Core Viewpoint - The global toy market is projected to exceed $100 billion in 2024, surpassing the global film market and being approximately half the size of the global gaming market. However, the profit margins for manufacturers, particularly in China's Chaozhou region, are minimal as major international brands dominate revenue and profits [5][6][15]. Group 1: Market Overview - The toy manufacturing industry is characterized by low profit margins and is often considered a labor-intensive sector that may shift to lower-cost production centers in South Asia and Southeast Asia [6][12]. - Chaozhou's toy production accounts for nearly one-third of the global output, but the region primarily engages in manufacturing and OEM, lacking in brand creation and high-value sales [5][11]. Group 2: Historical Context - Historically, Hong Kong was a major player in toy manufacturing until the 1980s when rising costs prompted a shift to Guangdong, particularly Chaozhou, which had established a plastic industry [11][12]. - The "front shop, back factory" model allowed Hong Kong to take orders while Chaozhou handled production, but as costs in Guangdong rose, the industry began to migrate to areas with lower costs [11][12]. Group 3: Industry Dynamics - The toy industry is increasingly moving towards high-tech and innovative products, with companies in Chaozhou beginning to develop smart toys and programmable educational toys [14][15]. - Major international brands like LEGO, Hasbro, and Mattel dominate the market, with LEGO reporting a revenue increase of 13% in 2024, reaching 74.3 billion Danish Krone (approximately 83.1 billion RMB) [17][20]. Group 4: Competitive Landscape - The highest value in the toy industry lies in IP and brand premium, with manufacturing being less profitable. This is why international companies often outsource production while focusing on high-margin areas [17][20]. - Chinese toy brands are attempting to differentiate themselves through strong IP collaborations and themes that resonate with adult consumers, such as military and aerospace topics, which are not typically covered by international brands [28][33]. Group 5: Future Outlook - The future of Chaozhou's toy production may involve a shift to other domestic regions or overseas, but design and R&D are likely to remain in Chaozhou, similar to LEGO's model of combining design and manufacturing [38].

Investment Rating - The report maintains an "Overweight" rating for the retail industry, indicating a positive outlook for the sector in the coming months [1]. Core Insights - The report highlights the upcoming inclusion of companies Bruco, Guming, and Mixue Group into the Hong Kong Stock Connect, which is expected to attract incremental capital allocation [4]. - Bruco, as the leading building block toy brand in China, has achieved a market share of 30.3% in 2023, with a global market share of 7.4%. The company is expected to continue its rapid growth through new IP, products, and channel expansion [4][9]. - Guming, the leading domestic ready-to-drink tea brand, has expanded its store count to 9,914 by the end of 2024, with a projected GMV of 22.4 billion yuan. The company is well-positioned to capture market share through its differentiated competitive advantages [4][10]. - Mixue Group, a leader in affordable ready-to-drink beverages, has established a comprehensive supply chain and has expanded to 45,302 stores by September 2024. The company holds a 31% market share in the sub-10 yuan price segment, indicating strong market presence [4][10]. - The report suggests focusing on new consumer brands such as Bruco, Guming, and Mixue Group, as well as collectible brands like Pop Mart and pet food sectors, which are expected to benefit from changing consumer habits and increased brand value [4][11]. Summary by Sections Industry Trends - The retail sector has shown a positive performance with a 1.29% increase in the Shenwan retail index from June 2 to June 6, 2025, and a year-to-date increase of 9.30% [12][23]. Company Valuation Table - The report includes a valuation table for various companies in the retail sector, providing insights into their market capitalization, closing prices, and projected earnings [21]. Market Performance - The report notes that the Shenwan retail index has outperformed other indices, indicating a robust market environment for retail stocks [12][23].