Pop Mart: It's just a toy, why "Zhen Huan returns to the palace"?

In this year's bleak consumer environment, Pop Mart is undoubtedly the "lonely" ceiling: first, the overseas market was inconspicuous last year, but by the third quarter of this year, it achieved a year-on-year growth rate of 450%, creating more than one Pop Mart overseas;

Secondly, apart from overseas, Pop Mart's original domestic business growth has also increased from over 30% in the first half of the year to 55%-60%.

So the questions arise:

How did Pop Mart reverse the situation? $POP MART(09992.HK)

Domestically, why is it going against the trend?

Overseas, how many more Pop Marts can be created?

After five times in half a year, is Pop Mart "expensive"?

In the last half-year performance review (“Pop Mart: Pinduoduo Going Overseas 'Too Low'? Going Overseas with 'Style' is Truly Cool!”), Dolphin Jun mentioned that to understand the investment value of the new Pop Mart, it is necessary to seriously assess how many more Pop Marts can be created overseas. Dolphin Jun will start submitting overdue assignments one by one today.

1. How did Pop Mart reverse the situation?

Looking back at Pop Mart's stock price performance since its listing, it has basically gone through a three-part storyline of peak - disillusionment - rebirth from the end of 2020 to now.

The storyline at the peak is still vivid in Dolphin Jun's mind: a. Trendy toys are a form of self-indulgent consumption for young people; b. The addictive gameplay of blind box figures; c. The overwhelming advantages in the entire industry chain layout from IP discovery, updates to operations, which can almost be regarded as a moat.

However, in the process of moving from blind faith to rationality, another set of realities emerged: a. Too many figures with no place to store them, leading to withdrawal; b. The blind box gameplay has no barriers and is also unregulated; c. The competition is too fierce, requiring more complex molds, joints, and processes, causing gross margins to decline.

The result of this situation is the double whammy of Davis from 2022 to 2023, and Pop Mart has returned from a supernova of a bubble period to the reality of a jinxed star

Most new consumer companies have become relatively unknown at this stage, such as Three Squirrels and Yixian E-commerce. However, Pop Mart has not; after two years of general decline from 2022 to 2023, it has made a comeback.

The key question now is, how did Pop Mart turn the tide? With repeated super guidance and exceeding expectations, what exactly did the market, and even Pop Mart's management, underestimate? Dolphin believes that one word can accurately summarize the answer: "drawing a line in the sand."

1) The Cliff King in the Trendy Toy and Figurine Sector

Before explaining why Pop Mart and the market's perception can be described as "drawing a line in the sand," Dolphin believes it is necessary to unify a recognition: Pop Mart has a crushing advantage in the IP monetization track of blind boxes—whether in terms of product strength, brand strength, or channel strength, it is in a class of its own.

(1) Channel Strength: Like most new consumer brands, Pop Mart has a presence both online and offline, but its standout feature lies in D2C (Direct to Consumer).

a. Online: Strong Private Domain: Although Pop Mart casts a wide net online, covering mainstream and emerging e-commerce platforms, it has not entered the official Pinduoduo platform. However, it has established a complete store matrix with its own community, Baqu, as well as WeChat mini-programs and an official mall.

b. Offline: Light Trial and Strong Direct Sales: The biggest fear of opening offline stores is choosing the wrong location; compared to online, the trial and error cost offline is too high. Pop Mart's approach is to first place an automatic vending machine in the mall, which it calls a robot store. If the robot store performs well, it then tests with pop-up stores, and if successful, it opens a regular retail storefront.

The essence of offline direct customer acquisition and online repeat purchases is that users have a stronger sense of brand private asset. On one hand, users are more likely to form brand loyalty without having to work for the platform; on the other hand, product design can more directly sense user needs.

(2) Product Strength and Brand Strength: High Aesthetic, Shareable, Playable, and Self-Satisfying

From the perspective of users purchasing blind boxes, the focus is on product design first, as there is no story or connotation in the character IP consumer goods. High aesthetics are the primary requirement to attract consumers to spend.

In terms of actual purchasing behavior, the significance lies in appreciation and enjoyment; if the aesthetics are low, it becomes an eyesore when placed on a table.

High aesthetics correspond to "shareability" in the era of internet dissemination: a plethora of unboxing videos and beautiful photos on Xiaohongshu, Moments, Douyin, and Bilibili can easily go viral. Coupled with cross-industry collaborations and endorsements from celebrities and trendsetters, Pop Mart has already formed a complete explosive operational process.

After launching one IP after another, users gradually transition from buying Molly to purchasing other series, forming brand recognition through products. Currently, it appears that Pop Mart's flagship IP has evolved from the initial Molly to include Molly, DIMOO, and SKULLPANDA, and now the Monsters. Pop Mart has repeatedly demonstrated to the market that it is not lacking in IPs, nor in popular IPs.

(3) Full industry chain self-operation, crushing scale

As a player in the full industry chain (from IP creation, IP operation, to channel sales), in addition to a more comprehensive online store layout, its offline store scale is close to that of channel retailers that focus on trendy toy products, at least placing it among the top tier of retail players;

In terms of IP reserves, the number of its own and exclusive IPs is absolutely top-tier among product-driven players that focus on IP itself;

In terms of the sales volume of IP product lines, Pop Mart is also the most prominent player: according to data from the trendy toy community, even during Pop Mart's downturn in 2020 and 2021, among the top ten IPs in sales volume, Pop Mart's IP accounted for seven.

Overall, through the above highlights, we can see:

a. In the niche market of figurines and trendy toys, Pop Mart has established a solid foundation by controlling channels, controlling products (having IP, controlling design), and leveraging strong user assets in private domains.

b. Although individually, neither the channel nor the IP scale may be the largest, when combined with top-tier levels in various segments, the final product sales volume and popularity are genuinely the industry leader.

From a comprehensive strength perspective, if one were to bet on a player in the trendy toy market, Pop Mart is almost the only choice. However, the strict qualifiers for this absolute leader—trendy toys & figurines—are too limiting!

2) Facing the leader, why does market perception remain "constrained"?

In such a small yet beautiful market, the biggest issue with investing in Pop Mart is essentially the calculation of the market space itself and the corresponding risk-return considerations.

This key issue has led to a constrained market perception, which, to some extent, includes Pop Mart itself.

When looking at Pop Mart in 2021-2022, the general analytical framework for the key issue—calculating Pop Mart's growth potential—was roughly:

a. How large is the customer base primarily composed of women born in the 1980s;

b. How does the purchasing frequency of this group play out;

c. What is the ARPU for a single purchaseIt can be seen that when the market funds recognized Pop Mart, no matter how much it is said that IP is the soul of Pop Mart, when it comes to growth expectations, monetizing IP is mainly limited to the figurine sector.

Of course, this is mainly because Pop Mart's original business—figurines—is absolutely mainstream, and the company has not clearly conveyed to the market that it intends to vigorously create a second category and second market. The market generally uses this analytical framework, but this framework makes it difficult to open up the true imaginative space of the IP business:

a. The target audience is domestic and too narrow; as the audience ages, it may require repeated customer acquisition;

b. In terms of purchase frequency, buying too many figurines leaves no space to store them, which may ultimately lead to exiting the market;

c. The unit price of figurines is only around 69-89 yuan, while the later launched Mega series priced in the thousands seems more like a precise harvest of a highly engaged audience, but the audience is simply too small.

At that time, in terms of IP monetization, apart from figurines and blind boxes, as well as in-store displays (excluding Mega), Pop Mart did not clearly show signals of vigorously betting on a second category. Meanwhile, overseas expansion was also delayed due to the pandemic, or had not been validated. In this context, Pop Mart's imaginative space was clearly limited.

2) From occupying the "corner of the display case" to occupying "the entire room," Pop Mart's landscape opens up!

In fact, taking overseas peers as an example, there are countless ways to monetize IP: from products to services; from stationery to clothing, from tableware to bags; from movies, TV shows, games, and animations to large amusement parks, in various forms.

The transition from IP licensing to development can only be said to have no limits; there are only things that have not been thought of, and it is merely a strategic choice of the company regarding what to pursue.

Currently, according to research information, Pop Mart's IP licensing business remains very restrained, with the overall approach still in the stage of protecting IP: a. Categories that are self-operated or intended to be self-operated are not licensed externally; b. The communication process is lengthy due to IP protection, requiring additional communication and confirmation with IP operators and creators, and also considering what exposure resources the partner brand can bring to Pop Mart; whereas companies like Sanrio and Disney, which are IP licensing companies, do not require such extensive considerations for licensing business, focusing instead on licensing duration, fees, commissions, and other commercial terms.

Pop Mart's core remains the self-operated IP business across the entire industry chain, but it has opened up its thinking in terms of categories:

a. This is Pop Mart's product line at the time of its listing in 2020:

b. This is Pop Mart's current product line:

In addition to its blind boxes and figurines, derivative products have blossomed everywhere, from plush toys to clothing and accessories, from viewership to building blocks and cards; from games to offline amusement parks. IP is the soul connecting each product and category.

According to the company's intentions, it is estimated that Pop Mart's online trendy accessories will be launched soon, while the Xiao Ye IP series will introduce bedding, home goods, clothing, and accessories, etc.;

Source: Company reports, Shenwan Hongyuan Research Institute

Summary in one sentence: The monetization of IP has opened up, and Pop Mart is starting to move from occupying a small corner of users' living room display cabinets to occupying the entire living room, bedroom, wardrobe, cabinet... occupying your entire room.

If we consider the games the company is trying to promote (the launch of "Dream Home," which competes with Nintendo's best-selling game "Animal Crossing") and offline parks, perhaps Wang Ning's ultimate ambition is to occupy users' entire lives.

Correspondingly, in terms of revenue, the multi-category monetization of IP is almost perfectly illustrated by Pop Mart's results in the first half of this year—incremental revenue from Mega + plush toys + other derivatives accounted for 65% of the revenue increase in the first half of 2024.

Basically, at this point, the answer to the first question of this analysis—how did Pop Mart turn the tide?—is quite clear: the mindset and vision have opened up, and the essence of the company is an IP business that sells emotions, with forms of realization beyond just blind boxes.

II. Why go against the current domestically?

However, at this point, some may still doubt how, in such a weak domestic consumption environment, a trendy toy, which is a "luxury" that can be done without, managed to achieve over 30% year-on-year revenue growth even in its local business?

Of course, in addition to the multi-category monetization of IP mentioned by Dolphin, there are many other explanations for the domestic market:

a. Trendy toys have a comforting effect, similar to buying them for solace at a temple in the current environment;

b. The lipstick effect—young people, unable to afford more expensive luxury goods, opt for domestic toy alternatives;

c. The balance between maternal and infant products vs. pets & trendy toys is a seesaw for young consumers. When young people are not having children and not buying baby products, spending on pets and trendy toys naturally increases.

However, in terms of results, the first phase of recovery in domestic business still seems to be driven by the activation of existing users through multi-category monetization. From the perspective of new member acquisition, it appears that the explosive growth on Douyin has indeed brought some incremental users, but the 4.57 million new users in the first half of 2024, compared to the total of 8.35 million new users last year, is not particularly outstanding

In terms of distribution channels, although online sales have gained new users through Douyin as a new channel, becoming a high-growth channel, the absolute value growth mainly relies on retail stores. In the past six months, retail stores in China have only increased by 21 stores, which is not a significant growth compared to the same period last year.

In offline retail stores, besides blind boxes, some key positions also display plush toys and large dolls. Moreover, some users first learned about plush toys before they started to engage with blind boxes.

Therefore, the revival in China primarily starts with the monetization of IP from blind box figures moving towards multi-category monetization, and secondly, reaching some new users through Douyin.

The online store of Pop Mart in mainland China, sourced from the internet.

Overall, through the analysis of <One—-Two>, Dolphin believes that Pop Mart's revival in the bleak domestic environment is primarily due to the opening up of the IP monetization pattern under the self-control model of the entire industry chain—shifting from the original strategy of occupying a corner to truly implementing and landing the idea of "occupying your entire living space."

In the next article, Dolphin will focus on analyzing how Pop Mart quickly established itself in overseas markets, how many Pop Marts can be recreated in overseas markets, and how much investment value remains in Pop Mart today. Stay tuned.

Dolphin Investment Research historical articles can be traced back to:

“Pop Mart: Pinduoduo Going Overseas ‘Too Low’? Going Out with ‘Style’ is Truly Cool!”

“Pop Mart: Endless Internal Competition in China, Is Overseas the Salvation?”

“The Overseas Market is Pop Mart's New ‘Sweetheart’ (Conference Call Summary)”

The risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure