Here Group challenges Labubu with Wakuku

The former adult education company has transformed to a pop toy maker, reporting its revenue from that business rose sharply in its latest quarter

Key Takeaways:

• Here Group’s revenue nearly doubled sequentially in its latest reporting quarter through September, as it ramps up its recently acquired pop toy business
• The company’s stock currently trades at a P/S ratio of just 2.5 using projected sales for this year, less than a quarter of the 10.3 for collectible toy sensation Pop Mart

By Doug Young

Watch out, Labubu. Wakuku is coming for your business.

That’s the challenge coming from Here Group Ltd. (HERE.US), a recently reborn company rising from the ashes of former adult educator QuantaSing. The warning could be a bit premature, since Here Group’s pop toy business, which we’ll describe in more detail shortly, is a tiny fraction of that for global sensation Pop Mart (9992.HK), owner of the Labubu franchise.

Here Group only entered the pop toy business this year through its acquisition of Shenzhen Yiqi Culture Ltd., also called Letsvan, owner of the Wakuku franchise launched a year ago. The company has wasted little time diving into this newer business with a campaign of aggressive promotions and plans to open a network of offline stores.

It announced plans to sell its older adult education business in September, and its latest quarterly report, released last week, is the first to include only its pop toy business. In keeping with its big shift, the company also ditched its older QuantaSing name and ticker symbol and began trading under the new Here Group name on Nov. 11.

The shift looks relatively prudent, since education has become an increasingly problematic area in China due to the potential for regulatory crackdowns. The company’s focus on adult education made it less prone to such regulatory changes, unlike the more sensitive primary education area that was subject of a major crackdown four years ago, wiping out an entire industry of after-school tutoring companies.

Pop toys are less sensitive, though they’re also quite fickle. Hit toys often fall as quickly as they rise, which appears to be happening now to Labubu, which sparked a worldwide craze this summer. That means companies in the space must be constantly finding and popularizing new characters, often called intellectual property (IP), to keep their sales alive.

Unlike other pop toy makers, Here Group is taking a gamble by betting almost exclusively on self-developed and exclusively licensed IPs. By comparison, rivals like Bloks (0325.HK), Miniso’s (MNSO.US; 9896.HK) Top Toy, and even Pop Mart, rely on a mix of exclusively developed IPs and non-exclusive licensing of popular characters from third parties like Disney (DIS.US) and Japan’s Sanrio (8136.T), owner of the Hello Kitty franchise.

On its first earnings call as a pure pop toy company last week, Here Group officials disclosed that nearly all of its 127 million yuan ($18 million) in revenue for the quarter through September – or 97% to be exact – came from three of its proprietary IPs, led by 71% from the Wakuku franchise, followed by 16% from another older IP called Ziyuli.

The use of exclusively owned IPs carries a big advantage of higher margins, since owners don’t have to pay expensive licensing fees and share revenue from product sales. But it also puts the big responsibility of popularizing IPs on the owners, unlike licensed characters like Hello Kitty that already enjoy high popularity and thus require far less spending on marketing.

Rapid revenue growth

Next, we’ll take a deeper dive into Here Group’s financials that reveal its pop toy business is showing some strong initial growth as the company aggressively markets its products. The 127 million yuan in revenue for the three months through September, the first quarter of Here Group’s fiscal year, is nearly double the 65.8 million yuan it earned from that business in the previous quarter through June.

The company said it expects revenue to keep growing to between 150 million yuan and 160 million yuan in the current quarter through December, implying continued growth but at a slower quarter-on-year rate of about 22%. But that slowdown is probably due to seasonal factors, and the company said it expects to earn revenue of 750 million yuan to 800 million yuan for its current fiscal year that runs through next September. That implies revenue of about 500 million yuan in the second half of its current fiscal year, which would be nearly double the roughly 280 million yuan it expects to earn in the first half.

Here Group’s stock seems to be moving roughly in sync with Pop Mart’s since announcing its move into pop toys early this year. The shares initially exploded, rising as much as sixfold from where they started the year to a peak in mid-June. They’ve fallen more than 60% since then, though they’re still more than double where they started the year. Similarly, Pop Mart’s shares more than tripled this year to a peak in mid-August, but have fallen more than 40% since then. Still, at current levels they are more than double where they started the year.

From a valuation perspective, Here Group’s stock certainly appears to still have plenty of upside potential if it can deliver on its promised growth. The shares currently trade at a price-to-sales (P/S) ratio of about 2.5, based on the annual revenue projection for its first year as a pop toy company. That’s just a quarter of the 10.3 for Pop Mart, and is also less than half the 6.11 for Bloks.

Here Group Chairman and founder Li Peng detailed many of the things the company is doing to market its products on the earnings call. Those included its launch of a themed street in Shanghai, and a partnership with the state-run Beijing TV and radio station operator, which it said could become a template for future partnerships around China. It also detailed the opening of its first offline stores in Beijing and Chongqing, and indicated more such stores will be coming next year. Its business remains mostly confined to China right now, but it also pointed out it has laid the foundation for a future global expansion by establishing operations in 20 other markets.

Here Group said the gross margin for its toy business improved to 41.2% in the latest quarter from 34.7% in the previous quarter, though both figures are still significantly behind Pop Mart’s 66.8% for all of 2024. Investors will probably be watching closely to see if that figure improves as Here Group’s pop toy business gains momentum. They’ll also be watching to see if the company can quickly return to profitability. It reported an adjusted net loss from operations of 17.1 million yuan for the latest quarter, marking a slight improvement from a 19.3 million yuan loss in the previous period.

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