for us to approach our forecasted growth of theme parks with cautious optimism.
Investment Thesis
Popmart is currently undervalued due to a decline in sales resulting from the economic downturn in the Chinese economy. Its sales is expected to increase in 2024 due to geographical diversification and expansion into new and profitable business verticals. Given that the majority of Popmart's revenue is derived from Mainland China, the stringent lockdown policies in 2022, along with the unfavorable economic outlook in 2023, have had an adverse impact on the company's top-line growth. The Chinese government implemented a zero-covid lockdown policy, which confined over 11 million residents to their homes. This negatively affected the sales of retail stores, which contribute to 40% of Popmart's revenue, and diminished the effectiveness of marketing efforts, consequently influencing other sources of revenue indirectly. Additionally, the relatively high cost of Popmart's products, coupled with the perception of toys as non-essential items, particularly during economic hardships, has further contributed to the revenue decline.
Despite these challenges, Popmart is proactively pursuing geographical diversification by identifying opportunities in other countries that have strong shopping and entertainment cultures, as evident in the opening of new stores in Australia, New Zealand, and the United States. In addition, Popmart has acquired its British partner in June 2023 to further penetrate the Western market. This strategic expansion aims to leverage Popmart's substantial growth, evidenced by a Compound Annual Growth Rate (CAGR) of 140% in markets beyond Mainland China. In addition, Popmart is acquiring Moreover, Popmart is broadening its product offerings to include theme parks and mobile games, providing an immersive experience that brings characters to life and enhances consumer loyalty.
Popmart has established a strong economic moat by actively seeking out global artists and securing intellectual property rights. This strategic move allows Popmart to develop its own unique toys and go beyond the production of toys solely derived from existing television series, establishing a distinctive brand presence. The company's in-house design team collaborates with artists to refine designs in alignment with the distinctive style of the intellectual property figures and incorporates valuable input from consumer feedback, enhancing the attractiveness of their products. This approach allows artists to concentrate on the creative design aspect while Popmart handles the commercialization process.
A pivotal moment in Popmart's expansion was founder Wang Ning's visit to Kenny, the artist behind Molly, in March 2016. Following three months of negotiations, Popmart secured the exclusive authorization to manufacture and sell Molly in Mainland China. The company invested RMB 1 million, which was a substantial sum in the industry at that time, to develop models and produce the initial series of Molly. In contrast, many competitors, even those with their own intellectual property for toy products, hesitated to make such significant investments. However, this risky investment worked out for Popmart as Molly became one of Popmart’s best selling series.
Popmart effectively captures a broad audience through comprehensive marketing strategies, including partnerships with major brands like KFC and Lenovo. Several Popmart intellectual property figures, such as Molly, Pucky, Dimoo, Skullpanda, Sweet Bean, and Bunny, have engaged in collaborations with international brands. The company has also ventured into cross-border collaborations with various brands such as Lays, Haagen Dazs, vivo, Paris L'Oreal, and Kiehl's, spanning diverse sectors such as FMCG, beauty, and daily use products.
In addition, Popmart has employed image advertisements to grab the attention of its audience. For instance, the SKULLPANDA X The Addams Family Series serves as a creative and visually striking method to promote Popmart's blind box collectible figures. This collaboration merges the distinctive characters of The Addams Family with SKULLPANDA's unique style, creating a juxtaposition of quirky charm and gothic allure. Consequently, this collaboration has the potential to capture the attention of both The Addams Family enthusiasts and Popmart's loyal customer base, as well as pique the interest of new buyers curious about the collaboration.
Popmart has also posted image advertisements that are strategically positioned across 14 regions and 5 media platforms, showcasing the company's global perspective and diverse marketing tactics. Canada and the US emerged as Popmart's primary target markets, with nearly half of all advertising through Instagram and Facebook focusing on these markets. The incorporation of various sales channels has now become an integral part of Pop Mart's toy ecosystem, catering to diverse consumer groups by providing both products and entertainment.
Valuation
While Popmart seems to be slightly overpriced, its strong economic moats justify its premium pricing. I used the best case EV/LTM Sales multiple to forecast EV as Popmart is expanding its offerings from toy figurines to immersive theme parks, an industry typically associated with higher EV/sales multiple.
I recommend a HOLD for Popmart, setting a 1 year price target of $2.25, and a 5 year price target of $4.37. Given that Popmart is expanding into new markets and venturing into new verticals that require high capital expenditure in 2024, the stock price could take a hit in 2024. However, I believe that the stock price will rebound in subsequent years due to the investment theses mentioned above.
Conclusion
In summary, Popmart has established a distinctive position in the toy manufacturing industry through the introduction of blind boxes and strategic collaborations with global artists and brands. This innovative approach sets it apart from conventional competitors. Moreover, the company's strategic expansion into theme parks and mobile games showcases adaptability and forward-thinking, enabling it to access broader entertainment markets. With a robust brand presence and initiatives aimed at enhancing customer loyalty through diverse product offerings, Popmart is poised for sustained growth. The continued popularity of collectibles and blind box products, coupled with Popmart's ability to adapt to changing consumer preferences, positions the company favourably for a rebound in its stock price.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk
References
https://fifthperson.com/pop-mart-turnaround-or-fad/
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