Bubble Mart: Is endless internal circulation in China redeemed only by overseas?

On the noon of August 25th, Beijing Time, Pinduoduo [Pinduoduo.HK] announced the first half of 2022's performance. After the stir created by their profit warning, the actual results for profit performance weren't as bad as the company had predicted:

1. SkullPanda brings in a crowd: In the first half of 2022, Pinduoduo's revenue reached 2.4 billion, a year-on-year increase of 33%. Under the epidemic, Pinduoduo relied mainly on online sales and their own IP to boost sales. Thankfully, their demon girl, SkullPanda, is quite popular, letting the company keep their income base.

2. Let's talk about overseas development: From the disclosure of the report in the first half of this year, it is obvious that the company will focus on expanding their overseas markets- the number of stores abroad, the income and gross profit margins of each foreign channel were all clearly explained. However, foreign contributions for the first half year were still relatively small, only around 7%. Nonetheless, after entering the retail business, their foreign gross profit rates have already caught up to domestic levels. It's estimated that with subsequent sales increases, the foreign gross profit rate has hope to act as a factor in improving the company's gross profit structure.

3. Intensified competition- where are the barriers: Although their performance in the first half of the year was better than the company's guidance, the final decline by less than 10% was far better than the 35% decline the company had predicted. However, the continuous decline in gross profit margins, as well as the unchecked expense growth (administrative expenses such as advertising, IP design and development), means that Pinduoduo's profits are still quite weak, even without taking into account the difference in expectations.

Overall: When Pinduoduo's self-directed lousy performance has passed, but has still exceeded expectations, the next step in repairing their stock price is to resolve the company's competitiveness and future growth. Particularly, with the current competition in the market, it appears that Chinese users have reached a difficult position to edge forwards quickly in the short term (only 3.5 million newly registered accounts in the first half of the year, much lower than the 12 million accounts in the second half of the previous year). Users are more picky, and blind box competition in the market is intense, so the company's competitiveness barriers are not particularly high.

Meanwhile, regulation for blind boxes is also coming, so perhaps true growth in addition to strengthening IP realization (such as large accounts like Molly and IP cross-border authorization) can really only be expected from the company opening up new growth areas overseas.

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I. Beat expectations with further success- these are quite the actions!

A little over a month ago on July 15th, when the first half of the year had already ended, Pinduoduo issued a profit warning announcement- roughly estimating that their revenue growth for the first half of the year would not be lower than 30%, and their profits shrink by no more than 35%.

How bad was this warning? Their revenue growth was still 60% in the second half of last year. More importantly, profits even had a positive growth of 30%, yet for the first half of this year, it plummeted straight down to a negative growth of 30%. The result directly scared away the funds, and the stock price collapsed. In fact, just after June, "smart money" was prescient and began to withdraw from PPMart, causing the stock price to fall from 40 yuan to less than 20 yuan all the way from July to now, more than halving.

However, from the actual situation, the revenue of PPMart in the first half of 2022 was 2.4 billion yuan, a year-on-year increase of 33%, which is basically the same as the guidance.

But the profit is obviously not as poor as the company's original guidance: net profit fell by 7% year-on-year, which is more than 300 million yuan, which is much worse than the implied warning of nearly 100 million yuan.

2. Overseas expansion story

This time, PPMart directly revealed its channel revenue in detail according to the domestic and overseas markets, which seems to imply that the domestic market is suspected of being mature early.

So let's take a look at the overseas market first: PPMart's retail stores, including online and offline, direct sales and franchises, as well as the previous wholesale business, contributed 7% of the revenue, approximately 160 million yuan, to PPMart, including Hong Kong, Macau, and Taiwan.

Moreover, the gross profit margin of the overseas retail business is quite good, reaching 57%, which is a significant increase compared with the 46% when the wholesale business was predominant in the same period last year, although it is still lower than the domestic business. Of course, with the accelerated growth of overseas retail business in the future, the gross profit margin of overseas business seems to have a chance to exceed that of the domestic business, which is one of the relatively better changes in revenue structure.

At present, PPMart has opened 24 offline retail stores and 98 robot stores, and has entered 11 cross-border platforms. The first store has been opened in the United Kingdom, New Zealand, and the United States.

Whether PPMart can use IP products with Chinese design characteristics to create a new self in the overseas market in the future, the volume is still small at present, and we can only wait and see.

3. Fortunately, there is a private domain, relying entirely on online

From the channel perspective, the online channel is still the key driver of revenue and profit, with a larger revenue volume and a relatively faster growth rate, and the gross profit margin in the first half of the year is currently the highest among the three categories.

However, it should be considered that the special situation in the first half of the year was the closure of offline stores under the epidemic, and most of the sales went online, but at the same time, the logistics of online sales were relatively difficult, which also increased the logistics expenses in sales costs.

If we look at it in detail online, it is mainly the "Bubble Grab Box Machine" on WeChat Mini Program.But the bubble grab box machine has grown by 67% year-on-year, and the growth rate on the JD platform is also good, although the base is not large. Other e-commerce platforms, which originally had a higher growth rate, also slowed down in the first half of the year. ** 二， Molly has successors, SKULLPANDA takes over**

From the perspective of IP, Pop Mart mainly divides IPs into three types: self-owned, exclusive, and non-exclusive. Self-owned IP has always been the core of the company, while exclusive IP also contributes to the company. Non-exclusive and third-party products only provide users with some purchase options, and are not the core competitiveness.

Currently, only self-owned IP, mainly Molly Dimoo and SkullPanda, are supporting Pop Mart. After the cute Molly, SkullPanda with a "dark style" female image was released last year and quickly gained popularity, surpassing Molly.

However, the exclusive IP was still weak in the first half of the year, with no new IP, and revenue still decreased compared with the same period last year.

Four, the cycle of craftsmanship and natural disasters, further decline in gross profit margin

As the styles, craftsmanship, and procedures are more complicated now, the manufacturing and processing costs have risen. In addition, due to the pandemic, the company conducted some promotional activities. The gross profit in the first half of the year only increased by 23%, less than RMB 1.4 billion, and gross profit margin was only 58%.

Although the highly priced MEGA dolls are now on sale, the complex craftsmanship still erodes Pop Mart's gross profit performance, and there is still fierce competition in the industry.

Four, excessive advertising and rising logistics costs, continuous decline in profit margin

In the first half of the year, revenue mainly came from online sales, which were maintained after the promotion. However, due to the promotion itself and the logistics problems caused by the pandemic, the logistics costs were still relatively high.

In addition, the company also had a lot of advertising investment in the first half of the year, such as Tmall and lucky box promotion, MEGA videos, IP theme exhibitions, etc., with an investment of over one hundred million, a year-on-year increase of 100%. However, the outbreak of the pandemic resulted in less obvious advertising effect.

In the end, the company's operating profit was RMB 450 million, a year-on-year decrease of 8%, which was not as exaggerated as the company's warning of a 30% decrease.

On March 28, 2022, telephone conference call "Does Pao Pao Mart Have a New Magic Weapon?"

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