Pop Mart International Group Limited (“Pop Mart”) (HKG:9992) is the largest and fastest-growing pop toy company in China. Shares of the Chinese toymaker more than doubled on its trading debut on the Hong Kong stock exchange on 11 December 2020 marking another eye-catching initial public offering (IPO).  If you are looking at Pop Mart with interest, here are 10 things to know before you invest.  

1. China’s pop toy retailing market 

China’s pop toy retailing market is still at an early stage and has witnessed a rapid growth in the past few years, according to Frost & Sullivan Report. The market size of pop toy retailing in China increased from RMB6.3 billion in 2015 to RMB20.7 billion in 2019, representing a compounded annual growth rate (CAGR) of 34.6%. Driven by continuously increasing popularity of pop toys in China, the market size of pop toys retailing is expected to reach RMB76.3 billion in 2024, representing a CAGR of 29.8% from 2019. 

(Source: IPO prospectus)

2. Pop toy fans in China 

According to a Frost & Sullivan survey, more than 95% of pop toy consumers are between the ages of 15 and 40, 63% of whom hold bachelor degrees or above. Amid the fast-evolving Chinese society, the young generation has much more exposure to diverse cultures, modern lifestyles and rich information. They have shown a strong desire for self-expression and individuality, and are willing to channel their spending power towards emotional satisfaction. Pop toy fans are also enthusiastic to share their feelings and preference through social media, as part of the communities of people with the same interests.  

Over time, many pop toy customers evolve from occasional buyers to regular purchasers, who are recognized as enthusiasts or fans. They demonstrate loyalty to pop toys through repeated purchases and can accept higher retail prices. According to Frost & Sullivan, 68.5% of pop toy customers made more than one purchase in 2019; 19.8% among whom purchased more than five times; 68.9% of the pop toy customers made a purchase in the last six months preceding the survey, and 27.6% of the pop toy customers are willing to pay more than RMB500 for a pop toy they like. 

3. Competitive landscape of China’s pop toy retailing market

In 2019, there were hundreds of players in China’s pop toy retailing market. The top five market players had market shares of 8.5%, 7.7%, 3.3%, 1.7% and 1.6% respectively, in China’s pop toy retailing market in terms of retail value. The following chart sets forth the top five pop toy retailing market players in China in terms of retail value in 2019:

(Source: IPO prospectus)

Pop Mart is the largest pop toy brand in China in terms of retail value in 2019 with a market share of 8.5%, and has experienced rapid growth with a CAGR of 226.3% from 2017 to 2019, outpacing all other major players. Among the top players in China’s pop toy industry, Pop Mart is the only one with an integrated platform covering the industry chain, including intellectual property (IP) operation, original equipment manufacturer (OEM) production, consumer access and pop toy culture promotion. 

(Source: IPO prospectus)

4. IP Pool  

IP is at the core of Pop Mart. As of 30 June 2020, the company operates 93 IPs, consisting of (i) proprietary IPS; (ii) exclusive licensed IPs; and (iii) non-exclusive licensed IPs.  

Proprietary IPs. Pop Mart’s proprietary IPs include (i) iconic IPs acquired by the company such as Molly and Dimoo, which evolve when the original artists continue to refine them and create new editions, and (ii) IPs developed by its in-house design teams, such as Yuki and BOBO&COCO. In July 2018, Pop Mart acquired ownership of the intellectual property rights of Molly in China, and later in April 2019, the company entered into an agreement to acquire ownership of the IP rights of Molly in the rest of the world. For proprietary IPs, the company enjoys full intellectual property rights, including the rights to develop and sell pop toys and license out for additional monetization opportunities. 

As of 30 June 2020, Pop Mart had 12 proprietary IPs. The table below sets forth its proprietary IPs: 

(Source: IPO prospectus)

In 2019, revenue generated from Pop Mart brand products based on proprietary IPs amounted to RMB627.0 million or 37.2% of total company revenue. Molly is critical to Pop Mart’s sales performance as it accounted for 27.1% of the company’s 2019 total revenue. If Molly erodes or fails to maintain its current appeal to consumers, there is no guarantee that the company could develop or identify comparable IPs as replacement. 

Exclusive Licensed IPs. Pop Mart’s exclusive licensed IPs, such as PUCKY, The Monsters and SATYR RORY are created by artists the company cooperates with. Pop Mart enters into license agreement with selective artists for exclusive rights to develop and sell pop toy products based on such IPs in China, and other specified regions. For most of its exclusive licensed IPs, the company may also sub-license them in specified areas for additional monetization opportunities. 

As of 30 June 2020, Pop Mart operated 25 exclusive licensed IPs. The table below sets forth the details of its major exclusive licensed IPs:

(Source: IPO prospectus)

In 2019, revenue generated from Pop Mart brand products based on exclusive licensed IPs amounted to RMB597.4 million or 35.4% of total company revenue. 

Non-exclusive Licensed IPs. Pop Mart’s non-exclusive licensed IPs include popular characters such as Mickey Mouse, Despicable Me and Hello Kitty. Pop Mart generally enters into non-exclusive license agreements with IP providers such as Disney and Universal Studios which grants the company non-exclusive right to develop and sell pop toy products based on their IPs in China, and other specified regions. 

In 2019, revenue generated from Pop Mart brand product based on its non-exclusive licensed IPs amounted to RMB159.8 million or 9.5% of total company revenue. As of 30 June 2020, the company operated 56 non-exclusive licensed IPs. The table below sets forth its major non-exclusive licensed IPs:

(Source: IPO prospectus)

In addition to Pop Mart brand products, the company also sells third-party products from selected third-party suppliers, such as blind boxes, action figures, puzzles, plush toys, electronics and accessories, primarily from selected third-party brand owners. In 2019, revenue from the sale of third-party products amounted to RMB19.2 million or 1.3% of total company revenue.  

5.  Product design, development and manufacturing

Pop Mart develops a broad array of original, unique and entertaining pop toy products based on its IPs, and its artistic and collectable products are able to attract grown-ups as well as young generations. The company’s Pop Mart brand products are primarily categorized into blind boxes, action figures, ball-jointed dolls (BJDs) and accessories. 

The following table sets forth images of the principal categories of Pop Mart brand products:

(Source: IPO prospectus)

Pop Mart’s products are not manufactured in-house but by selective third-party manufacturers in China. These third-party manufacturers are selected based on factors such as quality, capacity, price, reputation and compliance with applicable laws and regulations. Most of the third-party manufacturers have extensive industry experience and co-operate with other major toy brands in China and globally. 

6. Sales and distribution channels

Pop Mart operates a omni-channel sales network and marketing initiatives to accommodate consumer needs. The following charts illustrate the company’s revenue contribution by each of its sales channels as a percentage of total revenue for the periods indicated:

(Source: IPO prospectus)

As of 30 June 2020, the company had 136 retail stores in 33 cities in China, primarily located at major commercial districts in first-tier and second-tier cities. Retail stores are its primary sales channel which provides the widest selection of products to cater to different customers. Moreover, retail stores are also an important channel for the company to establish a brand image and build connection with fans. 

As of 30 June 2020, Pop Mart also had 1,001 roboshops. As compared to retail shops, roboshops incur lower upfront costs and ongoing operating expenses in terms of rental fees, personnel expenses and maintenance fees. Roboshops allows the company to reach regions not covered by its retail stores and provides valuable data insight for retail store expansion strategies. 

Pop Mart’s fast-growing online channels include Tmall flagship store, Pop Draw, Paqu and other mainstream e-commerce platforms in China. In 2019, revenue generated from its Tmall flagship store, amounted to RMB251.5 million and ranked first among all flagship stores of toy brands on Tmall in terms of retail value in 2019, according to Frost & Sullivan. Meanwhile, Pop Mart’s most passionate fans are gathered on Paqu, the company’s online community which features pop toy culture information and updates, e-commerce and social interaction. 

7. How the IPO proceeds are used

Pop Mart intends to use the net proceeds raised of HK$4.6 billion for the following purpose:

  • Finance expansion plans of consumer access channels and overseas markets (HK$1.4 billion or 30% of net proceeds);
  • Fund potential investments in, acquisition of and strategic alliance with companies along the value chain of its industry (HK$1.2 billion of 27% of net proceeds);
  • Expand its IP pool (HK$822.4 million or 18% of net proceeds); and
  • General corporate and working capital purposes (HK$456.9 million or 10% of net proceeds).

8. Substantial shareholders 

Pop Mart’s largest shareholders after the IPO are co-founder Mr. Wang Ning (王宁) and his spouse, Ms. Yang Tao (杨涛), with an equity stake of 49.8%. 

Mr. Wang Ning, aged 33, is the company’s executive director, Chairman of the Board and Chief Executive Officer. He founded Pop Mart in October 2010 shortly after graduating from university, and is responsible for the overall strategic planning and management of the company. Mr. Wang received his bachelor’s degree in advertising from Sias International College of Zhengzhou University in the PRC in June 2009, and his master’s degree in business administration from Guanghua School of Management of Peking University in the PRC in June 2017.

Meanwhile, Ms. Yang Tao, aged 33, is the company’s executive director and vice president. Ms. Yang joined Pop Mart in October 2010 towards the end of her master’s degree program, and is responsible for overseeing the product development of the company. Ms. Yang received her bachelor of general study degree from Fort Hays State University in the United States in May 2009, and her master’s degree in communication studies from Hong Kong Baptist University in Hong Kong in November 2010. 

9. Financial Highlights 

Years ended December 31,Six months ended June 30,
20172018201920192020
RMB’000RMB’000RMB’000RMB’000RMB’000
Revenue 158,074514,5111,683,434543,396817,791
Gross profit 75,254298,0251,090,334330,592533,439
Profit after income tax 1,56999,521451,118113,613141,284
Revenue growth (%)225.4227.250.5
Same-store sales growth of retail stores (%)59.663.1(23.1)
Gross profit margin (%)47.657.964.860.865.2
Net profit margin (%)1.019.326.820.917.3
Trade receivables turnover (days)876N/A10
Trade payables turnover (days)213629N/A50
Inventory turnover (days)494546N/A126
Current ratio1.51.81.9N/AN/A
Return on assets (%)1.124.742.3N/AN/A
Return on equity (%)2.045.576.1N/AN/A

(Source: IPO prospectus)

Pop Mart is a fast-growing and profitable company. There is much to like about its financials.

  • The company achieved jaw-dropping same-store sales growth of retail stores of 59.6% in 2018 and 63.1% in 2019, primarily due to (i) the rising awareness and popularity of its brand and products, (ii) the expansion of its product portfolio and (iii) the improved design and quality of products. However, it experienced a decrease in same-store sales of retail stores of 23.1% in the first half of 2020, as 88 of retail stores had experience temporary closure in the first half of 2020 due to the impact of the Covid-19 outbreak.
  • The company achieved commendable net margins of 19.3% in 2018 and 26.8% in 2019. However, its net margin decreased to 17.3% in the six months ended 30 June 2020 primarily due to (i) increase in distribution and selling expenses attributable to increase the number of retail stores and roboshops, (ii) the increase in general and administrative expenses mainly attributable to the increase in the headcount of administrative staff and creative and design and industrial development personnel to support its expanded IP portfolio business growth and (iii) same-store sales decline of retail stores and roboshops in the first half of 2020 due to the Covid-19 outbreak. 
  • Pop Mart’s return on assets of 42.3% and return on equity of 76.1% achieved in 2019 are spectacular and demonstrates excellent capital allocation by management. Management has indicated in the IPO prospectus that the company intends to distribute to shareholders on an annual basis no less than 20% of its profits.

10. Current valuation looks expensive   

With a closing share price of HK$81.35 as at 31 December 2020, Pop Mart is trading at a price to earnings (PE) ratio of 197.7, with a market capitalisation close to HK$114.1 billion. The company has a simple to understand business and is interesting given its growth prospects, but looks pricey at the current valuation. Since it is a new listing, investors should monitor the performance of the company for a while post listing before considering an investment. 

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(Source: Google Finance)

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