Pop Mart was severely wronged? Morgan Stanley: Overseas business has been “prematurely sentenced to death” by the market, and even in the most pessimistic scenario the stock price is still undervalued by about 20%.

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Pop Mart's stock price fell from last year's high of HKD 339.80 to around HKD 150, dropping by more than half. What crushed market sentiment was not a single piece of bad news, but the company's lack of guidance for Q1 after the earnings report, plus overseas sales in 2025 came in slightly below expectations, and then bulls sharply downgraded their 2026 forecasts. The expectation gap between bulls and bears narrowed rapidly.

According to Wind Pursuit Trading Desk, Morgan Stanley Asia Consumer Sector Analyst Dustin Wei directly pointed out in the latest report: the market’s pricing of Pop Mart assumes “the overseas business has already declared failure in markets where penetration has just begun.” He checked this logic with a sum-of-the-parts (SoTP) valuation—and deliberately adopted assumptions even more pessimistic than the market. The conclusion: the per-share value is about HKD 180, which means about 20% upside from the current price.

Rising inventory, pressured overseas profitability, and controversy over new businesses are three major hurdles in front of the stock price. The severity of these three issues may be overestimated: 40-45% of overseas SG&A are variable costs that change with sales and won’t infinitely amplify losses; the excess portion of inventory is estimated at 1-1.5 billion yuan, but Pop Mart’s products have no expiration dates or seasonal clearance pressure; the new businesses that are truly worth tracking are not the small appliances, which are most criticized externally, but the theme parks and animation shorts set to debut this year.

The sign of sentiment swinging to an extreme is often when the divergence between bulls and bears is minimal. Right now, almost all investors expect ugly Q1 overseas numbers; the bear case is fully priced in—which precisely forms the core basis for the report’s judgment that sentiment has phased bottomed.

Investors have priced in the worst-case scenario; there’s still 20% upside even under extreme assumptions

The market consensus for Q1 is roughly: group sales up 50-60% year-on-year; Greater China up 70-80% YoY; overseas up about 30% YoY, but overseas QoQ for Q1 down about 50%. For the full year, most investors expect revenue growth in the teens, lower than the company’s >20% guidance, and single-digit profit growth for the year, with profits declining year-on-year in the second half. Sell-side consensus is net profit of about 15.7 billion yuan in 2026, but this number is no longer an anchor for investor decisions.

If you back-calculate from the current stock price of about HKD 150 as fair value, it implies: about 18x PE for Greater China; about 7x PE for overseas business. What does 7x mean? Valued separately, the overseas business is worth only about $2 billion USD. This is a business that has established scale in Southeast Asia, North America, Europe, and Japan, with penetration in the U.S., Europe, and Japan still far from saturated.

Morgan Stanley’s SoTP specific assumption is: Greater China’s 2026 sales grow 26%, net margin 34.5% (slightly lower than 35.1% in 2025), at 22x PE; overseas sales fall 30%, net profit falls about 60%, net margin only 20%, at 7x PE. For the group as a whole: sales growth just 1%, profits fell 12%, equivalent to HKD 180 per share. Even calculated this way, it’s still 20% above current price.

The downside for overseas margins is overestimated

The market's concern is straightforward: expense ratios are diluted when sales grow quickly; once sales decline, fixed costs exert pressure. But the cost structure for overseas business is more flexible than this concern suggests.

Within overseas SG&A, e-commerce platform fees and international logistics/transportation costs account for 40-45%, both highly correlated with online sales—when sales go down, these fees naturally decrease as well.

The more important detail is that in 2H 2025 compared to 1H, both of these fees showed clear efficiency gains: the share of company’s own website grew, bypassing third-party platform charges; international logistics continued optimization. These changes imply that even if overseas sales drop sharply in 2026, the extent of operational deleveraging may be far less than the market expects.

Inventory pressure is controllable; pricing discipline comes first

Rising inventory is another focus for investors.

By end-2025, Pop Mart’s inventory reached 5.5 billion yuan (cost basis), higher than 1.5 billion at end-2024; inventory turnover days rose from 126 in 2024 to 148 in 2025, expected to further rise to around 179 days in 2026—close to pandemic-hit levels in 2022.

Of this, excess inventory is estimated at 1-1.5 billion yuan, caused by overly optimistic sales forecasts for Q4 2025 and Q1 2026 from July-September 2025. This number seems large, but there’s several buffers: Pop Mart’s products have no shelf life, so there’s no forced clearance timeline; cumulative inventory impairment from 2021-2025 totals only about 50 million yuan—even after the COVID years, this figure remains extremely low; continued channel expansion keeps bringing in new users, for whom existing IPs are “new products”; strong Greater China demand can also absorb some excess overseas inventory if needed.

Discount promotions and boosting “lucky bag” intensity are the fastest ways to clear inventory, but the cost is pricing power. Currently, the company hasn’t taken this route (overseas promotions did rise in Q4 2025, but not systematically), indicating the company believes pricing discipline is more important than inventory turnover speed.

Market misreads new business; short-form video IP potential is overlooked

Pop Mart’s upcoming small appliances product line has sparked market doubts, with some investors saying it’s a “throwing darts in desperation” due to lackluster growth.

The report points out this project has been under development for over a year and a half, during which the company was actually in a period of exponential growth. The small appliance line, like the MEGA series, targets Pop Mart’s top 5%-10% core consumer group; functionality is not the main selling point—they’re “secondary display items.” The first product is a Monsters Series mini fridge, positioned for room display rather than kitchen use.

The report acknowledges this category has lower gross margin and longer inventory cycle, but predicts the company won’t push it aggressively. Instead, they’ll closely monitor consumer feedback and treat it as a long-term category expansion experiment.

The truly worthy new businesses to follow are: Pop Land theme park, POPOP trendy jewelry, Pop Blocks building toys, and a dessert line—expected to see real progress this year. In addition, Twinkle Twinkle and Peach Riot animation shorts are expected to premiere this year. Once these animations gain their own audiences, IP value will no longer solely depend on stores—this is a narrative line almost completely unpriced by the market right now.

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The above wonderful content is from Wind Pursuit Trading Desk.

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