FIRST SHANGHAI issued a research report maintaining a "Buy" rating on BLOKS (00325), projecting Non-GAAP net profit attributable to shareholders of RMB725 million, RMB998 million, and RMB1.268 billion for fiscal years 2025-2027 respectively. The firm set a target price of HK$123.6, representing 40x PE based on FY25 earnings forecast, indicating a 30.1% upside from current stock price.

For H1 2025, the company achieved revenue of RMB1.348 billion, up 27.9% year-over-year, with net profit of RMB297 million turning positive from the previous year. Adjusted net profit reached RMB320 million, up 9.6% year-over-year, while adjusted net profit margin was 23.9%, down 4.0 percentage points year-over-year.

**Core Categories Drive Growth with Budget-Friendly New Products Gaining Traction**

By product category, building block role-play toys generated sales revenue of RMB1.325 billion, up 29.5% year-over-year. Sales volume reached 111 million units, surging 96.8% year-over-year, while average selling price was RMB12.0, down 33.5% year-over-year. This decline was primarily due to budget-friendly RMB9.9 products contributing RMB216 million in revenue and 49 million boxes in sales volume (no comparable products in the prior year period).

The growth in building block role-play toys was driven by commercialization of proprietary and licensed IP product portfolios, as well as rapid expansion of sales networks, particularly in overseas markets.

Building block toys revenue totaled RMB13 million, down 45.5% year-over-year, with sales volume declining 42.9% to 0.1 million units. Other products generated revenue of RMB330,000, up 111.5% year-over-year.

**Stable Offline Foundation with Outstanding Online Performance**

By sales channel, offline distribution sales reached RMB1.212 billion, up 26.5% year-over-year, accounting for 90.6% of total revenue. Offline consignment sales totaled RMB18 million, up 32.1% year-over-year, representing 1.3% of revenue. Online sales achieved RMB108 million, up 44.6% year-over-year, accounting for 8.1% of revenue. The online sales growth was primarily driven by increased online sales volume, particularly from consumers aged 16 and above.

**Strong Overseas Market Revenue Growth**

By geographic region, domestic revenue reached RMB1.226 billion, up 18.5% year-over-year. Overseas revenue totaled RMB111 million, surging 898.6% year-over-year, accounting for 8.3% of total revenue, up 7.3 percentage points year-over-year. Within overseas markets, Asia (excluding China), North America, and other overseas regions generated revenue of RMB57 million, RMB43 million, and RMB11 million respectively, representing growth of 652.5%, 2135.9%, and 594.7% year-over-year, with revenue contributions of 4.3%, 3.2%, and 0.9% respectively.

**IP Portfolio Optimization and Expanding User Age Demographics**

During the period, the company continued to enrich its IP portfolio and optimize IP structure to reduce dependence on single IPs. In H1 2025, the company's top four IPs each contributed over 10% of revenue, with a combined contribution of 83.1%, compared to the top three IPs' combined contribution of 92.3% in the prior year period, showing a more balanced revenue structure.

The company actively expanded its user age demographics, with products for ages 16 and above contributing 14.8% of revenue, up 4.4 percentage points year-over-year. Products for ages 6-16 remained the core revenue source, accounting for 82.6%.

**Temporary Margin Pressure with Increased Sales and R&D Investment**

H1 2025 gross margin was 48.4%, down 4.5 percentage points year-over-year. The decline in gross margin was primarily attributed to: 1) changes in product mix with increased proportion of new products having lower gross margins; 2) increased mold depreciation by 208.1% due to higher demand for high-precision and multi-cavity molds to meet requirements of newly launched SKUs.

In terms of expenses, sales, R&D, and administrative expense ratios were 13.2%, 9.6%, and 3.5% respectively, representing changes of +1.7ppt, +2.3ppt, and -35.1ppt year-over-year.

The increase in sales expense ratio was mainly due to RMB14.3 million increase in marketing and promotional expenses for new product launches, and RMB18 million increase in employee benefit expenses due to sales team expansion.

The increase in R&D expense ratio was primarily due to RMB37.9 million increase in wages, salaries, and benefits resulting from expanded R&D personnel. As of period end, the company's R&D team reached 599 people, up 81.0% year-over-year.

The decrease in administrative expense ratio was mainly due to reduced listing expenses and share-based compensation costs.

**Risk Factors:** 1) IP dependence and licensing risks; 2) overseas market expansion falling short of expectations; 3) intensifying competition.