"Chinese version of Lego" BLOKS has no price increase freedom

Recently, the second time that BLOKS submitted its application in Hong Kong completed a "life-changing" event.

It was initially regarded as the "Chinese version of Lego," starting off splendidly. Founder Zhu Weisong was once a partner at Youzu Interactive, and after achieving financial freedom, he founded BLOKS in 2014, securing 857 million yuan in angel funding. However, it wasn't until 2022 that it embraced IP partnerships and began selling building blocks featuring Ultraman and Transformers, which improved its financial data and allowed it to turn a profit by the end of 2023.

This made it seem more like Pop Mart. From blind boxes and IP to performance growth trends, the two companies share many similarities.

However, BLOKS has its own troubles.

In the IP business, it chose to collaborate with well-known IPs, going from launching its first Ultraman blind box to achieving 1 billion yuan in revenue within just two and a half years—by comparison, Pop Mart took five years from selling its first blind box, Sonny Angel, to reaching 1 billion yuan in revenue in half a year.

It seems that BLOKS took a shortcut, but it sacrificed its gross margin for this. During the same period of achieving 1 billion yuan in semi-annual revenue for the first time, BLOKS had a gross margin of 52.9% in the first half of 2024, while Pop Mart's gross margin in the second half of 2019 had already reached 66.64%, remaining high at 64.0% in the first half of 2024.

From multiple dimensions, this "life-changing" event is still incomplete.

BLOKS is now often compared to Pop Mart.

On December 6, 2024, just two days before BLOKS submitted its prospectus, many gray-haired elderly people rushed to buy BLOKS' limited edition pink Optimus Prime at the 2024 Transformers Cybertron (a planet name in "Transformers") annual meeting. Some netizens complained: it was originally one per person, limited to 400, and even the runner they hired for 150 yuan couldn't outcompete the elderly on-site.

Each generation has its own eggs, and the previous generation comes to snatch the current generation's eggs, possibly due to scalpers. Several netizens claiming to be on-site complained: the elderly bought them and immediately resold them to scalpers, who had many BLOKS bags on hand.

The profits for scalpers are likely substantial. Just two days before the launch event, players on Xianyu had already listed links for BLOKS' pink Optimus Prime, originally priced at 99 yuan, now marked at 550 yuan. By the end of the launch event, the price had risen to 650 yuan, akin to a stock "limit up."

Similar situations have also occurred with Pop Mart. Back in 2019, Pop Mart's Pan God Christmas hidden version, originally priced at 59 yuan, was scalped to a high price of 2,350 yuan, soaring 39 times. Now, a BLOKS large hidden version, Eternal Shining Trixie, has been scalped to 5,555 yuan, while a small hidden version, Galaxy Rising, originally priced at 39 yuan, has been resold for 1,180 yuan, a 30-fold increase.

This may be a scenario that Zhu Weisong never envisioned when he founded Grape Technology (the predecessor of BLOKS) in 2014.

As a father, Zhu Weisong became interested in Lego toys while selecting gifts for his child, which led BLOKS to initially benchmark against Lego and improve upon it: focusing on children aged 1-6, with larger pieces and rounder curvesZhu Weisong had already achieved financial freedom at that time, having appeared on the "2016 Hurun Report's List of Self-Made Billionaires Under 40" with a net worth of 2.6 billion yuan. He also had strong connections in the investment circle, and BLOKS secured 857 million yuan in its angel round.

BLOKS grew rapidly, achieving the highest sales growth in the building block sector for three consecutive years from 2018 to 2020, with revenue from the building block segment reaching 330 million yuan in 2021. However, behind this high growth were significant advertising expenses and promotional activities, with BLOKS's total revenue in 2021 not even covering the 390 million yuan spent on sales and distribution.

The "turnaround" began in 2022.

Trendy toys represented by blind boxes became popular. From 2017 to 2021, Pop Mart grew from 158 million yuan in annual revenue to 4.491 billion yuan, more than a 20-fold increase, becoming synonymous with high growth. Miniso established TOPTOY for trendy toys, and even Starbucks, Want Want, and Morning Glory ventured into co-branded blind boxes. Blind boxes directly replaced building models (the market where LEGO and BLOKS compete), becoming the largest segment in China's trendy toy market.

BLOKS also initiated a transformation in 2022.

It expanded its target audience beyond the previous age range of 1-6 years, gradually releasing blind boxes and figurines featuring IPs such as Ultraman, Transformers, and Heroes Infinite. Unlike the common 4.5 cm and 15 cm figures on the market, BLOKS pioneered a 10 cm size that is easy to hold, with 14 points of articulation and glowing eyes, better replicating the character details of the IPs.

At the same time, it increased its efforts in offline channels, including brands like Miniso, Morning Glory's Jiumu Miscellaneous Store, and Cool Trendy Toys, as well as stationery stores near campuses.

At the beginning of 2021, BLOKS had only 40 distributors nationwide. However, as of June 30, 2024, it had covered approximately 150,000 offline outlets, including all first- and second-tier cities and over 80% of third-tier cities. In the first half of 2024, the revenue contribution from BLOKS's online channels dropped from 51.8% in 2022 to 7.1%, while the revenue from distributor offline channels skyrocketed to 91.6%.

These adjustments in strategy essentially announced that BLOKS no longer wanted to continue being the "Chinese version of LEGO."

After shedding this identity "burden," BLOKS seemed to have entered an acceleration mode.

It even grew faster than Pop Mart.

From the release of its first Ultraman blind box in 2022 to achieving 1 billion yuan in revenue in the first half of 2024, BLOKS took only two and a half years. In comparison, Pop Mart began distributing its first blind box, Sonny Angel, in 2014 and reached over 1 billion yuan in semi-annual revenue by the end of 2019, taking five years.

Of course, BLOKS' "speed" also owes a lot to Pop Mart. The latter has taken on the role of market education. In 2022, the year of BLOKS' transformation, unboxing blind boxes has become a trend among young people, and it has also tasted the benefits of "those who plant trees benefit later."

Both are business models that combine IP and blind boxes, but BLOKS and Pop Mart still have differences.

The key lies in the type of IP.

Currently, BLOKS has authorized over 50 IPs, including Ultraman, Transformers, Naruto, Minions, Detective Conan, Hello Kitty, and more. Many of these top IPs have sufficient recognition; even if consumers have never purchased a blind box, they will know that Ultraman protects the Earth and that Optimus Prime and Megatron went from friends to deadly enemies.

BLOKS' own IP, Hero Unlimited, includes characters like Yang Jian, who splits mountains to save his mother, Nezha, who strips the tendons from dragons, and Sun Wukong, who causes chaos in Heaven. Consumers are very familiar with the stories and characters behind the IP, allowing for quick consensus and consumption.

This is reflected in the data.

In the first quarter of 2022, BLOKS launched the first series of Ultraman Star blind boxes, priced at 39 yuan, and sales exceeded 140,000 units in the first quarter after release. That year, the Ultraman IP contributed over 100 million in revenue to BLOKS, surpassing 500 million the following year. By the first half of 2024, this figure had climbed to 600 million. During the same period, the two major IPs, Ultraman and Transformers, provided 76.1% of BLOKS' revenue.

Pop Mart also has blind box products with authorized IPs like Ultraman and Transformers, but they are not mainstream.

It follows a path similar to IP selection. From Molly, The Monsters, Skullpanda, to Dimoo, these artist IPs only entered the public eye and gained consumer popularity after collaborating with Pop Mart.

In the first half of 2024, the eight IPs of Molly, The Monster, Skullpanda, Dimoo, Crybaby, Hirono, Zsiga, and Hacipupu contributed 782 million, 627 million, 575 million, 378 million, 349 million, 245 million, 123 million, and 95 million in revenue, respectively, accounting for 17.2%, 13.7%, 12.6%, 8.3%, 7.7%, 5.4%, 2.7%, and 2.1% of Pop Mart's revenue during the same period, totaling 69.7%.

It is not difficult to see: whether in terms of the revenue amount contributed by IPs or the proportion of revenue, the values are extremely balanced. Pop Mart does not rely on a single IP like BLOKSHowever, most of these artist IPs only have images and lack well-known, dramatic stories—this itself has an element of opening blind boxes for Pop Mart.

Transforming niche artworks into star IPs is highly uncertain. Its difficulty is comparable to Lehua Entertainment finding another Wang Yibo or Jiaxing Entertainment cultivating another Yang Mi. The costs incurred by Pop Mart are extremely high—year after year, it spends nearly 1/4 of its revenue on distribution and sales expenses.

Of course, the returns from a "winning bet" are also considerable. For example, in Pop Mart's overseas business, the hit product Labubu is an important contributor, directly driving Pop Mart's revenue from Hong Kong, Macau, Taiwan, and overseas operations from 376 million yuan in the first half of 2023 to 1.35 billion yuan in the first half of 2024, more than tripling.

Relying on the uniqueness of these artist IPs, Pop Mart has established a moat, thus laying the foundation for entering broader markets.

This is the imagination that BLOKS currently lacks.

It actively avoids the risks associated with "blind boxes," choosing to pay for certain costs, purchase certain IPs, and earn certain profits.

This allows it to achieve rapid revenue growth while controlling sales costs. In 2021, BLOKS, which sells building blocks, had distribution and sales expenses as high as 389 million yuan, exceeding the revenue of 330 million yuan during the same period. By the first half of 2024, BLOKS, which sells blind boxes, has reduced this cost to 120 million yuan, accounting for only 11.54% of the revenue during the same period (1.046 billion yuan).

By the end of 2023, this nine-year-old company finally turned a profit, at the cost of reduced uniqueness. Building production lines and purchasing major IP licenses has inherent replicability, which poses risks for BLOKS's future development.

Moreover, the difficulty of obtaining major IP licenses is not low.

The prospectus shows that the proportion of IP licensing fees in BLOKS's costs has been increasing year by year, rising from 7.3% in 2022 to 18.5% in the first half of 2024.

BLOKS has not publicly complained about IP licensors, but Ye Guofu, who also sought the Harry Potter IP license, once mentioned: Top-tier IPs like Harry Potter have very high requirements for partners, and after years of evaluation, they only decided to cooperate with us in 2024.

A common business understanding is that the licensing of well-known IPs is extremely strict.

According to the prospectus, BLOKS obtained the Transformers license from Hasbro, allowing it to sell Transformers building block blind boxes and figurines. However, customer service at BLOKS's Tmall flagship store indicated that the Transformers IP products sold in their store currently cannot transform—this suggests that BLOKS may not have obtained the transformation license for that IP.

Additionally, although BLOKS recently acquired popular IPs like Pokémon, these IP licenses are for a relatively short duration, with licenses for Naruto, Marvel: Infinite Legends, Spider-Man and His Amazing Friends, Pokémon, Kamen Rider, and Super Sentai expiring in 2025. If we deduct the time for design and production, the time left for BLOKS to sell is extremely limitedIn addition, competition around popular IPs tends to be more intense. The Ultraman IP that BLOKS relies on has authorized partners including Lingdong Chuangxiang, Wanda Nangu Dream, Miniso, TOP TOY, Bandai, and others.

This brings another headache for BLOKS: it can only compete on price.

From the perspective of product pricing, BLOKS has clearly embraced consumption downgrade.

In 2021, BLOKS' average selling price (revenue/sales during the same period, referring to the average price sold to distributors and other customers) reached 89 yuan, but during the first half of 2024, this figure has dropped to 19 yuan. Additionally, it launched a 5.5 cm tall Transformers Starry version priced at 9.9 yuan in November 2024, which may further lower the average selling price.

Similarly, for the Transformers IP authorization, Bandai's product prices are generally in the three-digit range. BLOKS' low-price strategy is akin to Uniqlo's initial launch of fleece.

Low pricing is a path that BLOKS has to take. From IP authorization, blind box formats to sales channels, it lacks sufficient uniqueness.

In other words, it lacks the foundation for premium pricing.

In contrast, Pop Mart is undergoing a brand upgrade.

In terms of products, Pop Mart has successively launched new items made of ceramic-like paint, temperature-sensitive color-changing paint, PVC, and resin figures, raising the product unit price. For example, a PVC figure launched in October 2023 is priced at 499 yuan, significantly higher than the ordinary figure priced at 399 yuan. The high-end line Mega launched in 2021 has a 1000% series priced as high as 5999 yuan.

In terms of store locations, Pop Mart prefers to open stores in malls crowded with luxury brands on the F1 level and well-known streets. According to data from YingShang as of July 2024, 70% of Pop Mart's domestic stores are located on the F1 level of shopping centers where luxury brands are concentrated.

In overseas markets, Pop Mart has even opened stores in the core area of Oxford Street and near the Louvre in France. These actions can enhance the brand's sense of high-end.

It is not difficult to see the comparison: from building blocks to blind boxes, "quickly becoming" Pop Mart, BLOKS has only completed the first step of "changing its fate." It has achieved more impressive sales data and a broader market, thus laying the foundation for a public listing.

However, this is not a one-time solution. It still has many specific concerns:

How to improve gross margin? In the first half of 2024, BLOKS' gross margin was 52.9%, which still has a significant gap compared to Pop Mart's 64% during the same period;

Where is the next "Ultraman"? A listed company is not like a singer who can sing only one song for a lifetime. Currently, the Ultraman IP authorization that BLOKS has obtained is valid until 2027, and the situation after expiration remains highly uncertain.

To some extent, BLOKS has original aspirations. When making a Chinese version of Lego, it would improve products based on the actual needs of young children in China. After transitioning to blind boxes, it also launched a national trend series, attempting to convey Eastern aesthetics. But ultimately, between the moon and sixpence, it chose the latterThe "money tree" Ultraman has determined its direction. Another factor driving its acceleration may be the investors. It raised 1.8 billion yuan in three rounds of financing before going public. According to the betting agreement, it needs to complete its IPO by June 30, 2026.

The ideal scenario might be: after completing the phased task of going public, BLOKS can continue to take the second step in "changing its fate."

This is a path that Pop Mart once took.

It was once just an offline toy store in Beijing, but after finding the business model of blind boxes, it rapidly rose to prominence, going public in December 2020 and completing the first step of "changing its fate." Three years later, founder Wang Ning proposed to "recreate a Pop Mart overseas," and the overseas market, which was laid out in advance, surged forward, ultimately achieving this goal a few months ahead of schedule in 2024. Excellent overseas performance helped Wang Ning make the Forbes Best CEO list in 2024, and Pop Mart also completed the second step of "changing its fate."

Whether it can continue to become a Pop Mart? This may determine the capital market's attitude towards BLOKS