"Flying" POP MART: "To exceed 60% for the whole year, and 200% growth overseas"

The following is a summary of the Pop Mart 2024 Q2 earnings conference call. For an interpretation of the financial report, please refer to "Pop Mart: Going international with a "stylish" approach is the real deal!"

I. Review of Key Financial Information:

II. Detailed Content of the Earnings Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress

1.1. IP Business

a. The IP matrix is more balanced, with 7 IPs generating sales exceeding 100 million RMB each.

b. More collaborations with artists and other types of IPs are being explored, such as efforts to expand Disney's licensing areas to support the company's internationalization strategy.

1.2. Action Figure Products

a. Despite a high base in the first half of the year, sales still achieved over 30% growth, accounting for 58.3% of total sales.

b. The new product series, Skull Panda Comic Collection, sold 196,000 sets in the first half of the year, generating sales exceeding 160 million RMB; the Temperature series accumulated sales of 680,000 sets, with sales exceeding 540 million RMB.

1.3. MEGA Products

a. The MEGA product line has entered a mature stage, with sales nearing 600 million RMB in the first half of the year. The MOLLY series performed well, especially new images like Space Molly driving brand and sales growth.

1.4. Plush Toys

a. Plush toy sales in the first half of the year reached 450 million RMB, a 993% year-on-year growth, accounting for nearly 10%. Products like Crybaby resin plush toys were well-received, and the company will continue to develop new products, optimize the supply chain, and enhance interaction and emotional connection with fans.

1.5. Building Block Products

a. Building block products were launched in mid-June, and the supply chain and product design will continue to be optimized. More new models will be introduced in the second half of the year, with the building block product line expected to become an important category for the company.

1.6. Channels and Application Scenarios

a. Offline Channels: Mainland China sales revenue in the first half of the year reached 3.21 billion RMB, a 32% increase. Structural optimization and store display improvements in offline channels, with nearly 300 stores driving cross-selling, and retail store growth of 24.7%.

b. Robot Application Scenarios: In the first half of the year, efforts were made to expand robot application scenarios and pilot new images to enhance the shopping experience. Single-machine productivity increased by 15%, and home delivery services were piloted.

c. Online Business: Upholding the integrated online and offline operation strategy in the first half of the year, the blind box machine Q2 resumed double-digit growth, Tmall achieved double-digit growth, and the 618 event returned to the top two rankings.

d. Membership Growth: Membership numbers steadily increased in the first half of the year, with member contributions and repurchase rates remaining stable compared to last year, but the number of consuming members and ARPU both increased

1.7. Production Supply Chain and Global Layout

a. With the expansion of overseas business, the globalization of the supply chain layout has become an important challenge. The company is committed to building a "3A" supply chain, focusing on agility, strong collaboration, and adaptability to local conditions. In the future, more emphasis will be placed on the localization needs of the global market, quickly and agilely reaching every consumer and fan.

b. In terms of lean production, the company has significantly increased its level of automation and improved production efficiency and quality control through lean manufacturing.

c. In the second half of the year, the plan is to add 30-40 new overseas stores to further expand the market landscape in support of the company's globalization strategy.

2) Financial Performance

2.1 Revenue and Profit

a. Revenue in the first half of 2024: RMB 4.558 billion, a year-on-year increase of 62%.

b. Gross profit: RMB 2.919 billion, a year-on-year increase of 71.9%, with a gross profit margin rising from 60.4% to 64%.

c. Net profit: RMB 964 million, a year-on-year increase of 102%, with a net profit margin of 21.2%.

d. Adjusted net profit: RMB 1.018 billion, a year-on-year increase of 90.1%.

2.2 Sales Channels

a. Mainland China revenue proportion: 70.3%.

b. Overseas revenue proportion: 29.7%, with revenue from Hong Kong, Macau, Taiwan, and overseas markets growing by 260% year-on-year.

c. Proportion of offline retail stores: 39.2%; blind box sales proportion: 24%.

d. Douyin channel sales grew by over 90% year-on-year.

2.3 IP Operations:

a. Artist IP revenue: RMB 4.58 billion, accounting for 96.2%, with a year-on-year growth of 70.4%.

b. Licensed IP revenue: RMB 690 million, a year-on-year growth of 60.9%.

c. Major IP: Molly series revenue of RMB 780 million, a year-on-year growth of 90.1%.

2.4 Key Financial Data:

a. Accounts receivable: decreased from RMB 321 million to RMB 263 million, with the payment period shortened from 15 days to 12 days.

b. Inventory: remained relatively stable, with inventory turnover days reduced from 133 days to 101 days.

c. Capital expenditure: RMB 186 million in the first half of the year, mainly used for store decoration and mold equipment renovation.

d. Earnings per share: basic earnings per share were 35.46 cents last year and 69.49 cents this year.

2.2 Analyst Q&A

Q: What are the performance expectations for the second half of 2024? Have any adjustments been made?

A: The company has continued to maintain performance growth. Given the high base in 2023, the company initially expected a 30% year-on-year revenue growth in 2024, with overseas market growth of no less than 100%. However, based on the better-than-expected performance in the first half of 2024, the company has made strategic adjustments, updating the guidance to: a full-year revenue growth target of no less than 60% in 2024, overseas market growth of no less than 200%, and sales exceeding RMB 10 billion. It is expected that the overseas market share will exceed 40% in the fourth quarter and surpass 50% in the Christmas single month target.

Q: What is the significance of the overseas strategy, particularly in Thailand and the Southeast Asian market, for the overseas layout strategy? In addition to accelerating overseas stores in the second half of the year, what other refined operational measures are there?

A: The company's layout in the Southeast Asian market can be used as a replicable strategy. As part of its ToC business, it insists on overseas direct operation. The ability of products to adapt to different countries and cultures has been validated, accumulating strong digital operational capabilities. The overseas team has more than 1,000 people, with over 95% being foreigners, effectively promoting localization and partnerships.

The Southeast Asian market is the main battlefield for the company's overseas expansion, with stores opened in Singapore and Thailand. The performance in the Thai market is particularly outstanding, with the first store opened in September 2023 now expanded to 6 stores, with individual store performance far exceeding expectations. The company plans to replicate the successful model in the Thai market (including themed stores and celebrity-linked marketing) to other Southeast Asian markets such as Indonesia, the Philippines, and Vietnam. In the future, the Southeast Asian market will focus on opening stores at key locations and further expand its influence through e-commerce and various collaborations (such as artist signings, celebrity collaborations, and brand partnerships with Samsung).

Q: Based on the current category expansion, how does the company view the performance of new categories? Are there any considerations for adjusting and optimizing in the future?

A: In the second half of the year, the company will continue to innovate in categories, launch a new brand and open accessory stores, selling products such as rings and bracelets. In recent years, the product department has been split from 1 department to 6, to strengthen internal and external studio collaboration, improving the quality and speed of product supply. The proportion of traditional blind box figurines has dropped to below 60%, with new categories such as plush toys and building blocks performing well. The richness of categories has brought supply chain challenges, with a development cycle of 10-13 months for single categories, and products currently launched are prepared one year in advance.

In the second half of 2024, the company will establish a new brand and open accessory stores while strengthening the development of building blocks and card categories. There is still room for improvement in the detailed design of building blocks, and the project team will continue to launch products, aiming to establish a certain brand influence within two years; the card team will focus on exploring the story attributes and will launch more cards suitable for adults and core audiences by the end of the year, further telling IP stories.

Q: In terms of the supply chain, what specific optimization measures have been taken to support the underlying development? Are there any other plans in the future, such as the commissioning of a factory in Vietnam or the establishment of storage facilities in Europe and America?

A: The company continues to promote the automation development of partner factories and actively layout overseas. Due to the relatively long cycle from design to production (10 to 10+ months), attention to detail, lean management, and collaborative cooperation are required at each stage to reduce deviations. Vietnam factory as a partner factory is expected to provide close to 10% of product supply in 2024. The company plans to further expand the layout of Southeast Asian factories in 2025-2026, even beyond that region. The layout of North American warehouses is also under consideration and will be promoted according to business development plans

Q: What are the main driving factors for the company's strong domestic performance in the first half of 2024? What are the performance expectations for the second half of 2024?

A: In the first half of 2024, the company's domestic business benefited mainly from the highlighting of emotional value, the "lipstick effect," frequent hit products, and the implementation of the "upgrading brand" strategy, which focuses on optimizing product, brand experience, and service perception. At the same time, the success of overseas business has also started to contribute to domestic performance growth.

In terms of operational strategy, the company adopts a day-by-day decision-making approach to better respond to consumer demands, continuing to adhere to the strategy set at the beginning of the year by uniformly allocating online and offline inventory nationwide, without using a static distribution model. By implementing static narrowing (removing ineffective product categories and products at the tail end, enhancing customer interaction and efficiency) and dynamic deepening (responding quickly to demands based on product lifecycle and customer interaction data), operational efficiency is improved to achieve real-time online and offline linkage.

In terms of decision adjustments, the company adopts a strategy of substituting space for time. Traditionally, new products are launched every Thursday, and the exposure of new products decreases 2-3 weeks later. Now, for product categories with significant weight among customers, the company uses offline store displays, online showcases, and promotional materials to allow consumers to have a deeper understanding of these products.

The dual growth logic of hit products lies in performance improvement and attracting new customers. In the first half of 2024, plush toys or derivative products attracted a large number of new brand users, who then converted into blind box enthusiasts and became loyal customers of the company.

Q: What are the company's operational strategies in the second half of the year in overseas markets, especially in key markets such as North America and Southeast Asia? In the long term, what are the further optimization directions and overall development potential of these markets?

A: The company is transitioning from market expansion to brand internationalization, with a focus on the United States and Southeast Asia as key regions, while also placing importance on Europe, Australia and New Zealand, East Asia (Japan and South Korea), and Greater China (Hong Kong, Macau, and Taiwan). In the North American market, the company plans to operate 20 stores by the end of 2024 and accelerate expansion next year. It will also increase market increment through the linkage of online lucky draw machines and offline signing events. In the Southeast Asian market, the focus will be on travel retail, prioritizing key locations in tourist cities such as the Louvre in France and Oxford Street in the UK. For Japan, South Korea, and Greater China regions, the company will upgrade and renovate stores opened before and after the epidemic, further refine operations, and increase talent development efforts to optimize overall operational effectiveness.

Q: Regarding the company's medium to long-term profit margin outlook, the annual report mentions a gross profit margin of over 60% and a net profit margin exceeding 20%. What are the key drivers for increasing gross profit margin and net profit margin? Can you provide a detailed breakdown of these factors?

A: The improvement in gross profit margin is mainly attributed to the continuous optimization of the supply chain and the increasing sales proportion in Greater China and overseas markets. It is expected that in the second half of the year, with further increase in the sales proportion of these regions, the gross profit margin in the second half of 2024 will slightly increase compared to the first half, with a year-on-year increase of about 3 percentage points. Due to the relatively higher expense ratio in overseas markets, the net profit margin will increase at a slower pace, but it is still expected to improve in the second half of the year.

Looking ahead over the next three years, the gross profit margin is expected to remain relatively stable, maintaining the level in 2024. Although new product categories may impact the gross profit margin, the margin for existing categories will remain unchanged. With the manifestation of economies of scale in overseas markets, the net profit margin is expected to increase over the next three years (excluding fair value changes).

Q: How is the performance of various online channels? The performance of the lucky draw machine improved in the second quarter, what specific efficiency improvement measures were taken? TikTok showed strong performance in the first half of 2024, what are the main driving factors for the future? In terms of popular products and new product releases, how are the product selection strategies formulated among various channels?

A: Lucky draw machine: Under pressure in Q1, improved in Q2. Starting from March, the company focused on enhancing new customer acquisition capabilities through the following measures: 1) Linking offline stores with lucky draw machines, where players interact in-store and then engage online through the lucky draw machine; 2) Implementing differentiated operational strategies for key product categories. The company will continue to adhere to this rhythm and strategy in the second half of the year.

TikTok: Significant growth since May 2023, achieving a 90% year-on-year growth in Q2 despite a high base. In the second half of the year, the company will attract more public domain traffic through TikTok's daily active users (DAU), attract more new brand users, expand the consumer base, refine customer flow, and open live rooms in multiple languages, cultures, and regions.

Tmall: Platform traffic is weak, and the company adheres to content buying points and investment flow strategies. The core strategy in the first half of the year was not ROI-driven, breaking through circles through targeted investment in key product categories to achieve double-digit growth in new consumer members, new members, and overall traffic. The company will continue to strengthen this strategy in the second half of the year to drive continuous growth on the Tmall platform and bring in more new members for brands.

Q: In terms of IP operation, how does the company design suitable development paths for each IP? Are there further targeted operational plans in the future? What measures will the company take to continuously enhance the attractiveness of IP and products?

A: Future IP outlook: The company will increase the number of IPs to reduce performance dependence on a single IP. By continuously introducing new IPs, market vitality will be injected. For example, the domestic "Star People" series performed well in sales, and will continue to be developed through the integration of illustrations, content, and animation; overseas, by increasing local teams and channels, the ability to explore local IPs will be enhanced, such as Thailand's Crybaby and the US's Peach Riot.

In terms of IP operation, the company has established a comprehensive business framework and its market insights have been validated. For example, Molly differentiates operations and product development based on themes of "courage," "childishness," "royalty," and "young artists" by expanding classic images; Dimoo has broken through age restrictions and developed new product categories; Skullpanda leads in figurine design and artistic expression, demonstrating the ability to transcend different cultural aesthetics, which will continue to help artists create innovative designs; Xiao Ye promotes through pop-up stores in Shanghai, Hangzhou, Bangkok, aiming to establish it as a lifestyle brand.

For each IP, the company has a clear development strategy and continuously optimizes operations through constant experimentation and data accumulation. With years of experience, the company's IP product development team has demonstrated strong IP operation capabilities based on deep market insights and data analysis, making it trustworthy.

Q: With significant growth in overseas e-commerce, does the company plan to further accelerate the layout of the overseas e-commerce sector? Looking at the medium to long term, what are the key focus areas and main platform choices for the company in the overseas e-commerce field? How can cooperation efficiency and smoothness with overseas e-commerce partners be further enhanced? In terms of synergy between overseas and domestic e-commerce, what measures does the company have to improve?

A: Overseas e-commerce is not just a sales channel but also a crucial way for the company to reach global consumers. Currently, the company covers 100 countries and regions through overseas e-commerce, providing key data support for opening stores in blank markets in the future. In the first half of the year, overseas e-commerce achieved a 335.4% year-on-year growth, with revenue exceeding 200 million RMB. It is worth noting that the characteristic of overseas e-commerce is that revenue in the second half of the year is usually higher than the first half due to several important marketing events.

Among the online channels overseas, Shopee and Lazada contribute the most as third-party platforms, mainly focusing on the Southeast Asian market, achieving revenue of 100 million RMB in the first half of 2024. Content e-commerce is also a rapidly growing important channel, with revenue reaching 35 million RMB in the first half, while official website revenue reached 56 million RMB.

To better coordinate domestic and foreign resources, the company will draw on mature domestic experiences such as supply chain management and customer service to integrate group resources for improved efficiency. Meanwhile, overseas teams will develop unique marketing strategies and operational methods based on the characteristics of their respective platforms to ensure success in the global market.

Q: How is the current situation of domestic members? What is the proportion of purchases between new and old members? What changes have occurred in terms of unit price and purchase frequency? Have there been significant changes in the consumption behavior of domestic members?

A: With a large existing member base domestically, the repurchase rate and retention rate remain relatively stable, with double-digit growth in new member numbers. The main driving factors for growth include: 1) controlling the rapid expansion of new members, focusing on improving consumer experience by reducing low-equity new user acquisition methods and targeting interactive consumers to ensure a better experience after joining; 2) Dual-drive: APPU value achieved double-digit growth, wallet contribution and overall channel ARPU value both saw double-digit increases in the first half of 2024. The company uses this data to correct and guide operational adjustments.

There have indeed been changes in consumption behavior: 1) a significant increase in the number of old consumer members (joined for over 1 year); 2) an increase in new consumer member numbers, with a noticeable increase in purchase frequency and unit price of new members; 3) among consumer members, the proportion of members purchasing 2 or more IPs continues to rise. Old members have seen improvements in wallet contribution, ARPU value, and unit price, transitioning from only purchasing blind boxes to expanding into multiple categories such as building blocks, derivatives, etc., which align closely with the company's product strategy.

In addition, it is worth noting that in the company's overall membership value system, the number and consumption growth of high-value member levels in the first half of the year have also significantly increased.

Q: In terms of inventory management, many styles are sold out on the day of listing, and restocking is quickly sold out as well. Considering the layout of our international markets, the impact of shipping schedules, and the different preferences for IP in different countries, this poses a certain challenge to inventory management. What effective solutions does the company have to address these challenges?

A: To improve the synergy of inventory management, the company has begun to improve internal operational processes. For example, in new product forecasting, we not only rely on the judgment of the product department but also combine the collective wisdom of the sales and supply chain planning departments to reduce forecasting deviations. Although there is uncertainty in predicting the future, through multi-party collaboration, this deviation can be significantly reduced.

Secondly, the company is committed to enhancing the agility of the backend, maximizing the flexibility of the supply chain. Even in the event of temporary stockouts, we can quickly restock within a week, or even three days, to ensure the continuity of market supply.

Furthermore, the company is expanding its global warehousing, including bonded warehouses and distribution centers (DC) in Southeast Asia and North America, to accelerate the market delivery speed (time to market) of products, allowing consumers to access products more quickly. Ultimately, the inventory strategy for each market will be determined based on business needs, adopting either an aggressive or conservative approach, which requires close collaboration with the business team to make decisions.

In terms of shipping, we have gained a deep understanding of the entire supply chain, shipping, and logistics processes, identifying many detailed issues. While solving these problems may need to be gradually implemented, we believe that by accelerating process efficiency and reducing costs, we will continuously optimize this process and achieve better inventory management results.

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