Overseas markets become the new "sweetheart" of Pop Mart (minutes of telephone meeting)

The following is the minutes of the telephone meeting of PPMart.HK in the first half of 2022, and the interpretation of financial reports can be reviewed in "Domestic Unlimited Internal Circulation, PPMart Pins Hope on Overseas Redemption" (https://longbridgeapp.com/topics/3370894).

I. Incremental information from management:

1. Due to the epidemic, we have scheduled the planning of new products for the second half of the year.

2. In terms of channels, Hong Kong, Macao, Taiwan and overseas will be the key markets for PPMart to cultivate in the future, so starting from this year, we will divide channels into China's mainland and Hong Kong, Macao, Taiwan and overseas for disclosure and analysis.

3. From the perspective of the whole year, we expect the growth of members to be around 40% to 45% for the whole year;

4. In the second half of the year, we expect to open more than 30 new stores.

5. In terms of promoting trendy toy culture, we held a trendy design competition, attracting cutting-edge designers, with more than 1800 designers participating.

6. In terms of globalization: In the second half of the year, we will continue to accelerate the expansion of offline channels. The end of the year is the peak season for overseas sales. We will launch more activities during the festival period such as Black Friday and Christmas to attract consumers.

II. Analyst Q&A:

Q: The recent trend is good. How is the overall performance in July and August, and how is the performance of each channel? The country has issued a policy for blind box specifications. How do you understand the unconditional return of full-package blind boxes? Will the demand for trendy toys weaken among consumers?

A: In July, offline business was restored well, and it reached a new high in August. In terms of online, we had a lot of pressure in June and July, but it has recovered significantly in August.

The issuance of policies affirms the legal and compliant nature of the blind box format, which is good news for the blind box industry. PPMart participated in the policy guidance research, and as a leading company, we also put forward our opinions. The implementation of the policy still requires time, and some understanding needs to be clarified.

In terms of consumers, our stores are mainly located in first-tier cities. The epidemic prevention and control in the second quarter had a significant impact on offline, but overall, we firmly believe that the market we are in is growing rapidly, and our products are cyclical resistant. When trendy toys become a lifestyle habit, it will be beneficial to our development.

Q: The proportion of overseas income in the first half of the year exceeded 5%, and the guidance in July mentioned that more than 40 stores, including franchise stores, would be opened by the end of the year. Has this guidance changed? Secondly, due to multiple factors, the gross profit margin was under pressure in the first half of the year. Can we see an improvement in the gross profit margin in July? In the medium and long term, how to strike a balance between art and business? Lastly, the overall performance of the online channel was eye-catching in the first half of the year. What innovative strategies will be adopted in different online channels in the future?

A: According to the currently confirmed number of stores, the number of stores expected to operate by the end of the year will be around 40. The Asian region already has the team and experience needed to open stores, and after the first store in Western countries, we have greater confidence, and the team has the ability to deal with faster expansion.

Stable operating stores include Hong Kong, South Korea, and Singapore. Hong Kong stores have an average monthly sales of over 1 million, and South Korea's existing stores have a monthly income of about 700-800,000. Singapore's monthly average revenue is around 1.2-1.4 million.

Among the newly opened stores, the US store is located in the largest shopping center on the west coast of California, with a monthly income of around 1.9 million. The new store opened in London, UK, with a monthly income of 1.2 million RMB.

In terms of cost structure, the rental structure is similar to that of the domestic market, but personnel costs and decoration investment are 50% higher compared to the domestic market. However, the income aspect can make up for this difference, and the scale of offline channels is improving, thereby enhancing profitability.

Gross profit is an important indicator that the company focuses on and is the core competitiveness of the company. From the perspective of the overall industry, LEGO and Hasbro are facing problems such as rising procurement costs, increasing inventory, and slowing turnover. LEGO has also announced that it will use price hikes to mitigate the increase in costs.

Our company's gross profit has dropped to 58%, and the increase in procurement costs is one of the factors. This part of the cost is mainly used for new technologies, such as the gradient color of School Panda, flocking technology, and soft rubber. In July, gross profit did not fall below the first half of the year's 58%. Overall, we strive to control the gross profit at 58% or above for the whole year. In terms of sales, we have canceled some ancillary activities, such as Tmall Super Brand Day, which will also help our gross profit to a certain extent.

In terms of online channels, with the changes in the overall environment, the traffic structure is also changing, and some traffic may have shifted from Tmall to Douyin. We have had multiple meetings with Tmall to discuss innovative ways of playing. Currently, we have three stores on Tmall and will carry out some differentiated operations, hoping to see more growth on the Alibaba platform.

Our cooperation with JD.com has a relatively short time, and it is still in normal operation. In the future, we will accelerate the development of JD through gift boxes and other forms.

We have encountered some challenges in Douyin. Although the viewing volume is good, there are still some problems in sales. We currently do not offer discounts and gift giveaways in the live broadcast room. In the future, we will open more live broadcast rooms and invite more influencers.

Q: Recently, new products have performed well. What is the annual product planning, and how does management select products? Secondly, what are the medium and long-term plans for overseas businesses? What is the inventory situation?

A: Product innovation is our core concept, and we continue to launch new IP images and various blind box series. We also hope to introduce more masculinized products to attract more male consumers.

Stores in overseas markets are profitable and will mainly expand in Western countries in the medium and long term. Our proportion of Asia and the West this year is 75% and 25%, and we strive to maintain this ratio next year or the year after. In addition, plans to enter Southeast Asian countries such as Thailand, Vietnam, and the Philippines are in progress.

The proportion of self-owned product inventory is 82%, and the structure has not changed much. The inventory proportion within six months is 73%, and we will not impair self-owned products. Only inventory that is over a year old will be impaired. We reduced value by more than 8 million in the first half of the year, and the amount in the second half is expected to remain stable. Overall, inventory is relatively healthy. Q: Regarding offline channels, what are the future plans for the robot store? What is the advertising plan for the second half of the year? What are the characteristics and preferences of overseas consumers? Who are the main overseas competitors?

A: The core logic of the robot store is people flow, so it is mostly located in places with high people flow, such as shopping malls and subways, while the store is for destination consumption. As the epidemic has a greater impact on people flow, it has an even greater impact on the robot business. We will adjust our robot vending according to the recovery of the epidemic and customer flow.

Our robot business is mainly divided into two types. In relatively mature places, the robot business is set up to assist the store and improve operation efficiency, while in less mature places, the robot business plays the role of radar and tests the layout of the store in advance.

The advertising spend in the second half of the year is expected to be 100 million yuan, with a slightly lower proportion. We will conduct online promotion during festivals such as Double Eleven and New Year, and also promote special products. We will also cooperate with offline shopping malls to launch some activities. However, overall advertising expenses will not be too high.

In terms of competitors, foreign competition is not very intense, while domestic competition faces many dimensions.

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