Bloks’ 1H25 revenue was up 28% YoY to RMB1,338m, while adj. NP was only up 10% YoY to RMB320m, which trailed behind investors’ high expectations. While some product delay related to Ultraman dragged 1H25 revenue by c.11%, Bloks also had frontloaded expenses, which could drag short-term profitability. However, as the Company is ready to launch more products and turn consumers into enthusiasts, it expected 2H25 revenue growth to accelerate to the range of 70-80% YoY, and we expect this could create some operating leverage. While we expect it takes time for Bloks to prove itself for delivering earnings consistently, we expect Bloks’ strong IP portfolio (e.g. Disney, Marvel, Transformers, Jurassic World, etc.) could make it highly competitive in both domestic and overseas markets. Maintain BUY after the recent dip.
　　Key Factors for Rating
　　1H25 a rather big miss due to high expectations and product delay. Bloks’ 1H25 revenue was up 28% to RMB1,338m, a miss as the Company delayed the launch of a new series of Ultraman products, where revenue of c.RMB150m, or 11% of 1H25 revenue was affected. Excluding this, the revenue was mostly in-line with our expectations. Meanwhile, due to higher frontloaded expenses such as depreciations of molds, R&D expenses and sales and logistics expenses for overseas markets, GPM declined by 4.5ppts YoY to 48.4%, and adj. NP only grew by 10% YoY to RMB320m, which disappointed investors.
　　Foundation laid for 2H25 and future growth as guidance sounds encouraging after correction. While 1H25 was weighed by the factors discussed above, mgmt. expected 2H25 revenue YoY growth to accelerate to the range of 70-80%, so that the Company is confident to achieve >50% YoY growth for the full year of 2025. While this may sound lower than the market’s original expectation, we expect this guidance should boost the confidence of investors after share price correction recently. We also expect this would also mean some positive operating leverage for GPM and NPM in 2H25, as the utilisation rate of the new molds could go up when new SKUs are sold.
　　Achieving good progress on diversification. In 1H25, we see Bloks is diversifying away from some business risks on two fronts: (i) top 4 IP accounted for 83.1% of 1H25 revenue (versus top 3 accounted for 92.3% income in 1H24); and (ii) products for aged 16 and above now accounted for 14.8% (1H24: 10.4%). Bloks would continue to launch more products that are collaborated with different IP owners, and also pricier SKUs (e.g. RMB199 and above) to turn casual buyers into hardcore enthusiasts with high repeat purchase rate. We expect new IP collaborations, such as Toy Story, Zootopia (from Disney), Jurassic World, Jujutsu Kaisen, etc. could broaden Bloks’ reach.
　　Overseas remained the strong catalyst. During 1H25, revenue from overseas grew 899% YoY to RMB111m, thanks to strong expansion in Indonesia’s convenience store channel and the US (including Five Below and Dollar General). We expect the growth in overseas market would remain strong for Bloks as it has gradually achieved strong recognition among distributors and customers, allowing the Company to secure more IP collaborations overseas. The IPs in the pipeline for overseas market include: (i) Japanese IPs, such as Hatsune Miku, Ultraman, Evangelion, Pokemon, Naruto, and (ii) American IPs, such as Transformers, the Minions, Star Wars and DC. We expect such collaboration could achieve strong traction in 2H25 after the positive feedback in 1H25 and Bloks already expanding its overseas team during 1H25.
　　Key Risks for Rating
　　Weak product pipeline, price competition, slow entrance to new markets, unexpected spike in COGS and other costs.
　　Valuation
　　We lower our FY25/26/27 EPS by 24%/20%/17% to account for: (1) the Company’s product delay in 2025, and its intentional slower product launches to ensure quality; (2) lower GPM as Bloks adopts more non-standardised parts in its products to enhance competitiveness, and (3) lower operating leverage due to slower revenue growth
　　Our TP, based on 25x 2026E P/E, is lowered to HK$132.70. Our TP is now equivalent to 38x 2025E P/E.
　　Despite the earnings miss, we maintain BUY on Bloks as we are confident on Blok’s long-term competitiveness due to its strong IP portfolio, strong competitiveness based on its Bloks System and strong long-term earnings growth. We expect the Company’s latest guidance could boost the confidence of investors post share price dip, and re-rating could happen as the market becomes more familiarised with Blok’s earnings seasonality (i.e. stronger 2H versus 1H).