Huafu Securities: Integration of IP and gameplay, stitching together high-quality scarce toy supplies for high growth.

Huafu Securities released a research report stating that, according to the Bruck IPO prospectus, the global construction character toy market is expected to reach 40.4 billion yuan by 2024, with a CAGR of 29% from 2023 to 2028, making it the fastest-growing segment in the global construction toy market. Due to issues such as high pricing and copyright, the industry in China is currently in a phase where there is a strong demand for high-quality, scarce supply. The industry urgently needs providers who can meet various levels of demand by offering authorized IP, high-quality products, and a wide range of price points. Bruck occupies a leading position in the industry and is expected to continue expanding its IP portfolio, SKU numbers, and user base. Key points from Huafu Securities: Construction character toys: Combination of IP image restoration and gameplay, the fastest-growing segment in the global toy industry According to the Bruck IPO prospectus, the global construction character toy market is expected to reach 40.4 billion yuan by 2024, with a CAGR of 29% from 2023 to 2028, making it the fastest-growing segment in the global construction toy market. The market size of construction character toys in China was 5.8 billion yuan in 2023, accounting for 5.5% of the total toy industry size of 104.9 billion yuan. It is estimated that by 2028, the market size of construction character toys in China will reach 32.5 billion yuan, with a CAGR of 41.2% from 2023 to 2028 (compared to an estimated CAGR of 9.5% for the toy industry as a whole), and the proportion of the toy industry will rise to 20%. Huafu Securities believes that the main reasons for the high growth of the construction character toy industry are twofold: first, these products meet the demand of players for a high-level reproduction of their favorite IP images and provide a greater sense of experience and emotional value through interactive gameplay; second, there is still room for expansion in multi-level demand, with a wide range of audiences targeted, not just children, but also fans and model hobbyists of top-tier IP characters. Excellent construction character toys such as Gundam, LEGO, and Transformers toys have maintained their popularity with unique IP images and gameplay, leading to long-term performance growth of related companies. Top market share in China, meeting strong demand for high-quality scarce supply Due to issues such as high pricing and copyright, the domestic market is currently in a phase where there is strong demand for high-quality, scarce supply. The industry urgently needs providers who can meet various levels of demand by offering authorized IP, high-quality products, and a wide range of price points. Bruck, as a leading player in the Chinese construction toy market, held a 39% share in the domestic construction character toy market in 2023, higher than Japanese companies (26%) and Danish companies (19%). Huafu Securities believes that Bruck's leading market share is mainly based on the company's standard and characteristic product forms of construction toys, which can achieve a high level of restoration of IP characters while being interactive, providing an efficient production path for manufacturers and allowing for flexible pricing based on the complexity of components. Bruck: Leading the way in Chinese construction toys, growth driven by IP and gameplay Covering a wide range of Japanese, American, and Chinese IP: the company has become the preferred partner of globally known IP copyright holders, with a strong presence in popular IPs from China, the US, and Japan. Although Ultraman contributed 57% of revenue in 1H24, other IP products such as Transformers are also rapidly growing. Efficient new product launches, attractive and affordable: from 2023 to 1H24, the company has released approximately 30 to 90 new SKUs every quarter, with a total of 197 SKUs in 2023. Plans for 2024 and 2025 include launching around 400 and 800 SKUs respectively. Thanks to long-term collaborations with exclusive factories and efficient product forms, the company can rapidly release new high-quality products and maintain consumer interest. In terms of pricing, the company's mainstream products range from 19.9 to 399 yuan, making them cost-effective in every price range. In addition to construction character toy gameplay like LEGO, the company has also expanded into other types of gameplay like action figures, pre-assembled blocks, and board piece construction, helping to expand the category, user base, and price range. Wide coverage of offline channels: currently, more than 90% of the company's revenue comes from offline distribution channels. By 1H24, the company had partnered with approximately 511 distributors and covered over 140,000 offline retail outlets, reaching both first and second-tier cities as well as around 80% of third-tier and below cities. Additionally, the company also sells overseas through distributors, with globally known IPs like Transformers and Ultraman having overseas licensing and the prospect of high-quality products going global. Comprehensive fan operations, efficient marketing: as of 1H24, the company's sales expense ratio was 11.5%, with marketing and promotion accounting for 5% of revenue. With popular IPs driving traffic, the company actively builds efficient marketing through key opinion leaders (KOLs) and fan communities. Investment recommendation: focus on high-quality supply in the construction toy industry Bruck The company is expected to list on the Hong Kong Stock Exchange on January 10, 2025, with a total market value of approximately 13.4-14.6 billion Hong Kong dollars. The company plans to issue 24.12 million shares, raising approximately 1.29 billion Hong Kong dollars. The funds raised will be used to increase research and development, establish its own factories, enhance IP cooperation capabilities, expand overseas markets, and set up flagship stores. The construction toy industry in China is currently in a phase of rapid growth, with a relative scarcity of high-quality, affordable, and fun-to-play products. Bruck holds a leading market share in the industry and is expected to continue expanding its IP portfolio, SKU numbers, and user base. Risk warning: IP licensing risk, consumer sentiment and market demand changes.