The maker of animation-themed trading cards and collectible toys has filed to list in Hong Kong, hoping to lure investors with its strong position in the high-margin business

Key Takeaways:

  • Collectible toymaker Kayou has filed for a Hong Kong IPO, with CICC, Morgan Stanley and JPMorgan as underwriters
  • The market for collectible toys in China is growing fast, catering to consumers from the country’s expanding middle class


By Warren Yang

Its collectible trading cards are already wildly popular in China, exciting everyone from kids to adults. Now, Kayou Inc. wants to try to take its trading expertise to the next level, hoping to excite stock buyers with a Hong Kong IPO built on the back of its trendy, high-margin products.

Last Friday, Kayou, known for its animation-themed trading cards, filed for an IPO in Hong Kong, backed by CICC, Morgan Stanley and JPMorgan as underwriters. No fundraising target was given. But a Bloomberg report last October said the company could raise as much as “a few hundred million dollars,” potentially making it one of the largest new listings this year in Hong Kong’s anemic IPO market. That’s likely what drew in the big-name investment banks, which typically shun smaller deals.

Kayou is hoping to entice investors with the story of a fast-growing Chinese collectible toy market fueled by consumers from an expanding middle class who are increasingly willing to open their wallets for this kind of nonessential but fun item that is also affordable. The company breaks down what it calls the “pan entertainment” goods industry into three segments: “Products,” “toys” and “stationery.”

Total gross merchandise value (GMV) for the “products” category, which include toys based on animation characters and clothes with similar themes, increased at a compound annual growth rate of about 17% in the five years to 2022 to reach about 130 billion yuan ($18 billion), according to third-party data included in Kayou’s prospectus. That figure is projected to grow another roughly 80% to 234 billion yuan by 2027.

A key part of the “toys” category is trading cards that are Kayou’s biggest business, with other items like block sets and figures making up the rest. The entire “toys” segment generated 69 billion yuan in GMV in 2022 and is expected to grow more than 87% to about 129 billion yuan by 2027.

Kayou has found its sweet spot in collectible cards featuring iconic animation characters like Ultraman. It says it is China’s largest trading card seller, and is also the country’s second largest player in the “products” and “toys” categories combined. Cards accounted for more than 95% of Kayou’s revenue in 2022, although that proportion fell to about 86% in the first nine months of last year as it started selling figures in its effort to become more than a one-trick pony.  It expanded into stationery in 2022 as well.

Such diversification is important, but it also takes time to build up new businesses. Kayou’s revenue jumped an impressive 80% to 4.1 billion yuan ($570 million) in 2022 from the prior year on the exploding popularity of its core trading cards. But the figure dropped nearly 50% year-on-year in the first nine months of last year. Such a sharp decline suggests its trading cards may have peaked in popularity, though the company also attributed the drop to “strategic efforts” to diversify its product mix and intellectual property (IP) catalogue.    

Enviable margins

Diversification also hurts Kayou’s overall margins because such new products typically sell for far smaller premiums over their costs compared with pricey cards that cost pennies to produce. A good example of the huge premiums its cards can command is one of Kayou’s Ultraman sets, which can sell for well over $150 for collectors.

The gross profit margin for trading cards exceeds 70%, compared to about 43% for figures and 54% for stationery. Even though figures and stationery still accounted for a tiny fraction of Kayou’s total revenue during the January-September period last year, their addition to the company’s product mix drove down its overall gross margin by more than 2 percentage points to a little over 67%.

Despite those enviable margins, the company still lost money in 2021 and 2022, largely the result of valuation losses on its preferred shares. Excluding such losses, Kayou was comfortably in the black. The good thing is that all of its preferred shares will be converted into ordinary shares, eliminating the need for any future valuation-related losses.

Pop Mart International (9992.HK) can be a good proxy for Kayou’s prospects as a listed company. Best known for its collectible toys sold in “blind boxes” that have captivated consumers in China, Pop Mart also went public in Hong Kong in late 2020, raising more than $670 million to great fanfare.

While its shares have lost more than 70% of their value since then, much of which probably owes to general weakness among Chinese stocks, they still trade at a strong price-to-earnings (P/E) ratio of 37, which suggests investors remain upbeat about the company’s potential. At that ratio, Kayou would have a market value of about 13 billion yuan, based on annualizing of its 260 million yuan profit for the first nine months of last year.

Kayou has a slightly smaller revenue base than Pop Mart, but has better margins. Thus, a key task for it will be finding the right mix between trading cards and other less profitable items to maintain its good margins while reducing its reliance on one product type in a collectible toy market that is notoriously fickle.

Like all retail businesses, another challenge for the company will be maintaining its sales in a weak Chinese economy, especially since its products are highly discretionary and something increasingly cost-conscious consumers could easily do without. Unlike Pop Mart, which has embarked on an aggressive overseas expansion to mitigate such risk, Kayou so far relies on China for all its business. But those risks aside, Kayou’s financials look quite shiny on the whole, suggesting it could become a collector’s item in its own right for investors seeking a lucrative niche in China’s vast retail market. 

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