POP MART is making waves?

In the freshly released 2024 Forbes China Best CEO list, the 37-year-old CEO Wang Ning of the trendy brand POP MART (09992.HK) made his debut on the list, becoming the youngest self-made founder in the history of the list.

It is worth noting that POP MART's stock price has risen by approximately 100% since the beginning of this year. Based on the current price of HKD 40.10, POP MART's market value may reach HKD 53.9 billion. According to the Hong Kong Stock Exchange (00388.HK) shareholding disclosure platform, Wang Ning holds 676 million shares of POP MART, accounting for 50.03%. Therefore, his net worth is estimated to be at least HKD 26.97 billion.

When POP MART went public on December 11, 2020, the offering price was HKD 38.50. On the first day of listing, it opened at HKD 77.10, closing nearly 80% higher for the day. POP MART's stock price reached a record high of HKD 107.60 in the early 2021 global bull market. However, as the stock market weakened, the sustainability of trendy toys' profitability was questioned, leading to a sharp decline in POP MART's stock price as shown in the image below.

As seen in the chart above, POP MART's stock price continued to decline after the peak in 2021. However, after hitting a bottom in 2023, its stock price started to rebound from 2024 onwards, finally surpassing the IPO offering price of 2020. What is the reason behind this?

Successful overseas strategy, first-half performance may soar

Looking at the performance data of the company since its records, due to the low base in the early period, POP MART's revenue and profit grew rapidly before listing. After going public in 2020, revenue and profit also increased by about 70%. At that time, trendy toys were highly sought after in the retail market. However, after 2022, POP MART's performance declined, with revenue growing by only 2.82% annually, and adjusted profit declining by 42.74% year-on-year.

Finance News believes that the massive costs brought about by the crazy expansion in 2020 and 2021 were the main reasons dragging down its performance in 2022. It is noted that in 2020 and 2021, POP MART added 73 and 101 retail stores respectively, and 526 and 510 robot stores, as shown in the image below.

Despite the significant increase in the number of stores, POP MART's revenue growth did not accelerate as a result, instead dragging down the overall profitability. As shown below, POP MART's non-IFRS adjusted net profit margin decreased from 22.30% in 2021 to 12.42% in 2022 and 18.89% in 2023

However, faced with the challenge of weakening domestic consumption of trendy products, POP MART seems to have found a second growth curve - going global.

Starting in 2018, POP MART began its globalization strategy. Finet noticed that by 2023, the company's store opening speed in overseas markets had significantly increased. By the end of 2023, POP MART had a total of 70 retail stores in overseas markets, with 42 opened in the same year; there were 99 robot stores, with 50 newly opened in 2023.

The results were immediate.

In 2023, the proportion of revenue from Hong Kong, Macao, Taiwan, and overseas business increased significantly from 4.09% in 2021 to 16.92%. The revenue in 2023 increased by 134.86% year-on-year. According to POP MART's Q1 2024 operating guidance, the revenue growth from Hong Kong, Macao, Taiwan, and overseas in the period is expected to be as high as 245%-250%, far exceeding the full-year growth in 2023.

The offline channel growth of Hong Kong, Macao, Taiwan, and overseas business was the most significant, as shown in the chart below. The revenue growth rates of offline, online, and wholesale channels for overseas business in 2023 were 324.7%, 72.7%, and 26.8% respectively.

Finet noted that the gross profit margins of POP MART's overseas offline and online channels were higher than their mainland counterparts, possibly due to higher pricing. For example, in 2023, the gross profit margins of the offline and online channels of the Hong Kong, Macao, Taiwan, and overseas division reached 74.4% and 73.5% respectively, much higher than the mainland's 63.0% and 60.5% for offline and online channels.

As a result, with the strong growth of overseas business offline and online channels (with higher growth rates than the lower-margin wholesale and other channels), the overall gross profit margin of this market also significantly increased, rising by 10.4 percentage points year-on-year in 2023 to 64.9%. POP MART's overall gross profit margin also increased from 57.49% in 2022 to 61.32%.

POP MART released a profit report on July 18 stating that its total revenue growth in the first half of 2024 will be no less than 55%. It is worth noting that the revenue growth in Q1 of 2024 ranged from 40% to 45%, lower than the first half of the year, indicating a further acceleration in overall revenue growth in the second quarter The company also expects that the profit for the first half of the year will increase by no less than 90% year-on-year. A higher profit growth rate than revenue growth may imply a further increase in profit margin for the first half of 2024.

POP MART explained that the main reasons for the performance fluctuations are: 1) Diversified product categories driving revenue growth, with rapid growth in revenue from Hong Kong, Macau, Taiwan, and overseas; and 2) Product cost optimization and economies of scale driving a significant increase in profit.

Finance News believes that given the relatively higher profit margins of its overseas business and significant overseas growth, it is entirely possible to enhance POP MART's profitability, which should be the foundation for its stock price rebound. We will closely monitor the company's latest performance indicators to confirm in which aspects its performance has significantly improved