POP MART: Is Pinduoduo's overseas expansion "too low"? Cultural goods demonstrate the decent example for oversea expansion!

At noon on August 20th Beijing time, Pop Mart announced its performance for the first half of 2024. Due to the explosive performance already hinted by achieving no less than a 55% year-on-year revenue growth and no less than a 90% profit growth as of July 18th, this performance announcement is more of a vivid experience, showcasing a model example of Chinese cultural physical goods going global.

Key points are as follows:

1) Revenue in the first half of the year increased by 62% year-on-year, and profit increased by 110% year-on-year. Both core indicators are slightly higher than the forecast from a month ago, but since the explosive performance was already hinted at, there is no fundamental expectation gap.

2) The key behind these explosive growth figures implies two main themes - the "counter-cyclical" trend of consumption among young people in China and the "reconstruction" opportunity for cultural goods going global, allowing Pop Mart to soar in revenue.

3) The fascinating aspect of the overseas story is that not only does it provide Pop Mart with an opportunity to reconstruct itself in terms of revenue, but it also offers greater profit potential. Under the self-operated model with high pricing, high gross profit margins are achieved, with over 30% of revenue contributing to more than 30% of gross profit.

4) Another appealing aspect of the overseas story is that, as it involves Chinese culture and design going global, within the first group of overseas consumers (Eastern cultural circle + Chinese cultural circle), there is less need for completely new and localized intellectual property (IP). Therefore, IP design development expenses can be reused for the overseas market without incurring significant additional costs.

Given the current shortage of overseas stores, individual store sales are booming, and the scale effect of sales expenses is also very strong.

5) With explosive revenue growth and the increase in gross profit margin from going global, while expenses remain relatively stable, the result of resonating performance is that under high revenue growth, the elasticity and certainty of profit release are stronger. It can be said that Pop Mart is definitely the brightest star in the consumer goods sector at present!

6) In terms of IP, self-owned and exclusive IPs such as Molly, Skullpanda, The Monsters, and DIMOO are still the mainstays, with Molly expected to soon become a super IP with a semi-annual sales volume exceeding 1 billion. However, relatively newer IPs like CRYBABY are also shining brightly.

7) In terms of product forms, in addition to figurines, Pop Mart's large dolls going global have performed exceptionally well, and plush toys and vinyl figures have directly achieved remarkable results. Last year, this segment did not exist, but this year it generated 400 million in revenue in the first half.

Dolphin's View:

Due to the prior hinting, although this performance is explosive, there is no real expectation gap. In Dolphin's view, the true incremental information lies in a deeper understanding of the flexibility that the overseas market brings to Pop Mart. This is where Dolphin finds truly inspiring:

In terms of overseas explosive growth, a 260% year-on-year increase in the first half of this year, surpassing even the growth rate in the second half of last year, is visibly stunning. In terms of contribution, despite only two years in the overseas market and just over 80 self-operated stores, there is a 30% revenue contribution and a 33% gross profit contributionIf this trend continues, it may create more than just another Popmart.

The deeper truth behind this result, in the view of Dolphin, is that the combination of brand and design with the export of Chinese culture in physical form is the true essence of exploring the vast opportunities globally. Clearly, it is smoother than the capacity export (anti-dumping) of the four little dragons, or the overseas expansion of car brands that are taxed due to subsidies.

In the circle of POP MART's overseas expansion, the path is also very clear: a. Southeast Asia and East Asia, including the East Asian cultural circle; b. Global overseas Chinese; c. European and American populations.

Currently, opportunities for the Chinese and East Asian cultural circle are still on the rise, and this group can be captured using the same IP design. There may also be opportunities in the future for the European and American populations. It is entirely conceivable that POP MART can replicate the success of Douyin in China by using TikTok in overseas markets to increase the proportion of higher-margin online channels.

Therefore, even if this performance does not have a significant expectation gap, funds still need to carefully reassess how many more "POP MARTs" can be created in overseas markets.

In addition to one's own research, this key information also requires the company to provide its own planning and guidance. It is necessary to pay attention to any possible qualitative and quantitative guidance in the company's conference calls, and Dolphin Jun will release this information in the app as soon as possible, so please stay tuned.

Here is a detailed analysis:

I. Popmart: An Alternative Landscape of Consumerism

On July 18th, POP MART had already revealed its explosive performance to the market in advance - estimating that its "revenue growth in the first half of the year will be no less than 55%, and profit growth will be no less than 90%".

In reality, the revenue for the first half of the year has reached 4.56 billion, a year-on-year increase of 62%.

Since the relaxation of the epidemic, POP MART has seen a significant increase in revenue from less than 20%, to over 50%, and now over 60%. The elasticity of profit growth is even more exaggerated. With continuous growth, POP MART has now completely found its place in the vast opportunities and is in a very favorable position.

Domestic income recovery and overseas explosion, Popmart's operating profit actually increased by 110% in the first half of the year, which is even better than the previously predicted 90%.

II. Trendy Play Against the Cycle?

The sluggish domestic consumption, as seen through JD.com and Alibaba's GMV, has been deeply felt. However, surprisingly, POP MART has been able to go against the tide in this domestic environment.

In the first half of the year, POP MART's mainland revenue reached 3.2 billion, a year-on-year increase of 31%. While it may seem like a slowdown from the 40%+ growth in the second half of last year, it is important to note that last year was the first year after the epidemic was lifted, so the comparison has a significant base effect.

Therefore, achieving a 31% growth on a normal year-on-year basis is indeed strong. Looking at the channels, online sales have doubled, and both the Pao Pao vending machine and Tmall store are growing positively. The Tmall store saw a 28% year-on-year growth, but the sales on Douyin have already exceeded the original leader Tmall in absolute valueAlthough the offline growth rate is slightly inferior, with over 20% growth, it means that retail stores and robot stores are equally impressive. With the normal expansion of stores (net increase of 11 retail stores in the first half of the year), both year-on-year and month-on-month sales per store are on the rise.

In the face of the sluggish domestic consumer market, it seems that Pop Mart has completely stepped out of the ordinary. Based on market research information, in the overall sluggish consumption in the first half of this year, there is a very interesting phenomenon:

Young people are unwilling to have children, resulting in very poor maternal and infant consumption. However, the seesaw effect of maternal and infant consumption is that pet consumption is exceptionally good, and accompanying pet consumption is the trend of toy consumption.

The result of this phenomenon is that Pop Mart, which seems to be a standard "optional" consumption type, is actually moving exceptionally counter-cyclically in this wave of young people downgrading their consumption from babies to pets.

III. Pop Mart's Vast Opportunities

Among the various Chinese assets that Dolphin is concerned about, it can be said that Pop Mart may be the company that has truly found its vast opportunities:

In 2022, Pop Mart began to seriously look overseas, and in the first half of 2023, it started to make some progress. By the second half of 2023, overseas operations began to yield results. In the first half of this year, the revenue from overseas (including Hong Kong, Macau, and Taiwan) directly increased to 30%. With a revenue volume of 1.35 billion and a year-on-year growth rate of 260%, Pop Mart has completely established itself in the overseas market.

But even more exciting is that the overseas market has higher pricing and even higher gross profit margins: the gross profit margin of the domestic business is around 60%, while the gross profit margin of the overseas business is almost 10 percentage points higher than that of the domestic business! As the proportion of wholesale business in overseas markets decreases, the gross profit margin of overseas business has reached 72%, showing very high certainty.

Looking at the channels in the overseas market, currently there are only 83 self-operated stores, and including joint ventures and franchises, there are only 92 stores. Dolphin calculated that the revenue per self-operated store in the first half of the year is close to 11 million RMB, far exceeding the less than 4 million RMB revenue per store in the domestic market. What does this indicate? Very simply, there is still a lot of room for opening stores overseas! In Dolphin's view, this is the true incremental information of this financial report, indicating that there is still a large market space to be explored overseas.

In terms of the revenue structure from overseas, the first half of the year saw a surge in the Southeast Asian market, especially in Thailand, followed by East Asia and Hong Kong, Macau, and Taiwan, clearly benefiting from the East Asian cultural circle.

III. Main IP in Charge, Small IP Blooming

From the perspective of IP, Pop Mart mainly divides into self-owned IP, exclusive and non-exclusive, among which self-owned IP and exclusive IP are the core competitiveness of Pop Mart. After the last disclosure adjustment, exclusive and self-owned IPs are collectively referred to as artist IPs. Typically, the gross profit margin of this type of IP is higher.

Among the core artist IPs in the first half of the year, besides the pillars Molly, SkullPanda, the Monsters, and Dimoo with large sales volumes, Molly alone has reached 780 million, approaching the 1 billion mark.

Relative newcomer IPs like CRYBABY have also reached a revenue level of 350 million in half a year, and Xiao Ye has also brought new vitality, with a year-on-year growth rate of over 100%.

Moreover, in terms of categories, Pop Mart is now playing more varieties. In addition to figurines, overseas markets are also very fond of large dolls. In addition, they have also produced cute particles, plush toys, cards, and even building blocks, coupled with offline theme park experiences, Pop Mart seems to be moving towards a larger entertainment landscape.

In the first half of this year, Labubu's plush toys have also started to increase in volume. Driven by multi-category growth, the proportion of figurine income has dropped from over 70% in the same period last year to less than 60%.

IV. Overseas: Attrative From the Inside Out

Due to the higher gross profit margin in overseas markets, Pop Mart's gross profit margin in the first half of the year has almost reached a four-year high, reaching 64%. The gross profit margin of its domestic business is mainly due to a slight recovery in the online channel gross profit margin, but overall, compared to the second half of last year, it has remained basically stable without improvement. This is mainly due to the gross profit margin in overseas markets, as self-operated income has surged, increasing its share, while the wholesale share is decreasing. The gross profit margin has soared to 70%. With the further expansion of overseas self-operated business, the gross profit margin will rise to 72-73%, which is almost a certainty, as wholesale was a legacy business that was not focused on overseas before and will only become smaller and smaller.

V. Vast Expansion of Personnel Restrained, High Single-Store Benefits, Bubble Mart's Profits More Gratifying

In the first half of this year, looking at various detailed segments, Bubble Mart's growth did not come from advertising, headhunting, or aggressively opening stores:

Advertising marketing expenses increased by 20% year-on-year, which is not high compared to revenue growth. Employee expenses increased by just over 30%, and in terms of employee structure, the increase was mainly in sales personnel, with no significant increase in administrative and IP development personnel. This confirms what Dolphin Jun said - existing IPs can be well reused in East Asian culture overseas, without the need for additional investment in localizing IPs.

From the results, it can be seen that during the high-speed revenue growth process, scale effects were significantly released, with turnover data such as inventory being relatively healthy, driving the company's operating profit to reach 1.1 billion, with a profit margin as high as 25%.