Pop Mart Steps Up Overseas Drive With British Acquisition

Key Takeaways:

• Pop Mart announced it has purchased British partner Mogic Ltd. for an undisclosed price, the latest step in its recent global expansion
• The collectible toy seller’s overseas revenue grew between 160% and 165% in the first quarter, in sharp contrast with a 5% to 10% drop for its core mainland China sales

By Doug Young

Pop Mart International Group Ltd. (9992.HK) is increasingly looking overseas, betting that consumers in the U.S., Europe and Southeast Asia will pay even bigger premiums for its trendy collectible toys than their counterparts in China.

That bet crossed a new milestone a week ago when the company announced the acquisition of its partner in Britain, in what looks like its first such publicly disclosed purchase. Pop Mart certainly has plenty of money for such purchases, reporting about 5 billion yuan ($700 million) in cash and short-term investments at the end of last year, according to its latest annual report.

Such an overseas expansion will be critical for Pop Mart as its home mainland China market, which currently accounts for the big majority of its sales, shows rapid signs of slowing after years of breakneck growth. The company’s China sales actually fell between 5% and 10% in the first quarter, according to a company business update in April, extending a 3.3% decline last year.

By comparison, Pop Mart’s overseas business reported triple-digit growth for the three-month period.

The sagging sales at home is a particularly worrisome trend for a retailer like Pop Mart, since most other retailers and consumer-facing companies reported sharp upticks in their business during the first quarter after China ended most of its Covid restrictions at the end of last year.

The discrepancy probably owes to the fact that toys are very much a discretionary purchase, unlike more standard items like household goods that are always in demand. What’s more, Pop Mart’s toys are more targeted at adults and sell for big markups due to their “collectible” status. Such collectors are far more likely to put off such purchases, often seen as a sort of fun hobby, in a weak economy like the one in China now.

Markets in the west and Southeast Asia, which are Pop Mart’s two primary overseas focuses, are doing relatively better economically right now, which explains why they are an attractive option. What’s more, consumers in the west typically pay more for their toys than their peers in developing markets, resulting in higher margins for a company like Pop Mart.

The company’s latest global move saw Pop Mart announce a week ago that it was acquiring Mogic Ltd., which was only described as “specializing in local retailing” according to a post on the company’s blog. No financial terms were given, which means the purchase price was probably less than $5 million, most likely paid for with Pop Mart’s big cash pile.

The announcement follows a string of similar steps that Pop Mart has taken on the global stage over the past year. Those include another announcement in May of its first brick-and-mortar store in Malaysia, as well as one in February for its first such store in France. The company announced the opening of its second store in Australia in Melbourne last November.

Investors appeared to like the new British acquisition, with Pop Mart shares rising 2.8% the day of the announcement at the end of last week. The stock continued to rally this week, and was up 8.2% from pre-announcement levels as of Thursday’s close.

Uphill Climb

Despite the recent stock gains, the road for Pop Mart has been anything but easy lately due to its difficulties in mainland China, which still accounted for 90% of its sales last year. The company was a superstar at the time of its 2020 IPO and briefly saw its shares nearly triple from their listing price of HK$38.50 to about HK$100 at their peak. Investors like the company not only for its trendy toys, but also for the fat margins it earns on them due to their collectible status compared with more traditional children’s toys.

But the stock has tumbled from those highs over the last year as its sales showed rapid signs of slowing, and at its Thursday close of HK$17.70 is less than half of its IPO price. Still, the shares are valued slightly ahead of similar companies. Pop Mart now trades at a forward price-to-earnings (P/E) ratio of 20, ahead of the 19 for domestic rival Miniso MNSO and comfortably ahead of the 16 for trendy U.S. retailer Target TGT.

So, investors haven’t given up on Pop Mart just yet, even if they don’t value it quite so highly these days.

All that said, we’ll end with a closer look at the current state of Pop Mart’s overseas business and where things might be going. The company’s history dates back to 2010, but it only began earnestly expanding abroad in the last two or three years.

Pop Mart had 43 overseas stores at the end of last year, though about half of those were jointly operated with local joint venture and franchisee partners. It also sells lots of its products through vending machines called “roboshops,” and had 120 of those overseas last year. The company appears to be placing a big emphasis on expanding its directly operated stores, opening 21 such outlets to bring its total to 28 last year.

As its self-operated store count grew, the company’s revenue from overseas retail stores soared to 136 million yuan last year from just 3.2 million yuan a year earlier. At that level, overseas retail stores accounted for about a third of Pop Mart’s total overseas revenue last year. The company’s 454 million yuan in overseas revenue last year was up 163% from 2021. That growth continued at a similar rate in the first quarter, with Pop Mart saying its overall overseas revenue rose between 160% and 165% in the first three months of the year.

As we’ve previously noted, the overseas operations tend to have higher gross margins, averaging around 74% last year, compared with about 60% for its domestic operations.

The company didn’t provide any more-specific roadmap for its international plans in its latest annual results, other than to broadly state such global expansion is a key focus. But the latest acquisition hints Pop Mart is serious about this effort – and may make other similar purchases in the near-term as it tries to diversify its business beyond its original home market.