Pop Mart’s online business weakens in China; Morgan Stanley cuts earnings forecasts but expects a quarter-on-quarter rebound in the fourth quarter

Why did third-quarter sales fall short of expectations?

Pop Mart’s group sales fell 45%–50% year on year in the third quarter of 2026, weaker than Morgan Stanley’s previous forecast of a 40%–45% decline. The bank estimates that the actual decline was close to 45% and sales were about 6% below its preview forecast.
The shortfall came mainly from China: third-quarter sales in China fell 25%–30% year on year, with online sales down 45%–50% and offline sales down 5%–10%. Management attributed the weakness to macroeconomic pressure, a high comparison base and slowing traffic on third-party e-commerce platforms.
Morgan Stanley estimates that group sales fell about 10% quarter on quarter in the third quarter, with China down about 12% and overseas markets down about 7%. Overseas sales fell 65%–70% year on year, broadly in line with the bank’s expectations.

Management expects sales in both China and overseas markets to improve quarter on quarter in the fourth quarter, supported by holiday demand, new products and new stores. Morgan Stanley believes the third quarter may be the lowest-sales quarter of 2026.
Foot traffic at physical stores in China grew year on year in the third quarter, and new customers increased by double digits year on year; both improved from the second quarter. Although traffic to the WeChat blind-box machine declined, its conversion rate improved, indicating better quality of visiting traffic.
Operating trends in most overseas countries stabilized from July to September and remained stable through October, although online traffic remained weak and was recovering slowly. Morgan Stanley expects overseas sales to return to year-on-year growth in the second quarter of 2027.

Morgan Stanley believes continued product launches and store openings can drive long-term overseas growth. Management is adjusting its Asia-Pacific organization and staffing, shifting merchandise management from reliance on hit products to more granular management of individual items. Six IPs together contributed more than 60% of Asia-Pacific sales in the third quarter.
Group inventory peaked in May 2026, began to decline in August and fell more noticeably by the end of September. The company plans to clear inventory through its Greater China retail network and regional channels rather than through large-scale discounting.
Headquarters has established a merchandise team to coordinate procurement and inventory allocation across four major regions, reducing instances of overordering in some markets and stock shortages in others. Management said, however, that overseas demand forecasting remains less accurate than in China.

Management expects gross margin in the second half of 2026 to decline by less than 2 percentage points from the first half, mainly because of a lower share of overseas revenue and overseas price adjustments. The US price adjustment is expected to reduce the US business’s gross margin by about 1 percentage points.
More new overseas stores in the second half are increasing fixed costs, including staff expenses and depreciation of store fit-outs. Despite cost savings from logistics optimization, management still expects the expense ratio to be higher in the second half than in the first, and margins to decline sequentially.
Morgan Stanley cut its revenue forecasts for 2026–2028 by 10%, 11% and 11%, respectively, and reduced its earnings forecasts by about 11%–12%. After the revisions, the bank expects revenue to fall 13% year on year in 2026 and grow 12% in each of 2027 and 2028.

Following its earnings forecast cuts, Morgan Stanley lowered its price target from HK$203 to HK$180, while maintaining its Overweight rating and valuation benchmark of 21 times forecast 2027 earnings.
The bank believes long-term overseas growth potential supports the valuation and expects a potential re-rating once overseas sales stabilize or rebound quarter on quarter. The company’s share buyback plan of 2 billion–5 billion yuan may also begin after the third quarter.