Pop Mart's 'Blind Box' Toys Attract Fans, Detractors

Key Takeaways:

• Pop Mart’s revenue rose 62% in the first half of the year and its profit nearly doubled, as its revenue from outside Mainland China more than tripled
• The company came under attack this week from the influential Xinhua news agency for the addictive nature of its collectible ‘blind box’ toys

By Doug Young

It’s a toy story that could only be made in China.

This particular tale is coming from Pop Mart International Group Ltd., which has found huge success with its trendy series of collectible toys sold from “blind boxes” that don’t reveal their contents until after a buyer opens them following a purchase. Last week, Pop Mart reported stellar results for the first half of 2024, including 62% revenue growth and a near-doubling in its profit, sparking a rally in its shares.

But just a week later, on Thursday this week, the company got an uncomfortable wakeup call when China’s official Xinhua news agency published an article on the evils of blind box toys. While no companies were named in the article, headlined “Minors should keep their distance from the “blind box lure,” Pop Mart was an obvious unspoken target.

Following a 12% rally for its shares in the days after announcing its results last week, Pop Mart’s stock fell as much as 5% on Thursday after the Xinhua article’s publication, before closing down by a milder 1.8%.

The stock is still up more than 8% since Pop Mart’s results announcement, perhaps reflecting investor belief that the Xinhua article doesn’t signal an upcoming regulatory crackdown that China has become famous for. At the same time, investors may also be reassured by Pop Mart’s lessening dependence on its unpredictable China home market through a rapid expansion of its global business, representing an important diversification move.

Next, we’ll delve more deeply into this China toy story by taking a closer look at Pop Mart’s latest results, before examining the Xinhua story that rattled investors.

The company began as a traditional toy maker using intellectual property (IP) licensed from other companies, before discovering it could make far more money by developing its own IP. It’s become quite successful in that regard, with a current stable of products centered on toys built around its Molly, The Monsters and Skullpanda IPs.

The company has also discovered it can sell more toys, and also create an element of excitement around its products, by packaging them in blind boxes, much the way that trading cards are packaged and sold in the West.

That potent combination has helped Pop Mart to record strong double-digit sales growth, even as other Chinese retailers have seen their sales stagnate and even start to decline in the current environment of consumer caution. As we’ve previously noted, Pop Mart’s revenue rose 62% in the first half of this year to 4.56 billion yuan ($641 million) from 2.81 billion yuan in the same period of 2023.

While the company posted 32% revenue growth in Mainland China during the period – no easy feat in the current environment – the more important engine behind its growth came from its young but fast-expanding international operation. That part of the business more than tripled to 1.35 billion yuan from 376 million yuan in the year-ago period, as the company expanded its global footprint to 92 brick-and-mortar shops at the end of June from 28 at the end of 2022. Its international roboshops, basically vending machines selling its toys, also grew to 162 from 49 over the same period.

Improving Margins

Pop Mart can earn far higher margins than many of its rivals due to the big premiums it charges for its toys because of their collectible nature. And it’s quickly discovering that foreigners are willing to pay even bigger premiums for their collectible toys than Chinese enthusiasts.

The company’s overall gross margin rose to 64.0% in the first half of this year, up from 60.4% a year earlier. Most of those gains came from its international operation, which includes Hong Kong and Macau, whose gross margin jumped to 70.1% from 62.9% year-on-year as that part of the business gained scale. By comparison, the company’s China gross margin is much lower, also rising by a more modest 1.5 percentage points to 61.5% from 60.0% over that period.

The big margin improvement, combined with the strong revenue gains, helped Pop Mart to nearly double its profit to 921 million yuan in the first half of the year from 477 million yuan a year earlier. Its stock now trades at a very strong price-to-earnings (P/E) ratio of 37, more than double domestic rival Miniso’s MNSO 17, and roughly comparable to global toy giant Hasbro’s HAS 36.

All that said, we’ll take a closer look at the Xinhua article and its implications, including why investors appeared to largely shrugging it off. Following its warning-style headline, the article goes on to compare blind box toys to drugs that unsuspecting minors can easily become addicted to. It also likens such collecting to a sort of addictive gambling, since such toys can often sell for far more than their price tags if someone “hits the jackpot” by purchasing a rare toy that’s in big demand.

The article also features a one-minute video of a police officer talking about both of these points, and mentions an existing guideline from China’s market regulator prohibiting blind box toys from targeting children under 8.

China’s regulators have been famous for their steps to protect minors from such unscrupulous businesses in recent years, most recently limiting minors’ access to video games – an action that dealt a major blow to many gaming companies. Thus, some might interpret this Xinhua article, coming from a leading state media, as signifying a potential new crackdown is coming for blind box toys.

While that’s possible, the reality is that Xinhua functions more as a newswire service like Reuters or Associated Press, and is more a conveyor of news rather than an opinion leader in China. An appearance of the same article in the People’s Daily, the official newspaper of China’s Communist Party, probably would be far more alarming. At the same time, Pop Mart’s international expansion is helping to ease concerns about any future crackdowns, showing quite clearly why geographical diversification is a shrewd step for any Chinese company with the resources to make such a move.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.