Another trendy dark horse? Citigroup initiates coverage with optimism on "Chinese version of Lego" BLOKS, predicting a 54% compound annual growth in net profit over three years

On January 10th, Bloks Group Limited, known as the "Chinese version of Lego," was listed on the Hong Kong Stock Exchange.

Founded in 2014, Bloks focuses on the design, research and development, and sales of building character toys, holding non-exclusive licenses for over 50 globally recognized IPs, including Ultraman, Transformers, Marvel Heroes, and Naruto.

According to news from the Chasing Wind Trading Desk, on July 24th, Citigroup initiated coverage on the Chinese IP toy company Bloks, believing that the company has rapidly grown to become the largest building mech toy company in China and the third largest globally, thanks to its strong IP operation capabilities, cost-effective products, and efficient supply chain.

The report states that the company's core competitiveness lies in its strong R&D capabilities, cost-effective product positioning, efficient new product launch speed, and supply chain efficiency, which make it the preferred partner for IP copyright holders and create high industry entry barriers.

The report indicates that benefiting from IP portfolio expansion, product line and channel development, and globalization strategy, Bloks is expected to achieve a compound annual growth rate (CAGR) of 54% in adjusted net profit from 2024 to 2027, with a revenue CAGR of 52% during the same period.

Citigroup has given Bloks a "Buy" rating in the report, with a target price of HKD 155, indicating a potential upside of 17.5% compared to the current stock price.

"Cost-Effectiveness" Positioning Creates Competitive Advantage

Since its strategic transformation in 2022 to focus on the building mech toy sector, Bloks has quickly established a market leadership position by obtaining the licenses for "Ultraman" in 2021 and "Transformers" in 2022.

In the licensed IP toy sector, Bloks stands out through its cost-effective positioning. Taking the Ultraman IP as an example, Bloks faces fierce competition from rivals such as Bandai, Qimiao Building Blocks, and Lingdong Innovation.

The report shows that Bloks adopts a more cost-effective positioning, primarily targeting children aged 6-16, with a mainstream price range of 19.9-79 yuan. In contrast, Bandai positions itself as high-end, targeting adult fans, with a price range of 99-1000 yuan. Bloks products maintain competitive pricing while offering high precision, rich playability, and numerous accessories and lighting effects, with similar functionality priced at about one-third of Bandai's.

According to Frost & Sullivan, based on GMV, Bloks achieved a market share of 30.3% in China's building mech toy market in 2023, ranking first; its global market share is 6.3%, ranking third, only behind Bandai Namco and Lego.

IP Matrix Diversification Layout

IP is the cornerstone of BLOKS's business model. Currently, the company owns over 50 authorized IPs and 2 self-developed IPs.

In 2024, BLOKS's two core IPs, "Ultraman" and "Transformers," are expected to contribute 49% and 20% of revenue respectively, indicating the company's high reliance on a single IP.

To reduce risk and expand its audience, the company is actively promoting an IP diversification strategy.

The report shows that the company strategically targets attracting female consumers and adult fans through new IP products (such as Pokémon, Sanrio, EVA, Hatsune Miku) to change the current customer structure, which mainly focuses on male minors.

At the same time, BLOKS has successfully expanded the licensing scope of the "Ultraman" IP to North America, Europe, and parts of Asia, and has extended the licensing of the "Minions" IP to over 150 countries worldwide. Additionally, BLOKS continues to develop self-created IPs, including the versatile BLOKS aimed at children and the culturally themed Hero Infinite.

The report predicts that by 2025, the revenue share of "Ultraman" under BLOKS will decrease from 49% to 30%.

"Fast Iteration" Builds a Moat

In addition to "high cost performance," BLOKS's product strategy is clearly centered around "fast iteration."

The report points out that BLOKS's product design adopts a model of "standardized structure + customized appearance," with about 70% of the parts being interchangeable standard components. This not only ensures the stability of product quality and achieves economies of scale but also allows consumers to create secondary creations across models.

Moreover, product innovation is highly efficient. The report states that BLOKS's IPs take only 6-7 months from concept to mass production, far below the industry average of 10-12 months. The company plans to launch 800-1000 SKUs in 2025, far exceeding the 197 in 2023 and approximately 400 in 2024.

Domestic Penetration and Overseas Expansion Progress Together

The report believes that BLOKS's future growth will be driven by further penetration of the domestic market and rapid expansion in overseas markets.

In terms of the Chinese market, the company plans to increase its sales points from 150,000 in 2024 to 250,000-300,000 in 2025, further penetrating lower-tier cities. Among them, the 9.9 yuan value products will continue to be the sales growth driver in 2025.

In terms of overseas expansion, as the IP licensing area expands, the company is increasing its footprint in Southeast Asia, the United States, and the European Union.

Citigroup expects that BLOKS' overseas business share will increase from 3% in 2024 to 10% in 2025. In 2024, 61% of overseas revenue will come from Asia, 26% from North America, and 13% from other regions.