This Stock With A Successful Toy Story Appears Undervalued

The company is finding success with its Top Toy business and overseas expansion, while its core traditional retail segment has become a drag

Key Takeaways:

• Miniso's newer chain of Top Toy stores is showing strong growth, despite fierce competition
• The Japanese-style store operator's shares have come under pressure due to its deep roots in traditional retailing

People may put off buying a house or iPhone in a slowing economy, but it seems they're still willing to pay for smaller, more affordable joys like toys.

That's a key story coming from retailer Miniso Group Holding Ltd. (9896.HK; MNSO.US), whose latest earnings show its five-year-old Top Toy sub-brand specializing in trendy toys continues to post healthy growth, significantly outshining the company's overall growth rate. Top Toy's revenue soared over 50% year-over-year in last year's fourth quarter, more than twice as much as Miniso's overall revenue growth of 22.7% for the same period.

"2024 marks Top Toy's first year of full year profitability," said Ye Guofu, Miniso's founder and chairman, during the company's earnings call following the release of the results on Friday. "We believe in the near future, Top Toy will secure a more important position in the Trended Toy segment, and bring more excitement and joy to the consumer worldwide."

But that may be easier said than done, given China's highly competitive collectible toy market, where industry leader Pop Mart International (9992.HK) is capitalizing on the latest Labubu craze, and smaller up-and-comers like 52Toys are also expanding aggressively to seize on the latest craze among young adults.

From Muji copycat to new toy story

Guangzhou-based Miniso is best known in China as a retailer that took its initial inspiration from Japanese retailers like Muji – a strategy that has attracted both fans who like the style but also detractors who accuse the company of being a copycat. It launched its less controversial Top Toy sub-brand in December 2020 — the same month Pop Mart went public in Hong Kong.

At the time, collectible toys – limited-edition, high-demand products designed for collecting rather than casual play – were surging into mainstream popularity, driven by a "blind box" culture from Japan, Gen Z's interest-driven consumption, and the expanding economy for companies with self-developed intellectual property (IP).

The value of China's collectible toy retail market will reach 110 billion yuan ($15.2 billion) by 2026, growing about 24% in recent years, according to a forecast by market consultancy Frost & Sullivan. The number of consumers buying such toys in China will rise from 40 million this year to 49 million by 2030, it forecasts.

Miniso clearly wants to jump on that growth wave. On its international web site, Top Toy says it wants to become "the world's largest and most comprehensive collectible toy Dream Factory," targeting consumers aged 10 to 40.

Unlike Pop Mart, which focuses on developing its own IP characters packaged in opaque blind boxes, Top Toy offers a wider range of products, from blind box collectibles to hand-painted figurines, and machine-style mecha models like Transformers, at more affordable prices. It relies heavily on licensed IP from brands like Disney, Marvel and Sanrio.

More than 200 products are available from its store on Alibaba's popular Tmall marketplace, ranging from as low as 19 yuan for a fridge magnet featuring Zanmang Loopy, a South Korean cartoon beaver, to as high as 509 yuan for a mecha model featuring Disney-Pixar's Buzz Lightyear. Pop Mart is pricier, featuring products up to 5,999 yuan on its own Tmall store.

While collaborations with famous brands help Top Toy release new products at a faster pace, they also make the company lack distinctive IPs that set it apart from others in a fiercely competitive sector. Self-developed IPs are also far more profitable than licensed ones, as the former are exclusive to the developer and don't require any licensing fees.

Pop Mart gained overnight fame worldwide last year when Lisa, a member of the popular Blackpink girl group, was spotted using a phone case featuring the company's self-developed Labubu character. 52Toys' Lots-O'-Huggin' Bear, or Lotso, also went viral on Chinese social media in late 2023, becoming a hit among young collectors.

Such successes helped to power Pop Mart to roughly 120% revenue growth in the third quarter. Meantime, 52Toys is trying to seize on its success with a planned Hong Kong IPO that could raise up to $200 million.

Nonetheless, Miniso seems to have made the right bet. By 2024, Top Toy had grown nearly tenfold compared to 2021, reaching 983.5 million yuan in annual sales. While its contribution to Miniso's overall revenue remains minor, the sub-brand's share of the total has grown from around 3.5% to nearly 6%.

It has become so successful that Miniso is planning to spin off the sub-brand. Earlier this month, Bloomberg reported the company is in talks with prospective advisers regarding a possible IPO for the sub-brand to raise about $300 million. This comes as no surprise, since Miniso founder Ye said in 2022 that he planned to spin off the sub-brand within three years.

Miniso's latest report, including the strong progress for Top Toy, didn't seem exciting enough to convince investors. Following the report's release, the company's U.S.-listed shares fell 8.9% on Friday. Its Hong Kong stock was trending similarly, down 7.3% in early Monday trading this week.

Tough retail environment

Chinese retailers are facing a tough environment, as consumers becoming increasingly reluctant to spend in a slowing economy. Despite reporting 4.7 billion yuan in revenue in the fourth quarter — up 22.7% year-over-year — and achieving a record 47.0% gross margin, revenue from the company's core Miniso-branded stores in China grew by just 6.5% during the three-month period. Same-store sales from that segment also dropped by a high single-digit amount last year compared to 2023, though that was partly offset by mid-single-digit growth for overseas Miniso-branded stores and Top Toy's strong growth.

Compared to Pop Mart, whose shares rallied about fivefold over the past year, and Bloks Group (0325.HK), which has surged over 40% since its listing in January, Miniso's shares have been under pressure, with its New York listed stock down by over 20% this year.

That discrepancy is largely due to Miniso's deep roots in China's traditional retail sector, where economic growth has been slowing. While the company has aggressively expanded overseas in recent years, Miniso's China business, where it sells things like low-priced phone cases and hair accessories, still accounts for about half of its total revenue.

Further frightening investors, Miniso acquired 29.4% of money-losing Chinese supermarket chain Yonghui (601933.SS) last September – a move that left many scratching their heads. Following the announcement, Miniso's shares lost about a third of their value, while Yonghui's rose by 10%.

Given its strong overseas growth and the rapid success of Top Toy, Miniso shares appear to be a good value at their current price, with a price-to-earnings (P/E) ratio of about 20. That's a fraction of Pop Mart's elevated 108, showing investors still see Miniso as a retailer rather than a collectible toy story, at least for now.