Overseas demand and margins cool in tandem; Pop Mart downgraded to Underweight

Overview

The report analyzes Pop Mart's first-half 2026 results, cooling overseas demand, high-base pressure in the second half, and operating deleverage. J.P.Morgan believes the company's IP operating capabilities and long-term overseas expansion potential remain intact, but near-term revenue, margins, and earnings expectations need to be repriced. It therefore downgrades the rating from Neutral to Underweight.

Core views

On rating and valuation, J.P.Morgan downgrades Pop Mart from Neutral to Underweight and cuts its Jun-27 target price from HK$165 to HK$120. The new target price applies a 12x 2027E P/E, down from 14x previously and in line with the valuation multiple of China's consumer discretionary sector. Based on the share price of HK$153.70 on August 20, 2026, this implies 22% downside. The report notes that the company's shares have fallen 18% year to date, versus a 0.3% rise in the Hang Seng Index over the same period. Although its valuation has declined from the peak P/E of 30x in August 2025, slowing earnings still limits near-term upside. The growth inflection point is the core rationale for the downgrade. Revenue in the first half of 2026 was RMB17.2 billion, up 24% year over year but 11% below J.P.Morgan's forecast. Regional performance diverged significantly: China revenue still grew 47% year over year, while overseas revenue declined 11%. The report estimates that total revenue in the second quarter fell 11% year over year, below the buy-side expectation for flat growth and marking the first quarterly revenue decline since 2023. China revenue still grew 11%, while overseas revenue plunged 44%. This indicates that the explosive growth driven by the Labubu craze in 2025 is normalizing, with overseas markets becoming the primary drag. The near-term revenue trajectory remains challenging. With both China and overseas markets facing a high base created by the Labubu craze, J.P.Morgan expects revenue to decline by more than 35% year over year in the third quarter of 2026, narrowing to approximately 20% in the fourth quarter. Although the report expects China and overseas revenue to improve sequentially from the third to the fourth quarter, both are still expected to post double-digit year-over-year declines. Its model forecasts total revenue in the second half of 2026 to decline 29% year over year, comprising a 7% decline in China and a 54% decline overseas. Full-year revenue is forecast at RMB33.711 billion, down 9.2% year over year and reduced 17% from the previous forecast of RMB40.598 billion. The report therefore believes that the previous bear-case scenario has effectively become the new base case. Slowing revenue is flowing through to margins via operating deleverage. Adjusted net profit in the first half of 2026 was RMB5.1 billion, up 11% year over year but 10% below J.P.Morgan's RMB5.7 billion forecast. Excluding the RMB720 million foreign-exchange loss disclosed by the company, adjusted net profit would have been approximately RMB5.8 billion, broadly in line with the original forecast. However, overseas operating margin declined 14 percentage points year over year to 30%, while relatively rigid overseas operating expenses create greater risk to second-half margin delivery. J.P.Morgan expects the second-half net margin to fall to approximately 27%, down 9 percentage points year over year, a substantially greater contraction than the 3.5-percentage-point decline to 30% in the first half. Full-year overseas operating margin could fall from 49% in 2025 to 18% in 2026 before gradually improving. China and overseas gross margins are expected to stabilize at 69%–70% and above 70%, respectively, during 2026–2028. Earnings forecasts were consequently cut across the board. J.P.Morgan reduced its FY26–28E revenue forecasts by 17%–18% and its adjusted net profit forecasts by 14%–22%. Its FY26 adjusted net profit forecast was cut 21.6% from RMB12.119 billion to RMB9.5 billion, which the report expects to represent a 26% year-over-year decline. Adjusted EPS was reduced 21.6% from RMB9.02 to RMB7.07. FY27 adjusted net profit was cut 14.3% from RMB13.792 billion to RMB11.818 billion, while EPS was reduced 14.3% from RMB10.27 to RMB8.80. The current model forecasts FY27 revenue to rebound 11.2% to RMB37.474 billion and adjusted EPS to grow 24.4%, followed by another 9.1% increase in FY28 revenue to RMB40.876 billion, indicating that the report still expects a return to moderate growth in 2027. Inventory and management strategy also add to near-term uncertainty. Inventory rose to RMB6.1 billion as of the end of June 2026, while inventory days increased from 150 days in 2025 to 245 days in the first half of 2026. Management stated that inventory had already begun declining since July 2026 and that excess inventory might be cleared through methods such as “lucky bags.” Management did not provide formal guidance and showed no willingness to alter its established operating strategy solely to meet growth targets. The company also plans to conduct RMB2 billion to RMB5 billion of share buybacks over the next six months, equivalent to approximately 1.1%–2.8% of total shares outstanding, which the report believes could provide some downside support. The long-term view does not deny the company's competitiveness. J.P.Morgan believes the 2026 adjustment reflects the reflexivity and cyclicality of a single IP rather than damage to Pop Mart's underlying competitive advantages. Its deep IP portfolio, ability to commercialize artist IPs, operating experience, pricing power, and strong ROE characteristics remain intact. The report forecasts 2025–2028 revenue CAGRs for non-Labubu IPs of 16% in China and 9% overseas. With only slightly more than 220 overseas stores currently, significant expansion potential remains, creating scope for a return to moderate growth in 2027. However, until overseas execution and margins stabilize and the market completes its earnings-expectation reset, the report sees limited upside for the share price.

Analysis framework

The report first uses the first-half 2026 results and implied second-quarter revenue to validate the growth inflection point, then separates revenue performance between China and overseas markets and forecasts the third- and fourth-quarter trajectory in light of the high Labubu base. It subsequently assesses the impact of operating deleverage through overseas operating margins, rigid operating expenses, and changes in net margin, and accordingly lowers its 2026–2028 revenue and earnings forecasts. Finally, it revalues the company using forecast 2027 earnings and a target P/E while discussing the conditions for a long-term recovery and near-term support in the context of the IP portfolio, overseas store potential, inventory, and the buyback plan.

Methodology notes

• Valuation MethodologyP/E and PEG Valuation

  Target P/E valuation

  The report applies a target 2027E P/E of 12x to forecast earnings to derive a Jun-27 target price of HK$120. The multiple was reduced from 14x previously and benchmarked against valuations in China's consumer discretionary sector.

• Corporate Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Operating deleverage amid slowing revenue

  The report believes overseas operating expenses are relatively rigid, meaning that declining revenue will cause operating margin and net margin to contract more rapidly. It uses this assessment to evaluate earnings pressure in the second half of 2026.

• Event-Driven Analysis and Behavioral FinanceExpectation Gaps/Expectation Management

  Comparison of actual results, institutional forecasts, and market consensus

  The report compares first-half revenue and profit with its own forecasts and compares second-quarter revenue with buy-side expectations for flat growth and FY26 earnings with the pre-results consensus of approximately RMB10 billion to identify the risk of downward earnings revisions.

• Corporate Fundamentals and Financial Framework

  Regional revenue and margin breakdown

  The report separately analyzes revenue and margins across China, overseas markets, Asia Pacific, the Americas, Europe, and other regions to determine the primary sources of the overall slowdown and distinguish the short-term overseas adjustment from the company's long-term competitiveness.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Pop Mart (9992.HK)

  The China business remains resilient, but declining overseas demand, a high base, and operating deleverage are pressuring revenue and profit in the second half of 2026.

  Strengths

  It has a deep IP portfolio, experience in commercializing artist IPs, pricing power, and strong ROE characteristics. Its overseas store count remains low, leaving room for long-term expansion.

  Weaknesses

  Growth is relatively sensitive to a single popular IP and its cycle, while overseas operating expenses are relatively rigid, causing margins to decline rapidly when revenue slows. Inventory days have also risen significantly.

  Comparison

  In the first half of 2026, China revenue grew 47%, while overseas revenue declined 11%. In the second quarter, China grew 11%, while overseas markets declined 44%, with domestic performance significantly stronger than overseas performance.

  Risks

  Delays or failures in launching new IPs, overseas execution difficulties, cost inflation, and geopolitical and regulatory risks.

Key data

• Rating ChangeDowngraded from Neutral to UnderweightGrowth is transitioning from hypergrowth to normalization, while overseas execution and margins are under pressure
• Jun-27 Target PriceHK$120.00Previously HK$165.00; based on a 12x 2027E P/E and implying 22% downside
• First-Half 2026 RevenueRMB17.2 billionUp 24% year over year and 11% below J.P.Morgan's forecast
• First-Half 2026 Regional Revenue GrowthChina +47%; overseas -11%Significant divergence between domestic and overseas performance
• Second-Quarter 2026 Revenue GrowthTotal revenue -11%; China +11%; overseas -44%The first quarterly decline in total revenue since 2023, versus the buy-side consensus for flat growth
• Third- to Fourth-Quarter 2026 Revenue Forecast3Q26E below -35%; 4Q26E approximately -20%Primarily affected by the high base created by the Labubu craze
• First-Half 2026 Adjusted Net ProfitRMB5.1 billionUp 11% year over year and 10% below the RMB5.7 billion forecast; approximately RMB5.8 billion excluding the RMB720 million foreign-exchange loss
• Overseas Operating Margin30%Down 14 percentage points year over year in the first half of 2026; FY26E could fall to 18%, versus 49% in 2025
• Second-Half 2026 Net Margin ForecastApproximately 27%Down 9 percentage points year over year; first-half net margin was 30%, down 3.5 percentage points year over year
• FY26 Revenue ForecastRMB33.711 billionDown 9.2% year over year and reduced 17% from RMB40.598 billion
• FY26 Adjusted Net Profit ForecastRMB9.5 billionDown approximately 26% year over year and reduced 21.6% from RMB12.119 billion
• FY27 Adjusted Net Profit ForecastRMB11.818 billionReduced 14.3% from RMB13.792 billion
• Inventory and Inventory DaysRMB6.1 billion; 245 daysAs of the end of June 2026, with inventory days above the 150 days recorded in 2025
• Share Buyback PlanRMB2 billion to RMB5 billionPlanned for implementation over the next six months, equivalent to approximately 1.1%–2.8% of total shares outstanding
• Non-Labubu IP Revenue CAGRChina 16%; overseas 9%J.P.Morgan's forecast for 2025–2028

Impact & implications

The report believes the key issue for Pop Mart's near-term valuation is no longer whether it can sustain the explosive growth of 2025, but rather the market's need to reset revenue and profit expectations for the second half of 2026. Declining overseas revenue combined with rigid operating expenses could cause margins to contract faster than revenue, while rising inventory also suggests that demand normalization will take time to absorb. Long-term IP commercialization capabilities and overseas store potential still support a return to moderate growth in 2027, but a recovery depends on overseas execution, margins, and inventory stabilizing first. The planned share buyback can provide only some downside support.

Risks

• If a new mega IP is successfully launched, the Underweight thesis could face upside risk.
• Expansion of the licensing business, category expansion, or a faster recovery in overseas operations could result in operating performance exceeding the report's forecasts.
• Delays or failures in launching new IPs could further weaken growth.
• Overseas execution challenges could cause revenue and margin recovery to be slower than expected.
• Cost inflation could further compress margins.
• Geopolitical and regulatory changes could affect overseas operations.

What to watch

• Monitor whether 3Q26 and 4Q26 revenue declines by more than 35% and approximately 20% year over year, respectively, and whether sequential improvement materializes.
• Watch when overseas execution and operating margins stabilize, particularly the deleveraging pressure caused by rigid operating expenses.
• Track the decline in inventory since July 2026 and the effectiveness of clearing excess inventory through methods such as “lucky bags.”
• Monitor whether new mega IPs, the licensing business, and category expansion can reduce dependence on the Labubu cycle.
• Monitor the actual implementation of the RMB2 billion to RMB5 billion share buyback plan over the next six months.