China’s slower growth hasn’t dragged down this consumer stock. Why it’s up 90% this year

In a summer of cool consumer spending, Chinese toy company Pop Mart alerted investors to double-digit growth in the first half of the year: it now expects revenue to rise by at least 55% and profits to grow 90% or more. Morgan Stanley and other investment firms raised their price targets on the Hong Kong-traded stock after Pop Mart gave a profit alert on July 18. Shares initially surged, but have since wavered amid a broad decline in Asian stocks. “We think Pop Mart’s expansion is still in early innings, with Rmb7bn ($970 million) sales from China and Rmb3bn from overseas market,” Morgan Stanley analysts said last month, noting “the runway is long” since Lego’s annual global sales are 70 billion yuan. Beijing-based Pop Mart sells collectible figurines based largely on its own intellectual property (IP), along with sets featuring the Minions, Avengers or Disney characters. Each toy costs about $10, sold in a “blind” box so customers won’t don’t know which character they’ve bought. ‘Underlying demand’ “We believe the emotional value with low price sensitivity offered by Pop Mart IP products provide strong support on underlying demand in the China market,” CLSA analysts wrote in a note last month, rating Pop Mart outperform. “We expect 30 retail store openings this year in China and China market sales to grow 21% YoY in 2024.” The CLSA analysts raised their price target to 45 Hong Kong dollars ($5.76), up from 37 previously. They expect high-single-digit growth in Pop Mart’s mainland China same-store sales this year. China’s retail sales grew by 2% in June from a year ago, and major Western brands such as Apple and Starbucks reported lower second-quarter sales in China. When Pop Mart listed in Hong Kong in December 2020, shares immediately doubled in price and went on to hit an all-time high of HK$105.21 in February 2021. The stock then plunged with the Hong Kong market, before a recovery starting this year. Despite the latest pullback, Pop Mart shares have held gains of more than 90% for the year so far — temporarily crossing the 100% mark with a high of HK$41.75 on Wednesday. But even that remained several Hong Kong dollars below analysts’ newest price targets. Raised target Morgan Stanley raised its price target to HK$52, up from HK$45 previously, after Pop Mart’s profit alert. The Wall Street investment bank has an “overweight” rating on the stock. “By market, we estimate China growth accelerated from 20% in 1Q to 40% in 2Q,” Morgan Stanley said. “Strong pickup in online channels and Pop Land were the key drivers, while offline sales growth also accelerated (driven by teens% [same-store sales growth]).” Pop Land is a theme park that Pop Mart opened near a major city park in Beijing in September 2023. The company, which considers intellectual property its core asset, said in its annual report in April it has also opened an art gallery, with plans for gaming and animation products. “Pop Land being part of the earnings beat is encouraging — another example showing the value of management’s determination in doing new projects when they are considered ‘far-fetched,'” the Morgan Stanley analysts said. “Also, bad weather and consumption slowdown in China didn’t deter Pop Mart’s momentum, an evidence of its market share gain in the rising IP product segment.” Pop Mart has yet to announce when it will release full results for the first-half of the year. In 2023 the company published its interim report in late August. Other investment firms are more cautious on Pop Mart shares. China Renaissance rates the stock a “hold,” with a far lower price target of HK$27.39. “Pop Mart’s June 2024 online sales fell 6% YoY possibly because Pop Mart did not provide many discounts during the 618-shopping festival, in our view,” the China Renaissance analysts said in a report last month, referring to a mid-June promotion. Also in mid-July, Nomura analysts upgraded their view on Pop Mart, but only to “neutral” from “reduce,” albeit with an increased price target to HK$41. “The company is well-prepared to sustain its high sales growth momentum into 2H24F, in our view (we estimate 2H24F total sales growth of 39% y-y),” the Nomura analysts said. Growing international business While most of Pop Mart’s stores are in mainland China, the company has a growing international business with stores in countries ranging from Thailand to the U.S. One day after the opening ceremony of the 2024 Paris Olympics, Pop Mart opened a store in the Louvre . “It is very difficult to forecast Pop Mart’s sales momentum from 2025 onward, as its growth driver is not store opening but the pace of IP product launches,” Jefferies analysts said. They rate the stock a buy, with a price target of HK$47.40. “We like management’s strategy of focusing on its core IPs and investing in these IPs through various media,” a Jefferies report said. “Pop Mart’s IPs could be in the form of not just blind boxes but also games, movies and other product categories. It is also looking to expand its retail format using the theme park as the incubator. This could lengthen an IP’s cycle should it be successful.” — CNBC’s Michael Bloom contributed to this report. 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