POP MART (9992. HK) 23Q3 Review: Domestic Sales Recovering Steadily, Online Channels Expands Significantly

On October 24,  POP MART (9992. HK) released its Q3 2023 operating data report. The company's overall revenue for the third quarter of 2023 increased by 35%-40% year-on-year from the same period last year; by region, the company's revenue for the third quarter of 2023 increased by 25%-30% year-on-year in mainland China; and revenue for Hong Kong, Macao, Taiwan and overseas regions increased by 120%-125% year-on-year.

By channel in mainland China, offline retail stores grew 35%-40% year-on-year, and offline robot stores grew 45%-50% year-on-year; Pop Mart drawers declined 10%-15% year-on-year; e-commerce platforms and other online channels grew 20%-25% year-on-year, with Douyin's flagship store growing 875%-880% year-on-year, and Tmall's flagship store declining 20%-25% year-on-year; Wholesale and other channels grew 50%-55% year-on-year.

The company's mainland China revenue grew 35% -40 % year-on-year in the third quarter of 2023. Regarding product supply, quality products continued to be upgraded in the third quarter, with 10/11/12 blind box products and 1/1/3 MEGA collector's series released in July, August, and September respectively. In terms of the macro environment, demand is picking up and retail sales of consumer goods are recovering steadily. According to the National Bureau of Statistics, the total social retail in September grew 5.5% year-on-year, accelerated by 0.9 pct compared with August, realizing the growth rate accelerated for 2 consecutive months; social retail in January-September increased by 6.8% year-on-year compared with last year. Offline steady recovery, online Douyin channel expansion effect is remarkable to drive the overall improvement of online. According to the company's announcement, Pop Mart's offline retail stores grew 35-40% year-on-year in the third quarter of 2023, box drawers declined 10%-15% year-on-year, the Tmall flagship store fell 20-25% year-on-year, and the Douyin flagship store grew 875%-880% year-on-year. In our view, in terms of online channels, as the fourth quarter enters the nodes of big promotions and events, Double Eleven, Christmas, etc., it is expected to further boost the online channel revenue in mainland China. from October 24 onwards, the new blind box products, such as DIMOO WORLD and POPMART NIGHT 13th Anniversary Series, will be put on sale in the flagship store of Tmall. At the same time, it will be used for pulling in users through the setting up of playing games such as sharing of exclusive benefits. Douyin flagship store set up different full-reduced giveaways in time slots during the Double Eleven Goodies Festival to stimulate users to increase the amount of a single purchase.

The company's revenue from Hong Kong, Macau, Taiwan, and overseas regions grew 120%-125% year-on-year in Q3 2023, maintaining high growth. According to the company's previous forecast, the overseas business will be around 1 billion yuan in 2023 and is expected to exceed the entire group's 2019 pre-IPO revenue (i.e. 1.68 billion yuan) in 2024. According to our statistics (official social media account, please refer to the company's caliber), as of the end of September 2023, Hong Kong, Macao, Taiwan, and overseas totaled 68 retail stores (including joint ventures) and 150 robotic stores (including joint ventures and franchises.) In July, Hong Kong, China, Taiwan, and Australia added 1/2/1/2 offline retail stores, and the UK added 1 robotic store, respectively; and in August, Japan, Australia, In August, Japan, Australia and New Zealand added 1/2/1 robot store respectively; in September, Thailand, Macau, China, Taiwan, the United States, France and Australia added 1/2/3/1/1/1 offline stores respectively, and Thailand and Australia added 1 robot store respectively. We believe that Q4 enters the peak season of overseas sales, which is expected to further boost overseas performance growth.

On the basis of deep cultivation of head IPs, the Company has continued to broaden IP cash flow channels, with the official opening of "Pop Mart City Park" in Beijing Chaoyang Park on September 26, which received tens of thousands of visitors during the National Day holiday. The company has continued to invest in the IP to make it deeper and thicker, providing consumers with more opportunities to interact with the IP image offline and establish deeper emotional links. We believe that as the company's other new businesses such as games are coming on stream, the channels for IP realization will be further broadened, and we are optimistic about the company's IP operation capability and realization potential in the long run.

Short-term important node activities catalyzed superimposed on new products continue to power, the company's domestic and overseas business recovery to release performance, we predict that Pop Mart 2023-2025 revenues of 6.45/86.9/10.80 billion yuan, an increase of 39.7%/35.0%/24.2% year-on-year; adjusted net profit in 2023-2025 (Non-IFRS), respectively, of 1.18/16.6/20.7 billion yuan, up 117%/40%/25% year-on-year. In the long run, further broadening of IP realization channels is expected to contribute incremental performance, and we are optimistic about the company's IP operation capability and realization potential in the long run. We believe that the landing of the company's parks, games, and other projects, is expected to bring the company's value revaluation, so give 34x PE in 2023, a target price of HKD 32, and maintain the "buy" rating.

Risk of intensified competition in the industry; IP performance is less than expected; park performance is less than expected at the early stage of opening.