Pop Mart (2): Explosive Growth Overseas, This "Bubble" Can't Be Burst

In the previous article, Dolphin Jun focused on the comeback soul weapon—diversified monetization of IP, which is still an ongoing story. This article will focus on another lever that has emerged—overseas markets, discussing the following questions:

How did Pop Mart achieve reckless growth overseas?
How many more Pop Marts can be recreated overseas?
After five times in half a year, is Pop Mart "expensive"? $POP MART(09992.HK)

Here are the details:

1. Reckless Growth Overseas, How Did Pop Mart Achieve It?

Pop Mart opened its first overseas store (in Seoul, South Korea in September 2020), and after delays due to the pandemic, it only began to expand overseas rapidly in 2022. By 2024, it has fully exploded in just two years.

If anyone is still unaware of Pop Mart's explosive overseas growth, the following set of numbers can provide a deep insight: a. By the first half of this year, it contributed 30% of Pop Mart's overall revenue with 83 overseas stores (which is only 20% of its domestic stores); the proportion in the second half will definitely exceed 40%, while most IP companies have a stable overseas market share of around 30-40%.

b. In the third quarter, overseas revenue increased by over 440% year-on-year, while domestic growth, even at 60%, pales in comparison; moreover, with high pricing in overseas business, the gross profit margin has reached as high as 70%.

The question is, how did it achieve this? Current explanations in the market usually attribute it to product and operational localization:

a. Product: Localized products, overseas co-branded items, overseas limited editions

b. Operations: Offline and online influencers & KOLs forming brand promotion and grass-planting matrices; offline exhibitions for core audience dissemination; pop-up stores + robot stores for trial runs;

c. Market Layout: Priority regions - focusing on China and expanding outward in the East Asian cultural sphere; Priority cities - opinion cities (trendy cities) in the selected countries.

Source: Pop Mart WeChat Official Account, Dolphin Research

In the view of Dolphin, these strategies are indeed important, but for a company engaged in overseas business, the so-called localization mentioned above can only be considered basic operations. Even the operations and market layout are essentially copied from the domestic standard SOP processes. These operations are quite familiar to Pop Mart, a leading all-channel IP manufacturer in China, representing a capability transfer overseas.

Especially when we look at the results, apart from some external IPs that have their own storylines, the best-selling products in most of Pop Mart's overseas markets are not significantly different from those in the Chinese market—Molly, Skull Panda, Dimoo, and Hirono.

Among the overseas designers signed by Pop Mart for its international expansion, only two products have gained some recognition—CRY BABY created by Thai designer Molly, and Peach Riot by American designer Libby Frame.

These two products, aside from Peach Riot having a bit of "Western style," still follow the cute aesthetic of CRY BABY, showing no strong local characteristics, and are still popular in China.

Conversely, looking at the currently best-selling top IPs—Molly, SKULL Panda, Labubu, DIMOO, and HIRONO—there are no obvious national characteristics in their basic elementsFor example, character-type IP—Molly Classic is a blonde, blue-eyed little girl, while Skull Panda usually has purple eyes; and the naming itself does not reveal their "origin," except for Xiao Ye, which has a slightly Japanese style, while the others are basically all named in English.

Tracing back, it may be because the founders of these IPs are mostly designers from Hong Kong, who are originally in a place where Eastern and Western cultures and languages blend. This, to some extent, also leads to their designed IP library not needing major adjustments or new IPs that fit the local image; they only need to create new series that comply with local cultural norms, as these IPs are inherently "internationalized" in design and naming, completely reusing design capacity.

The next question, however, is actually more tricky: without a clear storyline of Chinese culture (lacking its own Eastern cultural characteristics), why would so many people be willing to pay for an IP image created out of thin air?

This is probably a common doubt many had at the beginning regarding how Pop Mart could succeed overseas—Western IPs gain global recognition, generally supported by movies or animations.

In comparison, Chinese IPs are about Journey to the West, Three Kingdoms, and they need to carry strong cultural connotations to go overseas. What qualifies an IP lacking a storyline and worldview to enter the overseas market? After reviewing several industry studies, Dolphin Jun feels that we shouldn't complicate simple issues.

a. Southeast Asia is the Chinese trendy toy market from 2017-2019.

Unlike the complete IP production and operation chains of Marvel, Disney, One Piece, Dragon Ball, etc. in Europe, America, and Japan, Southeast Asia's IP consumption has just awakened, with little IP accumulation of its own, and a higher acceptance and tolerance for foreign cultures, making it easier to form a "celebrity effect" to chase after, representing an underdeveloped blue ocean IP market.

b. Advantages of the industrial chain in Chinese manufacturing: The penetration rate of Western IPs is insufficient, while Japanese and Korean IP players either cannot compete on price or cannot match the speed of supply chain response (new launches, supply).

c. Recognition of Chinese goods and culture in Southeast Asia: After years of cultural exchange (Chinese dramas going abroad) and Chinese goods going overseas, the Southeast Asian region not only has a large Chinese population but also does not reject the "Made in China" label and the negative impressions that come with it.

d. Pop Mart's ability to quickly replicate IP operations overseas.

A very simple example, in a survey, the manager of a Pop Mart store in the U.S. stated that store staff do not need to spend a lot of effort explaining Molly, Skull Panda, etc. to incoming customers, as these users already have an understanding of these IPs' basic characteristics and personalities through social media like YouTube and TikTok.

In summary, the Southeast Asian IP blue ocean market + Made in China + Hong Kong design + Pop Mart's fully self-operated industrial chain + standardized explosive product creation strategy have allowed Pop Mart to quickly become a phenomenal consumer symbol in markets like Southeast Asia**

3. How many Pop Mart can be recreated overseas?

After the rapid growth overseas, the key question now is how many Pop Mart can be recreated in the overseas market, including how many Pop Mart can be recreated in terms of business value and investment value.

Firstly, since the entire market is still in a relatively blue ocean stage, it is quite difficult to accurately answer these questions. Currently, Dolphin Jun sees various metrics in the market, from per capita GDP to the estimated market space for trendy toys and per capita blind box consumption. Overall, while the methods are correct, the conclusions are hard to determine due to the numerous and significant variables involved in the estimation process.

However, if we refer to the overseas revenue proportions of several licensed IP companies, we find obvious issues. Whether it is Sanrio, Bandai Namco, or Funko, these companies generally have overseas revenue proportions that do not exceed 30%, and even Disney's overseas business proportion is only around 30%.

But Pop Mart, which operates the entire industry chain, has already far surpassed these licensed IP business model companies, and Pop Mart is still in the early stages of opening stores.

In terms of international benchmarking, we select the Danish toy company LEGO, which also promotes its business through a store (only franchise sharing) model. Both belong to the trendy toy category, and their main business model is offline retail store openings, with gross and net profit margins similar to Pop Mart, around 60% and 20%, respectively, and the company is already fully mature.

From the perspective of business expansion, LEGO: a. North America and Europe are the fundamentals; b. Asia, especially China, is in the expansion phase. Although LEGO's business in China has not been prosperous in recent years, the company remains optimistic about the future and continues to open stores.

By the end of 2023, LEGO had a total of 1,031 retail stores worldwide. Among them, there are over 500 stores in China, slightly higher than Pop Mart's offline store count of less than 400.

As for the revenue structure, from the perspective of Denmark itself, it is entirely an international company; if we consider the Americas as its base, LEGO has achieved 53% of its revenue from non-American regions, still maintaining a very high level of internationalization.

Referring to the awakening period of the Chinese trendy toy market, which is from 2017 to 2022, the number of new Pop Mart store openings peaked at 50-100 new stores (and this was during a period of rapid online store expansion);Combining with market research information from peers:

"The Southeast Asian single market has the potential to open over 500 stores, but the current pace is slow, mainly because the company operates under a self-operated store model, negotiating store leasing conditions independently in each market rather than through local franchisees. Of course, with this number of stores, the sales volume may turn to negative growth."

Currently, the Southeast Asian market is likely in a positioning phase, and subsequent Trendy toy collection store may enter one after another. Dolphin Jun has made a rapid store opening forecast for 2025 and 2026. However, considering that the actual site selection for Bubble Mart's self-operated stores is relatively strict, under a relatively conservative assumption, Bubble Mart's steady-state overseas stores are close to 400.

As for the single-store revenue, the single-store revenue of 25 million this second half of the year (over 4 million monthly total) is related to the insufficient number of store setups. In this case, Dolphin Jun assumes that the actual single-store revenue in 2025 will decline by about 10% compared to this second half of the year, and then the single-store revenue will only increase by 3% each year, with single-store sales slightly lower than LEGO (annual single-store income 4900 vs 5600), meaning growth relies solely on store openings, and single-store sales do not drive growth (compared to the stable state of domestic store openings, where single-store sales can still maintain a stable annualized growth of over 5%, more related to the product category lifecycle). Overall, the assumption for the overseas market is neutral to slightly conservative.

Ultimately, we can roughly obtain a set of key data: if based on 2025, the company can still achieve a compound growth rate of over 20% in the next three years, with overseas growth reaching over 30%, and domestic growth at a steady state of 10-15%. Moreover, due to the higher profit margin of overseas business, it drives a higher profit contribution from Bubble Mart's overseas business compared to revenue contribution.

In terms of valuation calculation, Dolphin Jun used two methods, PE + SOTP and DCF, to verify the calculations. Under the DCF valuation, with a 3% perpetual growth rate and a 13% WACC, Bubble Mart's valuation is approximately HKD. The valuations in both cases basically verify each other, considering the uncertainty of the IP product cycle, a relatively high requirement for WACC is given under DCF discounting

From the perspective of SOTP, Dolphin Jun assigns a PE multiple based on the performance benchmarks of 2025, combined with the compound profit growth over the next two to three years. In this case, the reasonable valuation is approximately **** HKD, corresponding to a per-share value of *** HKD.

At the same time, from the perspective of peer comparison among listed companies, for a Pop Mart that is still in the process of reshaping its growth curve overseas, this valuation is not outrageous.

At this point, Dolphin Jun can clearly answer the question mentioned at the beginning: how many Pop Mart-like companies can be recreated in the overseas market? From the perspective of market capitalization creation, under the Davis double-click, the overseas market may recreate three to four Pop Marts.

Summary: The Davis double-click opportunity brought by overseas recreation

The opportunity for a double-click in valuation and performance brought by overseas recreation is not uncommon among many consumer brands overseas, such as the energy drink Monsters, and even including Coca-Cola.

However, there are very few successful cases of high-margin branded consumer products going overseas (excluding products with average gross margins and manufacturing attributes). Pop Mart's "Ready to go" full industry chain asset reserve, along with a more immediate self-operated store opening model, is more efficient compared to traditional channel models that require local cooperation to enter supermarkets, convenience stores, and mom-and-pop shops.

The market does have doubts about the sustainability of the explosion: what is the lifecycle of old IPs? This question was actually studied by Dolphin Jun when the company went public. Throughout the process, the company has repeatedly proven its IP development and operational capabilities with strong operational abilities, significantly reducing the risk of this issue.

Next, Dolphin Jun will wait for more Davis double-click opportunities for Chinese consumer products going overseas, driven by strong supply chains and self-operated stores.

In the future, Dolphin Jun will also explore more overseas consumer brands, studying how century-old consumer products can cross borders and transcend cycles, starting with the century-old brand—Coca-Cola. Stay tuned.

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