Nothing Playful About The Rise in China's Toymakers' Shares

The toymaker's shares have nearly doubled since their January trading debut, as its revenue also more than doubled last year despite continuing losses

Key Takeaways:

• Bloks Group reported its revenue rose 156% in 2024, as it maintained strong growth in the second half of the year
• The company's annual loss rose by 91.8%, but much of that was due to listing expenses and share-based compensation, and it was profitable on an adjusted basis

Investors seem to think that consumer sentiment in China is turning for the better, at least based on the soaring prices of some related stocks.

Among those leading the charge is Bloks Group Ltd. (0325.HK), whose shares charged out of the gate in their Jan. 10 debut with an 82% surge on their first trading day. Despite its status as a maker of products costing just a few dollars each, the company raised HK$1.6 billion ($210 million) in the listing, valuing it at a hefty HK$15 billion ($1.93 billion). The post-IPO gains have raised that to HK$28.6 billion, showing the company is no run-of-the-mill plaything.

Bloks Group wowed investors with its status as one of China's leading toymakers selling to domestic consumers. According to its prospectus, the company is the largest player in China's assembly toy segment with 30% of the market in terms of gross merchandise value (GMV). It also impressed with its supercharged growth, including a 170% rise in GMV in 2023.

In its first post-IPO financial report for 2024 released last Friday, Bloks reported its revenue rose 155.6% for the full year to 2.24 billion yuan ($290 million). Its gross profit rose by an even larger 184.1% to 1.18 billion yuan, while its net loss also widened by 91.8% to 398 million yuan.

Investors weren't too impressed, sending Bloks' shares down by nearly 3% on Monday, the first trading day after the report's release. That extended a string of declines that have seen the stock fall about 8% from its post-IPO closing high of HK$126.70 on March 14. Despite that, the stock is still nearly double its IPO price.

China's consumer stocks have been trending up in Hong Kong lately, lifted by the broader rally for China stocks dating back to October. The Hang Seng SCHK Consumer Discretionary Index is up over 30% since September, outpacing a 24% rise for the broader Hang Seng Index over that time.

Richard Lin, chief consumer analyst at Shanghai-based investment bank SPDB International, said Bloks' strong results reflect a clear comeback for embattled Chinese consumer stocks. "Retail investors' enthusiasm is rooted in the fact that sizeable consumer companies with solid fundamentals and sector tailwinds have finally emerged after a lull," he told the South China Morning Post. "If you're a market leader and your valuation is cheap enough, people are going to clamor for you".

A closer look shows Bloks' loss decelerated sequentially to 144 million yuan in the second half of last year from 202 million yuan in the first half, while its revenue rose from 1 billion yuan to 1.2 billion yuan over that time. Most of the annual loss came from 359.3 million yuan for share-based compensation, together with 33.4 million yuan in listing expenses. Excluding share-based compensation and other non-cash items, the company reported a non-IFRS profit of 585 million yuan for the year, up sharply from a 73 million yuan profit in 2023.

Ultraman leads the pack

Of the four main assembly character toys that Bloks sells, Ultraman, Transformers, Hero Infinity and Kamen Rider, Ultraman was by far its biggest money spinner with 1 billion yuan in sales, or 45% of total revenue last year. That was followed by Transformers with 454 million yuan in sales, accounting for 20% of revenues.

While Ultraman is Bloks' biggest seller, the series' contribution to its revenue has fallen from 63.5% of the total in 2023. The company makes toys based on the character under a non-exclusive license from Tsubaraya Productions, which lasts until 2027 for China but expires this year in North America, Europe and some countries in Africa. The company's Ultraman sales quintupled between 2022 and 2023, and nearly doubled again in 2024.

Transformers, also produced under a non-exclusive license from Hasbro (HAS.US) and new to the Bloks stable since 2023, has been gaining ground since generating 124.9 million yuan in sales, or 14% of revenue, that year. Hero Infinity, the company's self-developed character toy, jumped from 7.3% of revenue to 14% in 2024. Another licensed character toy, Kamen Rider only launched in July 2024, so its 7.5% share of revenue is similarly impressive.

Meanwhile, Bloks' original Lego-like bricks-based toys have steadily lost ground, falling from 321 million in sales in 2021 to 39.4 million in revenue in 2024.

While many retailers are moving increasingly online for their sales, Bloks is doing just the opposite. Its offline sales grew from 732.7 million yuan in 2023 to 2 billion yuan in 2024, accounting for more than 90% of its total revenue. Its overseas sales have also made headway, though they still account for a relatively small total of about 4% of sales.

Of four analysts following the company, three rate it as a "buy" or "strong buy" and only one rates it as a sell, although its price-to-sales (P/S) ratio of about 17 may be a bit frothy. That may be partly because analysts expect its revenue to double this year to just over 4 billion yuan. Collectible toy sensation Pop Mart (9992.HK) trades at an even higher ratio of 21, while retailer Miniso (MNSO.US; 9896.HK), which is also making an aggressive move into toys, trades at a far lower 3.1.

Those toymakers are part of a broader wave of Chinese consumer stocks being buoyed by positive investor sentiment, as China takes steps to boost consumer spending to revive its sluggish economy. Shares of leading bubble tea chain operator Mixue (2097.HK) have also nearly doubled since their March 3 trading debut. But the company trades at a much lower P/S ratio of about 6, as investors remain relatively cautious on the catering sector.