EB SECURITIES: Initiates coverage of BLOKS (00325) with a "buy" rating and a target price of HKD 5.60.

EB Securities released a research report stating that the market space for the Chinese building block toy industry is vast, and BLOKS (00325) has successfully transitioned into this track, forming a certain brand power with high-quality IP, strong product capabilities, and channel network advantages. The company is deeply tied to top IP such as Ultraman and Transformers, with future development of new IP and expansion of product categories driving growth. The bank expects the company to achieve revenue of 4.029/5.728/7.023 billion yuan in 2025-2027 (yoy +79.8%/42.2%/22.6%), achieving net profit attributable to owners of 992/1.492/1.928 billion yuan, achieving adjusted net profit of 1004/1.508/1.944 billion yuan. As a leader in the Chinese building block role-playing toy industry, the company is expected to accelerate profit release with economies of scale. First coverage, with a "buy" rating. EB Securities main points are as follows: BLOKS is China's largest building block role-playing toy company The company successfully entered the building block role-playing toy track from the children's education field, officially launching building block role-playing toys (brick people) and its own IP "Heroes Unlimited" in 2022, achieving revenue of 2.241 billion yuan in 2024, a year-on-year increase of 155.6%, with building block toy revenue accounting for 98.2%. The company's scale effect continues to show, with overall gross profit margin increasing from 37.4% in 2021 to 52.6% in 2024. Revenue marketing and promotion expenses have significantly decreased, with adjusted net profit turning from loss to profit in 2023 and achieving 585 million yuan in adjusted net profit in 2024, corresponding to an adjusted net profit margin of 26.1%. Building block role-playing toys are the fastest-growing and most promising segment market in the toy industry The global market size of role-playing/building block/building block role-playing toys grew at a compound annual rate of 7.7%, 11.1%, and 20.5% from 2019 to 2023. The compound annual growth rates of the Chinese market for role-playing/building block/building block role-playing toys were 11.9%, 12.7%, and 49.6% from 2019 to 2023. BLOKS has a strong leading position: by GMV calculation, BLOKS' domestic market GMV reached approximately 1.7 billion yuan in 2023, with a market share of 30.3%, ranking first in the industry; in the global market, GMV reached approximately 1.8 billion yuan, with a market share of 6.3%, ranking third in the industry. IP+strong product capabilities+offline-based distribution network are the core elements of BLOKS' growth 1)The concentration of IP is relatively high, with Ultraman revenue expected to decline. The company has a rich IP matrix, with 2 proprietary IPs and about 50 authorized IPs. Among the authorized IPs, Ultraman currently contributes the main revenue, with Ultraman's sales revenue in 2024 increasing by 96.8% to 1.096 billion yuan, accounting for 48.9% of revenue, a decrease of 14.6 percentage points year-on-year. 2)High-quality and wide range of product portfolio: In terms of quantity, as of the end of 2024, the company has achieved a diversified product portfolio of 682 SKUs, with 519 SKUs mainly targeting the 6-16 age group. The mainstream product prices range from 9.9 yuan to 399 yuan, with the best-selling mass-market products priced at 39 yuan. In terms of quality, the company strictly selects and manages production partners and collaborates with leading third-party manufacturers for long-term exclusive production of categories. The company plans to invest in dedicated large-scale factories for building block role-playing toys and station personnel in partner factories to supervise product production and ensure product quality. 3)Perfect layout of offline distribution channels: In 2024, offline distribution channel revenue accounted for 92.1%, with the company cooperating with over 450 distributors to effectively cover all first and second-tier cities and over 80% of third-tier and below cities, penetrating deep into downstream markets. Risks: IP licensing cannot be renewed, intensifying industry competition, channel management risks, overseas market expansion falling short of expectations, and risks of fluctuation in stock prices.