The collectible toy market has recently witnessed significant fluctuations, raising eyebrows among investors and enthusiasts alikeA particular brand, Labubu, has grabbed attention for its plush toys, which have seen a decline in resale prices, sparking worries about the future profitability of its parent company, Pop MartBetween December 23 and December 27, Pop Mart's stock plummeted nearly 9%, and a further drop of over 6% occurred a few days laterHowever, analysts from Morgan Stanley argue that these fears may be overblown and that the company's proactive restocking and global expansion could lead to substantial growth in the upcoming year.

In a report issued on January 5, Morgan Stanley attributes the recent instability primarily to concerns stemming from the falling resale prices of Labubu plush toys in the Chinese market, coupled with typical year-end profit-taking behaviors by investors

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Notably, they believe the market has been overly sensitive to these shifts in resale pricing.

Analysis from Morgan Stanley indicates that the decline in resale prices is driven by an increase in supply rather than a dip in consumer demandThe company’s decision to actively replenish its stock since late October was a strategic response to persistent shortages that had previously hindered availabilityBy doing so, they have not only improved consumer access to products but have consequently seen a drop in resale prices, with current figures often aligning closely with original retail prices.

Diving deeper into the situation, Morgan Stanley asserts that the market's anxiety over declining resale values is unfoundedThey highlight three key points: first, the reduced resale prices are due to increased supply rather than decreased demandSecond, consumers exhibit a preference for purchasing directly from official channels instead of relying on resellers

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Third, unlike limited-edition items in luxury markets, these products are not classified as limited edition, which traditionally justifies a price premium seen in markets for high-end goods such as fine wines.

Moreover, Morgan Stanley believes that Pop Mart's strategy could yield several benefits moving forwardThey project a potential sales growth of over 120-125% year-on-year in the fourth quarter of 2024, mitigating future stockpiling behaviors from resellers, and reducing risks associated with inventory saturationProper management of stock replenishment is crucial, with the company adopting several online metrics to track supply and demand equilibrium.

Labubu, alongside other hot IP products like Skullpanda and Crybaby, continues to face demand that far exceeds supply levelsMorgan Stanley suggests that even with the international market accounting for nearly 50% of total sales, general trends in China should not be prematurely extrapolated to the company's overall performance.

Looking ahead, Morgan Stanley remains bullish about Pop Mart's future

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They anticipate that Pop Mart will realize the fastest sales growth among its peer group, projecting a 35% increase in sales for 2025, with growth in China estimated at 12% and overseas at 69%. Key drivers of this anticipated growth include the following:

• Global expansion emerges as a significant growth catalyst, with the international sales' share projected to surpass 50% by 2025. The company is keen on continuing its expansion efforts, especially in booming markets such as Southeast Asia and the United States.
• Specifically, in Southeast Asia (excluding Singapore), the number of stores is expected to grow from 10-12 by the end of 2024 to around 20 by the end of 2025, sustaining high productivity levels in these markets.
• By 2024, the United States will have approximately 20 stores, with projections to increase this number to over 40 by 2025. The productivity in U.S
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  stores is anticipated to rise significantly, from roughly RMB 2 million per store in 2023 to RMB 2.5 - 3 million by the third quarter of 2024.

• The continued replenishment of hot-selling products is also expected throughout the first half of 2025.
• The firm intends to strategically delay certain product releases scheduled for 2024, allowing room for more popular lines like Labubu while leveraging the potential for positive surprises from other collections such as Skullpanda, Crybaby, Twinkle Twinkle, and Chaka.
• New product categories including Pop Blocks, cake shops, jewelry, and trading cards will see a more measured release rate to ensure that the quality exceeds consumer expectations.

Ultimately, Morgan Stanley has positioned Pop Mart as a potential leader in the consumer goods sectorThey project a net profit of approximately RMB 4.091 billion by 2025, representing a 37.4% increase from 2024, along with earnings per share estimates of RMB 3.06, which would correspond to a price-to-earnings ratio of 29.9 times