Labubu's price drop, POP MART plunges! Morgan Stanley: Market concerns are excessive

Recently, the decline in resale prices of the popular toy Labubu has raised market concerns. From December 23 to 27, POP MART's stock fell about 9% over three trading days, and today, POP MART's Hong Kong stock price dropped over 6% again. However, Morgan Stanley believes that the market's concerns about the decline in resale prices are excessive, and proactive restocking and global expansion will help the company's performance continue to grow significantly next year.

In a report on January 5, Morgan Stanley pointed out that this round of volatility was mainly caused by market concerns over the declining resale prices of Labubu plush toys in the Chinese market, as well as profit-taking behavior at the end of the year, and that the market's reaction to the decline in resale prices has been overly sensitive.

Morgan Stanley's latest analysis indicates that the decline in resale prices is driven by an increase in supply, rather than a decrease in demand. The company's recent restocking strategy may drive sales growth in the fourth quarter of 2024 (4Q24) and the first half of 2025 (1H25), while reducing resale activities, thereby improving consumer experience.

Furthermore, Morgan Stanley stated that global expansion has prolonged popularity, and the IP product flywheel effect remains intact. It is expected that POP MART will achieve a 35% sales growth in 2025, realizing the fastest sales growth among large consumer brands. As overseas sales and revenue mix may exceed 50% in 2025, its valuation premium is reasonable, and the target price has been raised to HKD 113, indicating a 27% upside from the current stock price.

The market is overly concerned about the decline in resale prices

It is worth mentioning that due to the popularity of POP MART's IP, many scalpers have been hoarding scarce products, causing some consumers to pay a premium to purchase, which undermines the experience of loyal fans, while there may be counterfeit products in the resale market.

POP MART's strategy has always been to try to meet 70-80% of the "actual demand" for its most popular products, and IP products require a "slight shortage" to maintain the growth of popularity. However, months of severe shortages made management realize that supply was far below ideal levels, so the company began to restock more aggressively since the end of October. The increase in supply has led to a decline in the prices of Labubu plush toys in the resale market, and now resellers are eager to clear inventory, with resale prices approaching the original listing prices.

Morgan Stanley believes that the market is overly concerned about the decline in resale prices:

1. Supply increase rather than demand decrease: The decline in resale prices of Labubu plush toys is mainly due to an increase in supply, rather than a decrease in demand.
2. Consumer preference: Consumers prefer to purchase directly through official channels rather than from resellers.
3. Product attributes: These products are "non-limited editions," so resale prices should not have a significant premium, unlike high-end liquor.

Morgan Stanley believes that POP MART's measures may bring the following benefits:

Sales growth in the fourth quarter of 2024 may exceed the model's predicted year-on-year growth rate of 120-125%, suppressing future hoarding behavior by resellers and reducing inventory backlog risks. In addition, to prevent oversupply, POP MART has thoughtfully considered inventory management and uses online indicators to monitor supply and demand balance. For example, the sales speed after product restocking and the trend of customer pre-orders.

Currently popular IP (intellectual property) products are still in short supply, such as Labubu, Skullpanda, Crybaby, etc. Morgan Stanley believes that the demand for POP MART's top IP products still far exceeds supply. Furthermore, POP MART's international market accounts for about 50% of total sales, which means that the trends in China should not be overly extrapolated to the overall performance.

Strong Sales Growth Expected Next Year

Morgan Stanley believes that POP MART will achieve the fastest sales growth, predicting a 35% sales increase by 2025, with China growing by 12% and overseas by 69%. The main growth drivers include:

1. Global expansion remains a key driver of growth, with international sales expected to account for over 50% of total revenue by 2025. Continued global expansion, especially in Southeast Asia and the U.S. market.

Southeast Asia: By the end of 2024, there will be 10-12 stores in Southeast Asia (excluding Singapore), expected to increase to about 20 stores by 2025, with store productivity remaining high. U.S.: The number of stores in the U.S. will be 20 in 2024, expected to increase to over 40 by 2025. Store productivity in the U.S. market will increase from RMB 2 million per store in 2023 to RMB 2.5-3 million per store by the third quarter of 2024.

1. Popular products will continue to be restocked in the first half of 2025.

2. Strategic delays in some product launches for 2024 to make way for the Labubu series, with Skullpanda, Crybaby, Twinkle Twinkle, and Chaka potentially bringing positive surprises.

3. The pace of launching new categories (such as Pop Blocks, cake shops, jewelry, trading cards) will slow down to ensure that the quality of new products exceeds consumer expectations.

Overall, Morgan Stanley believes that POP MART, with its global expansion, IP ecosystem, and proactive inventory management, is expected to become one of the fastest-growing companies in the consumer goods industry. Morgan Stanley forecasts that POP MART's net profit will reach RMB 4.091 billion in 2025, a 37.4% increase from 2024. Earnings per share (EPS) are expected to be RMB 3.06, corresponding to a price-to-earnings (P/E) ratio of 29.9 times. The target price is HKD 113, indicating a 27% upside potential from the current stock price of HKD 88.4