After a surge of 180%, is POP MART's valuation too high?

According to news from the Wind Trading Platform, UBS research on July 14 shows that benefiting from the popularity of Labubu, POP MART has surged 180% this year. The cash flow return on investment (CFROI) for 2024 has risen to 24%, and it is expected to exceed 40% in 2025/2026, with its profitability and sales growth far surpassing global peers.

Despite strong financial forecasts, the current market pricing model suggests that POP MART's cash flow return on investment will decline to 32% by 2029. This indicates that the market is cautious about whether POP MART can maintain its current high growth and high profit margins.

UBS believes that the key to POP MART's future stock performance lies in its ability to sustain high growth and profit margins. If it can maintain recent forecast levels, the stock has about a 40% upside potential; however, if growth slows to peer levels, it faces a 40% downside risk.

CFROI Performance Outstanding, but Market Expectations Are Cautious

Among global toy and character brand companies, POP MART's profitability is unmatched.

The research report points out that driven by a doubling of sales and a recovery in EBITDA profit margins, the company's cash flow return on investment (CFROI) for 2024 has been raised to 24%. CFROI is one of the core indicators for assessing company value.

The company's profit margin last year reached 42%, far exceeding the long-term median level of about 20% for its peers. Additionally, in terms of asset efficiency, thanks to accelerated sales growth over the past two years, POP MART's asset turnover has gradually improved to the industry average.

However, the report also warns that compared to older peers, both growth and profit margins in the toy industry are cyclical, and when companies reach cyclical peaks, these two indicators typically slow down.

Based on the general earnings forecasts from IBES, POP MART's CFROI is still expected to exceed 40% in 2025/2026. IBES is the world's most authoritative analyst consensus earnings forecast database, summarizing global institutions' consensus expectations for the future performance of listed companies.

Interestingly, the market expectations implied by the current stock price are relatively conservative. Market pricing models indicate that investors seem to expect the company's CFROI to decline to 32% by 2029.

This reveals a core contradiction: there is a significant gap between analysts' optimistic forecasts and the cautious market pricing, indicating that the market does not fully believe that POP MART can maintain such high profit levels in the long term

Valuation Analysis and Scenario Simulation: What is the Market Betting On?

The UBS HOLT model's valuation analysis simulates three potential trends for POP MART:

Market Implied Scenario (Current Pricing): The current stock price reflects the market's expectation that the company's sales growth will slightly slow to 24% in 2028-29, and the EBITDA margin will return from its peak to the company's own five-year median of 35%. It is worth noting that even under this "slowdown" expectation, its growth and profit levels are still far higher than the industry’s long-term median of 6% sales growth and 20% profit margin.

Optimistic Scenario (Upside Potential): If POP MART can continue to maintain its recently forecasted growth level (28% sales growth) and profit margin (40%), then its stock price would have about a 43% upside potential. This represents the market recognizing it as a "structural winner."

Pessimistic Scenario (Downside Risk): If the company's IP popularity wanes, leading to a slowdown in sales growth to 20%, while the profit margin returns to a level close to the industry average of 25% due to intensified competition and other factors, its stock price would face about a 42% downside risk. This represents the market viewing it as a "flash in the pan" trend.

In summary, UBS believes that POP MART is at a crossroads.

POP MART's outstanding financial data and strong growth momentum are undoubtedly impressive. However, for investors, the core judgment lies in whether its strong IP creation capability and brand appeal can transcend cycles and truly become a globally successful and sustainable consumer brand.

The current stock price is seeking balance in this game of optimism and caution