• 1H26 results came below expectations, mainly due to slower 2Q26 growth and bigger margin squeeze vs. expectations. 2H26 could decelerate further amid the steepest comparable base for 3Q26; supply-chain fixes and store upgrades override sales growth
• Overseas slump along with traffic normalization rather than demand collapse; global store rollout shifts from speed to strict site selection 
• New verticals (e.g., desserts, theme park II) extend IP beyond toys; RMB2–5bn buyback also signals conviction
• Cut FY26/FY27 EPS by 12%/17% and lower TP to HKD195 on 17x 12-month rolling PE (previous TP: HKD247 on 20x FY26 PE). The counter currently trades at 13.4x PE with 2% yield; we retain a BUY in view of sound medium-term potentials from its strengthening IP portfolio.

1H26 profit growth decelerates on overseas weakness and margin compression. Pop Mart delivered revenue of RMB17.2bn in 1H26, up 23.8% y/y, with gross profit rising 22.6% to RMB12bn on a 69.7% gross margin (-0.7ppt). Operating profit grew 11.3% to RMB6.7bn as operating leverage softened. Attributable profit came in at RMB5bn (+10.1%), while non-IFRS adjusted net profit reached RMB5.2bn (+9.5%), at 30% adjusted net margin. Basic and diluted EPS were RMB 3.8 (+10.5%) and RMB 3.79 (+10.8%), respectively. The deceleration from 1H25's triple-digit profit growth reflects a normalising base, overseas demand headwinds, and stepped-up investment in global footprint expansion.

Domestic rebound masks overseas contraction as geographic-mix shifts. The PRC market stood out, with revenue surging 47.3% y/y to RMB12.2bn, representing 71% of group sales (1H25: 60%). PRC gross margin remained robust at 72.1% (-1.8ppt). By contrast, overseas revenue contracted 9.1% to RMB5bn (29% of total), with gross margin falling 4.1ppt to 63.7%. Regionally, Southeast Asia declined 12.3% to RMB2.3bn, East Asia (incl. HK/Macau/Taiwan) fell 8.5% to RMB1.4bn, and Europe & others dropped 15.6% to RMB0.4bn. Only North America bucked the trend, growing 2.4% to RMB0.8bn. 

Plush toys surge 60% and overtake designer toys as core revenue driver. Product mix shifted materially: plush toys revenue soared 60% y/y to RMB9.8bn, surpassing designer toys (RMB 6.16bn, -4.3%) to become the largest category at 57% of sales. The plush margin of 67.8% (-2.3ppt) trails designer toys at 73.2% (-1.5ppt), implying a modest structural margin dilution as the mix tilts toward lower-ticket, higher-volume plush SKUs. Other products grew 18.4% to RMB1.2bn. The plush outperformance underscores the viral success of the Labubu and related IP franchises.

Offline channel strength and accelerated store rollout underpin domestic traction. Offline revenue grew 26.5% y/y to RMB11.3bn, driven by retail stores (+28.2% to RMB9.3bn) and roboshops (+19.1% to RMB2bn). Online revenue rose 17.1% to RMB4.3bn, with Douyin leading at RMB1.2bn (+22.8%), followed by Pop Mart WeChat mini-program at RMB1.1bn (+12.5%) and Tmall at RMB1bn (+15.2%). Wholesale and other channels contributed RMB1.6bn (+25.6%). The store network expanded to 676 retail stores (+46 net) and 2,827 roboshops (+190 net), with PRC adding 28 stores and 116 roboshops, and overseas adding 18 stores and 74 roboshops. Registered members crossed 100mn, reinforcing the recurring-revenue ecosystem.

Margin erosion and operating deleverage. While gross margin held relatively firm at 69.7%, operating margin compressed meaningfully as distribution & selling expenses jumped 35.2% y/y to RMB3.9bn and administrative expenses rose 28.3% to RMB1.4bn. The step-up in opex reflects front-loaded costs for overseas store openings, marketing campaigns, and talent build-out. Net cash remained exceptionally strong at RMB13.4bn, providing ample balance-sheet capacity to fund the global rollout without straining liquidity.

Repositioning 2026 as a rectification year. Management explicitly labelled 2026 as a year for adjustments, prioritising operational fixes over sales goals, even at the cost of likely missing the prior 20% y/y full-year revenue growth target. Chairman Wang stressed that last year’s viral traffic surge had masked structural weaknesses, ranging from supply-chain forecasting errors to inconsistent store-level service standards. Hence, the current focus is on building a sustainable global platform. Evidence of this health improvement is visible in its IP portfolio: Labubu’s revenue contribution has fallen to roughly 25% of sales, while six IPs exceeded RMB1bn sales each in 1H26, and eleven surpassed RMB100mn revenue each, with Twinkle Twinkle sales surging remarkably by 580.6% to RMB2.7bn. Organisationally, Pop Mart has consolidated four regional teams under a unified global operational platform to enforce consistent brand presentation, service protocols and merchandising standards across all markets. During 1H26, a total of 11.2mn shares were repurchased and cancelled for c.RMB1.55bn. The board also announced a RMB2–5bn share buyback programme over the next six months to signal conviction in long-term value creation beyond near-term earnings volatility.

2H26 guidance turns cautious on record comparables. Domestically, offline foot traffic grew at double-digit rates y/y in 5M26, while Jun 2026 turned slightly flat amid an exceptionally high base created by last year’s marketing event; Jul-Aug 2026 quickly returned to a positive territory. By contrast, overseas revenue contracted 9.1% as online channels - where traffic had spiked abnormally in 2025 due to an under-built store network - suffered the sharpest correction. Offline stores overseas remain healthy and busy, underscoring management’s view that the pullback was a traffic-normalisation story rather than a demand collapse. Looking ahead, the company warned that 3Q26 will face an even more demanding comparable base, and that full-year profit growth will likely decelerate further in 2H26. Overseas operating margins are also under pressure due to weaker scale leverage and pre-opening costs for new stores. Therefore, we cut our revenue estimates for FY26/FY27 by 11%/16% and earnings by 12%/17% in view of a more cautious near-term outlook.

Cross-regional allocation and supply-chain digitisation to restore inventory balance. Inventory rose by c.RMB600–700mn from year-end 2025, driven chiefly by demand-forecasting deviations during last year’s explosive growth, elongated logistics lead times to the western markets, and mistimed product launches such as the world cup-themed labubu collection hitting shelves in march – a bit too early to sustain sell-through. Pop Mart noted that inventory inflected downward starting in Jul 2026, supported by three levers: (1) global cross-regional stock transfers to match supply with geographically divergent demand; (2) tighter order controls in 2H26 to align procurement with a more rationalised sales forecast; and (3) supply-chain realignment and localised production (using overseas factories to supply overseas markets) to shorten lead times and reduce air-freight reliance. The company ruled out large-scale discounting to clear stock, opting instead to protect brand equity while gradually optimising SKU mix and warehouse layout across its ten-country logistics network.

New verticals (desserts, home appliances & entertainment) on disciplined rollout pace. Pop Mart is advancing its conglomeratisation strategy alongside globalisation, using internal incubation, external partnerships and strategic investments to embed its IPs into broader lifestyle scenarios. The dessert business, which originated from its theme park F&B operations, opened its first standalone store in Aranya (Hebei, China) in Jun 2026 and a second in Singapore’s Sentosa in Jul 2026; the Aranya flagship recorded over 60,000 visits, while the Singapore location achieved an average ticket above SGD50 within its first month. The company has also rolled out 40-plus dessert pop-ups across 25 cities in China. Home appliances and food merchandise are also progressing on schedule, and Pop Mart’s film project remains in development. Management emphasised discipline, stating that the immediate priority is refining product development, staff training and supply-chain fundamentals rather than chasing store count, ensuring that each new vertical genuinely deepens the emotional bond between fans and its IP ecosystem.

Beijing theme park expansion drives footfall and night-time engagement. Following a year-long renovation, the Beijing theme park reopened this summer with an expanded map, new attractions and a night-tour programme that has already shifted the visitor experience. Footfall doubled m/m and rose c.40% y/y post-expansion, with more than 25% of traffic coming from night tours. Guest feedback on atmosphere and immersion has exceeded internal expectations, though management acknowledged operational friction points including long queues for popular attractions and seasonal extremes (summer heat and winter cold). Looking forward, bubble street will undergo renovation next year, and concept design for phase two has commenced with plans to introduce additional IPs into the park. Strategically, Pop Mart views the park not merely as a revenue line but as a brand-building platform that transforms casual buyers into emotionally invested fans through live performances and narrative world-building.

Store network pivots from speed to quality. Domestically, Pop Mart renovated and relocated more than 20 stores in 1H26, delivering double-digit improvements in both sales per sm and overall traffic. Several dozen additional upgrades are planned for 2H26 across tier-1 through tier-3 cities in Mainland China, as well as Hong Kong, Macau and Taiwan. Flagship formats are no longer confined to Shanghai or Beijing; newly opened large-format stores in tier-2 and tier-3 cities have matched or even exceeded the 30-day footfall of the Shanghai flagship. In overseas markets, the strategy has shifted from quantity over quality to rigorous site selection, as the company is now willing to delay openings rather than compromise on location, size or lease terms. Early stores in sub-optimal positions are being relocated or resized toward the standard 150–200sm prototype, and similar renovation efforts are beginning in Asia Pacific. Globally, the network stands at 676 retail stores (+46 net) and 2,827 roboshops (+190 net), with online-offline membership integration ensuring a seamless user journey across every touchpoint. Over the medium-term, we believe margin stabilisation and re-accelerating profit growth should be more easily achievable as the store network matures and opex leverage improves.

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