52Toys taps China's designer toy boom in play for Hong Kong IPO

As China's collectible toy market surges, the company is hoping to fund an aggressive expansion and build iconic IPs with a new listing

Key Takeaways:

• 52Toys has hired investment banks for a planned Hong Kong IPO, following the listing of rival Bloks earlier this year
• The collectible toymaker faces growing competition abroad and lags its domestic rivals in developing its own intellectual property

Once known as a cruel villain in Disney's animated film "Toy Story 3," Lots-O'-Huggin' Bear, or Lotso, with his pink fur, big plum nose, and signature strawberry scent, has now become a darling of young toy collectors in China.

Part of Lotso's charm lies in his lifelike design — his eyes seem to follow you wherever you go. A series of palm-sized Lotso figurines, offered in various postures, are sold in opaque "blind boxes" for around $10 each. The excitement of only discovering which figure you've received after making a purchase and opening the box adds a playful thrill for collectors.

The mastermind behind Lotso's transformation from screen figurine into celebrity plaything is 52Toys, a rising star in China's booming collectible toy market. Known for blending creativity with cultural trends, the company is rapidly carving out its place in this fast-growing industry.

Now, 52Toys, whose Chinese name sounds similar to "I love toys," is in discussion with investment banks as it aims for an IPO in Hong Kong later this year, a source with knowledge of the plan told Bamboo Works. The company is seeking to raise up to $200 million, according to media reports.

Executives of the firm, which has already raised more than $80 million from private investors, including CICC Capital and the state-backed Qianhai Fund of Funds, dismissed the news as rumors, without offering more details.

Beijing-based 52Toys is the latest to tap into booming demand in China for collectible toys that carry much higher margins than traditional toys. It's aiming to challenge more established players like Pop Mart International (9992.HK), whose shares have soared more than fivefold over the past year, as well as the more mass market-oriented Bloks Group (0325.HK), which has rallied 12% since its recent listing in January.

Beyond its wildly popular blind box products, 52Toys boasts five other product lines, including posable dolls, designer collectibles, and transforming toys. Each targets specific demographics: blind boxes resonate more with young female consumers, while the BeastBox series, featuring transforming animals, draws a predominantly male fanbase.

The company has adopted a "dual-track strategy" in intellectual property (IP), developing both self-designed products such as BeastBox and Kimmy & Miki, while also partnering with established brands like Disney Princesses and Harry Potter.

Late mover disadvantage?

Company co-founder Chen Wei is a toy industry veteran, starting his career as an agent for U.S. firm McFarlane Toys and Japan's Bandai after graduating from college 20 years ago. He launched his company in 2015 along with Huang Jin, founder of "War of Three Kingdoms," a popular board game in China.

Designer toys are becoming popular among young Chinese who increasingly value emotional fulfillment and seek self-expression through collectible items, which also add a social element as people engage in trading their favorite products. Frost & Sullivan predicts that the Chinese market will grow 24% annually from 2022 to 2026, surpassing 110 billion yuan ($13.8 billion) by 2026. The customer base for such toys currently numbers about 30 million, a figure that is likely to grow to 49 million by 2030, Frost & Sullivan forecasts.

However, questions remain about whether 52Toys is moving swiftly enough to build up its own fanbase in an increasingly competitive market.

Despite its claims of launching three to five new stores each month with sales of 10,000 yuan per square meter, or about $1,400, 52Toys has only six offline stores in top-tier cities like Shanghai and Beijing listed on the popular Amap mapping app. By comparison, the company has stated ambitious goals of operating a network of over 100 stores and 1,000 vending machines nationwide within the next year, a goal revealed by Chen in an interview.

Meanwhile, the company is also betting big on expanding globally, a popular direction lately for Pop Mart as it looks to diversify geographically to hedge against slowing demand in China with the nation's economic slowdown. Like many Chinese companies, 52Toys' international roadmap is starting in Southeast Asia, which has a large ethnic Chinese population and shares many qualities with the China market.

During the first half of 2024, over 40% of Pop Mart's overseas revenues came from Southeast Asia, its biggest market outside of China. Pop Mart previously reported its revenue grew by 120% or more in last year's third quarter, driven by a 60% increase in China and more than 440% growth overseas. Pop Mart also boasted enviable gross margins of 61.5% for its domestic business and 70.1% internationally in the first half of last year, well ahead of the roughly 48% over the last five years for more mass market-oriented global leader Mattel (MAT.US).

Since first venturing abroad in 2017, 52Toys has entered more than 10 countries and regions. It now sees Thailand as a key market, opening 10 stores in in the country within a year as of last December.

But what's popular within China may not translate into other markets. On the popular Southeast Asian e-commerce site Shopee, sales of several BeastBox toys amounted to less than 100 per month — not exactly impressive for a company with such big ambitions.

Overreliance on outside IPs

Another pressing challenge for 52Toys is proving its ability to create its own original sensations, rather than leaning so heavily on other companies' established IPs like Lotso. The company operates using a "721 rule," where it allocates 70% of resources to mainstream products, 20% to forward-looking designs, and 10% to experimental ideas. Its success with self-developed IPs so far appears to be relatively limited.

On China's popular Tmall marketplace, only four 52Toys products have sold over 10,000 units, and just one of those is based on a proprietary IP. By comparison, Pop Mart boasts 27 products surpassing this sales milestone, with over half featuring its own self-developed characters like Molly and Labubu.

While it remains unclear how much revenue 52Toys derives from self-designed IPs, it may need more original hits to sell investors on its status as a maker of self-developed collectibles that command the types of fat profit margins that Pop Mart gets.

On TikTok, the fanbase for Pop Mart's Labubu, a mythical creature with pointy ears, impish gaze and serrated teeth, is 10 times larger than the combined fans for 52Toys. Those kinds of numbers have helped Pop Mart achieve an impressive valuation of HK$145 billion ($18.7 billion) after the recent runup in its shares, with an equally high price-to-earnings (P/E) ratio of nearly 90. While 52Toys is unlikely to achieve such a high valuation, it will need to go beyond relying on borrowed characters like Lotso and focus on developing its own sensations to compete with industry leaders and attract investors to its own collectible toy story.