The anime-themed trading card and collectible toy maker has filed for a Hong Kong IPO in hopes of luring investors with its strong position in the high-profit business.
Highlights:
Collectible toy manufacturer Kayou applied for listing in Hong Kong, with CICC, Morgan Stanley and JPMorgan Chase acting as underwriters.
China's collectible toy market is growing rapidly, meeting the needs of China's growing middle class of consumers.
This article was written by Liang Wuren.
Card Tour***'s collectible trading cards are so popular in China that everyone from kids to ** is excited about them. Now, the company is looking to take its trading expertise to the next level, with its sleek, high-margin products listed in Hong Kong to stimulate buyer interest.
Last Friday, a card game known for its anime-themed trading cardsApply for listing in Hong Kong, underwritten by big-name investment banks such as CICC, Morgan Stanley and JPMorgan Chase. The target of the funds it plans to raise is unknown, but a report by Bloomberg News last October suggested that the company could raise up to "hundreds of millions of dollars", making it on track for one of the largest IPOs in Hong Kong's IPO market this year. And that's probably why it's attracting big-name investment banks, which usually shy away from smaller deals.
Cardgame hopes to attract investors with the story of the rapid growth of China's collectible toy market, which is driven by an expanding middle class of consumers who are increasingly willing to shell out of their pockets for this non-essential, but fun, and affordable item. The company divides its so-called "pan-entertainment" product industry into three segments: products, toys, and stationery.
According to third-party data in the card game's listing application documents, in the five years to 2022, the total transaction value of clothing "products" including toys and similar themes of anime characters reached 130 billion yuan, with a compound annual growth rate of 17%. It is expected to grow by about 80% to $234 billion by 2027.
A key component of "Toys" is trading cards, which are the biggest business of card games, and the rest is made up of products such as blocks and dolls. The total merchandise volume of the entire "toys" category in 2022 was 69 billion yuan, and it is expected to grow by more than 87% to reach about 129 billion yuan by 2027.
The card game has found its vantage point among collectible cards featuring iconic anime characters such as Ultraman. The company claims to be the No. 1 in the field of trading cards in China, and the No. 2 in the "product" industry and the "toy" industry. In 2022, cards accounted for more than 95% of card game revenue, but that percentage dropped to around 86% in the first nine months of last year, as card games began selling dolls in an effort to change the landscape of a single product. In 2022, the company also expanded into the field of stationery.
This diversification is important, but it also takes time to grow a new business. Due to the popularity of the core trading cards, the revenue of card games in 2022 will soar by 80% from the previous year to 4.1 billion yuan. But in the first nine months of last year, that number fell by nearly 50 percent year-on-year. Such a large decline suggests that the popularity of trading cards may have peaked, although the company attributes the decline to diversifying its product portfolio and IP (intellectual property).
Enviable profit margins
While this diversification is necessary, it also affects the overall gross margin of card games, as the sales premium for these new products is typically much smaller compared to cards that are extremely low cost to produce. A great example of this is the Ultraman card in the card game, which can bring a huge premium, and the transaction between collectors** can be well over $150.
Trading cards have a gross profit margin of more than 70%, compared to about 43% for dolls and 54% for toys. Although dolls and stationery still accounted for only a small percentage of total card game revenue between January and September last year, they lowered the company's overall gross margin by two percentage points to just over 67% after their launch.
Despite the enviable gross margin, the company still lost money in 2021 and 2022, mainly due to the loss in the valuation of its preferred stock. If these losses are not taken into account, the card game is completely profitable. What's more, even if no such adjustments are made in the future, the company should be able to remain profitable, as all of its preferred stock will be converted into common stock, eliminating any valuation-related losses in the future.
Bubble Mart(9992.HK) can be a good reflection of the prospects of the card game after its launch. Pop Mart is known for selling collectible toys in the form of "blind boxes", which has attracted many consumers in the Chinese market, and the company went public in Hong Kong at the end of 2020, raising more than 6$700 million.
Since then, Pop Mart's share price has exceeded 70%, largely due to the general weakness of Chinese concept stocks, but its price-to-earnings (PE) ratio is still as high as 37 times, indicating that investors are still optimistic about the company's future. The profit for the first nine months of last year was 2600 million yuan, if calculated according to this price-earnings ratio, the market value of card games is about 13 billion yuan.
The revenue base of card games is slightly smaller than that of Pop Mart, but the gross profit margin is higher. As a result, a key task for the company was to find the right balance between trading cards and other lower-margin products in order to maintain good gross margins while reducing reliance on one commodity in the notoriously fickle collectible toy market.
Another challenge for the company, like all retail businesses, is to maintain sales in the face of a weak Chinese economy, especially since its products are not essential and increasingly cost-conscious consumers can easily abandon purchases. In order to mitigate this risk, Pop Mart has embarked on an aggressive overseas expansion, unlike Kayou, which has relied on the Chinese market for all of its operations so far. Still, these risks aside, the overall financial situation of the card game is quite positive, suggesting that it could become a collectible item in its own right for investors looking for a profit in China's vast retail market.