Another successful case of going global? Morgan Stanley: Pop Mart is expected to enter the "fast lane" within 1-2 years

The 2023 financial report of Pop Mart has just been released, with overseas market revenue exceeding 1 billion particularly eye-catching - tapping into the over 30 billion trendy market, how far away is it from "recreating" another Pop Mart?

On March 25th, Morgan Stanley analyst team led by Dustin Wei released the latest research report, raising the target price for Pop Mart by the end of 2024 from HKD 32 to HKD 38, indicating a 35% upside potential from the current stock price; it is expected that sales and profits for the 2024 fiscal year will increase by 31% and 32% respectively, based on an expected P/E ratio of 30 times in 2024 (previously 28 times).

Morgan Stanley believes that with continued overseas expansion and new business initiatives, Pop Mart's stock price is expected to experience a second rebound after a recent uptrend, and profit growth is expected to enter the fast lane in the next 1-2 years.

Strong Domestic Profit, Overseas Potential to "Recreate" Another Pop Mart

With Pop Mart continuously expanding overseas stores and increasing revenue from new businesses, Morgan Stanley is optimistic about the mid-term profit growth of Pop Mart, expecting its operating profit margin to further improve under economies of scale and the DTC (direct-to-consumer) business model.

Considering that the sales and net profit growth rates for the 2023 fiscal year exceeded expectations, Morgan Stanley expects the company's revenue to continue to exceed expectations this year, reaching over 30% year-on-year.

We expect that Pop Mart's sales in 2024 will increase by 31%, with the Chinese market growing by 16% and the overseas market surging by 102%. The overseas market share will increase from 17% in 2023 to 26%-32% in 2024-2025.

For the following reasons, we have raised our overall sales expectations for 2024 by 5% and adjusted our net profit expectations by 11%: 1) The better-than-expected sales momentum in overseas markets will increase gross profit margin (GPM); 2) The company will replace existing third-party products with high-profit proprietary accessories, further enhancing GPM; 3) The company will continue to reduce promotional activities and optimize the supply chain.

According to Morgan Stanley's forecast, by 2024, Pop Mart's overseas market revenue will increase from 1.066 billion to 2.153 billion, achieving the goal mentioned by Chairman Wang Ning of "recreating" another Pop Mart overseas.

Strong Growth Momentum, IP Business Continues to Strengthen

The report points out that Pop Mart's product pricing is relatively fair, benefiting from the "lipstick economy" effect, and the company is expected to maintain strong profitability in 2024.

Morgan Stanley has raised Pop Mart's target price from HKD 32 to HKD 38, with a P/E ratio of 30 times, and believes that this valuation is reasonable.

We believe that this is not high for a rapidly growing high-quality diversified consumer goods company, which is maintaining good profitability while expanding rapidly.

In a bull market scenario, it is expected that Pop Mart will achieve a growth rate of over 30% during the period 2024-2024, the external environment will improve, and overseas expansion and product diversification will be more successful.

In terms of business, Morgan Stanley believes that the IP-centered business model of Pop Mart has strong driving force in creating a new TAM (Total Addressable Market), which will bring greater market size and a longer development path for the company.

Currently, Pop Mart is trying to establish a gaming business and is expected to launch a social simulation game in the first half of this year. The report points out that this game can be used to test the market preference for new IPs, may bring in some revenue from in-game purchases, and enhance the company's IP value, with expected initial performance.

The report indicates that the financial contribution of POP Land city theme park is limited, however, with the company's continued investment in tourism services, construction, catering services, and performing arts, revenue channels are expected to expand.

Morgan Stanley concludes in the report that while Pop Mart's path to transform from a blind box manufacturer to an entertainment giant similar to Lego, Bandai, and Disney is still long, the company has always focused on strategic initiatives when facing macro challenges, and the overall outlook is optimistic