LD Capital: [STOCK] Miniso Shines Overseas Expansion and Brand Upgrade Drive Success

I. Company Overview

In 2013, Ye Guofu established his own retail brand, Miniso, in Guangzhou. After a decade of rapid growth, Miniso has become a new retail consumer enterprise driven by design and R&D, flourishing both online and offline. The company primarily boasts two major brands: MINISO and TOP TOY. MINISO primarily offers cost-effective creative household items, including home goods, small electronic products, textiles, bags and accessories, beauty tools, toys, makeup, personal care, snacks, perfumes, stationery, and gifts. TOP TOY focuses on the trendy toy market, launching various products through extensive IP collaborations and some in-house IPs, including blind boxes, building blocks, figurines, assembly models, dolls, collectibles, sculptures, and more.

Miniso began its global strategy in 2015, successfully entering over 107 countries and regions, and now has more than 5,500 stores worldwide. In 2020, it was listed on the NYSE with the ticker symbol “MNSO”, and in 2022, it was officially listed on the Hong Kong Stock Exchange with the stock code “9896.HK”.

Since 2022, the company has initiated a brand strategy upgrade, emphasizing its core product categories and delving deep into the innovative potential between the brand and super IPs. By using IP products, they aim to establish a distinctive competitive edge and move away from the “ten-dollar shop” image. Miniso has further deepened its collaboration with Disney, introducing joint products featuring popular IPs like Strawberry Bear, Three-eyed Alien, Marvel, and Frozen. On June 20th, they exclusively launched a series of baking products in partnership with Pixar Animation, releasing over 100 co-branded products. On July 14th, they collaborated with Barbie to launch a new series themed “Everything Can Be Matched in Pink”, introducing more than 120 Barbie co-branded products globally. Within 5 days of the launch, nearly 50% of the entire new series was sold out, and the Barbie-themed store in Changsha saw a 170% sales growth compared to the week before its opening. Miniso has amassed significant experience in IP co-branding.

In terms of sales channels, Miniso primarily focuses on franchise stores domestically. Franchisees are required to pay an annual franchise fee of 19,800 yuan and follow a product deposit system. After a one-time deposit of 250,000 yuan, they don’t need to pay for goods on future orders. Store sales revenue is set at 38% (33% for food) as the franchisee’s income. This asset-light model has greatly accelerated store expansion.

The company primarily adopts an agency model for its operations overseas, with a focus on selecting high-quality agents. This allows the company to quickly integrate into the local market. Agents are expected to bear the inventory risk, but they have greater decision-making power. They are also responsible for the day-to-day operations of their stores, including recruiting staff, selecting the types of products for the store, and pricing rights.

II. Business Data

MINISO announced its unaudited financial results for the fourth quarter and the full year up to June 30, 2023, on August 22nd. The financial report indicates that in the fourth quarter of the fiscal year 2023, the overall performance maintained the high growth rate of the previous quarter. The total revenue surpassed the 3 billion RMB milestone for the first time, reaching 32.52 billion RMB, a year-on-year increase of 40.3% and a quarter-on-quarter growth of 10.1%. The adjusted net profit was 5.71 billion RMB, up 156.3% year-on-year and 18.3% quarter-on-quarter. Gross margin was 39.8%, up 6.5 percentage points year-on-year and 0.5 percentage points quarter-on-quarter. Net margin was 17.6%, up 8 percentage points year-on-year and 1.2 percentage points quarter-on-quarter.

1. Continuous Recovery in the Domestic Market

MINISO’s revenue from China in the previous quarter was 21.37 billion RMB, a 39.4% increase from 15.33 billion RMB in the same period in 2022. According to data from the National Bureau of Statistics of China, the overall domestic retail sales only grew by 10%, the average transaction volume increased by 18%, and the average transaction amount grew by over 5%.

As of June 30, 2023, MINISO had a total of 5,791 stores, of which 3,604 were in China, an increase of 378 stores year-on-year and 221 stores quarter-on-quarter (257 new stores opened, 36 closed, with a closing rate of 1.0%). In terms of city tiers, there were 474 in first-tier cities, 1,496 in second-tier cities, and 1,643 in third-tier and below cities, with a net increase of 16, 75, and 130 stores respectively. This quarter set a record for the number of stores opened in first and second-tier cities since the pandemic started over three years ago. The company plans to increase the number of MINISO stores in China from 3,325 at the end of 2022 to around 5,000 by the end of 2027.

The average revenue per store increased by about 30.8% year-on-year, driving a year-on-year growth of about 42.3% in revenue from MINISO’s offline stores in China. The revenue per store directly impacts how much franchisees can earn from their stores, subsequently affecting their ROI period. This increase in this indicator has boosted the enthusiasm of franchisees. The number of MINISO brand franchisees has increased from 754 at the beginning of 2022 to the current 1,022. The top 50 franchisees account for nearly 50% of the total number of stores, with 40 of them having cooperated with the company for more than six years.

The growth trend continued in July, with nearly one-third of MINISO’s national stores setting a new historical monthly sales record. The average GMV per store increased by about 14%, the average order volume per store grew by 10%, and the average spending per customer increased by 3% year-on-year. In the first seven months of 2023, the GMV per store in China returned to the 2021 level, about 85% of the pre-COVID level in 2019, meeting the company’s expectations at the beginning of the year.

2. Broad Growth Potential in Overseas Markets

In the last quarter, the revenue from overseas markets was ￥1.115 billion, a year-on-year increase of 42.0%. This growth was primarily due to an 11% year-on-year increase in the number of overseas stores and a 27.9% year-on-year increase in average revenue per store. Miniso’s key overseas markets include Asia, North America, and Europe. The average selling price (ASP) in China is ￥35, while overseas markets are 2 to 3 times that of China. Revenue from overseas markets contributed to 34.3% of the total revenue in the fourth quarter, compared to 33.9% in the same period of 2022 and 27.1% in the previous quarter. The GMV per store in North America/Latin America/Europe/Asia has returned to 193%/89%/92%/64% of the levels seen in 2019 respectively. With the release of operational leverage in the direct sales markets, the profitability of overseas business has significantly increased.

There are 2,187 overseas stores, an increase of 214 stores year-on-year, and 56 more than the previous quarter. This year, Miniso entered LARCOMAR, a landmark mall in Lima, Peru, and Connaught Place, a core commercial area in New Delhi, India. In May, the first global flagship store opened in Times Square, New York, becoming the first Chinese brand to open a store in Times Square. The store attracted long queues on its opening day, with sales exceeding ￥550,000, setting a new global single-day sales record. By consistently entering core commercial areas in different countries, Miniso has enhanced its global brand image. International expansion remains a key strategic goal for the company.

3. Strong Growth in Trendy Toys Business

Miniso’s gross margin for the second quarter of 2023 was 39.8%, a year-on-year increase of 6.5pct, and a quarter-on-quarter increase of 0.5pct. Continuous product structure optimization led to cost reductions and efficiency improvements, contributing to a gross margin increase of approximately 6%. Meanwhile, TOP TOY, due to its product mix shift towards higher profitability products, saw its gross margin increase significantly by 10%.

TOP TOY has 118 stores, 21 more than last year, and 2 more than the previous quarter. The average revenue per store increased by approximately 46.4%, resulting in an 82% year-on-year increase in revenue from TOP TOY. During the June 1st “Children” themed brand campaign, TOP TOY, focusing on Chinese building blocks and inviting Ouyang Jing to serve as the “June 1st Children’s Ambassador,” targeted trendy music and toy enthusiasts. Over 100 stores nationwide were transformed into “Childhood Compensation Departments” with childhood-themed atmospheres, achieving outstanding single-day sales of ￥10 million on June 1st.

Since 2015, the scale of China’s trendy toy market has expanded year by year, reaching ￥63 billion in 2015 and rising to ￥478 billion in 2022. With a compound annual growth rate of over 30% from 2015 to 2022. The Chinese trendy toy market is currently in a growth phase, and it’s expected to continue this trend, possibly exceeding ￥1.3 trillion by 2028.

4. Abundant Company Cash Flow and Clear Dividend Plan

As of June 30, 2023, Miniso held a total balance of cash, cash equivalents, restricted cash, fixed deposits, and other investments of ￥7.3 billion ($1.007 billion). This compares to ￥5.828 billion as of June 30, 2022. The company has established a future dividend policy of not less than 50% of adjusted net profit. For the fiscal year 2023, the board of directors approved a cash dividend of $0.412 per American Depositary Receipt (ADR), approximately 50% of the adjusted earnings per share of $0.81. The total cash payment is about $128.5 million or ￥931.7 million, providing shareholders with predictable returns.

III. Profit Forecast and Investment Recommendation

According to the Frost & Sullivan report, based on GMV (Gross Merchandise Value), the size of the global private-label integrated retail market increased from $41.4 billion in 2017 to $41.9 billion in 2021, with a compound annual growth rate (CAGR) of 0.3%. It is projected that from 2022 to 2026, it will continue to grow at an accelerated CAGR of 12.6%. The scale of China’s private-label integrated retail market grew from ￥715 billion in 2017 to ￥951 billion in 2021, with a CAGR of 7.4%. Furthermore, it is expected to grow at a CAGR of 14.2% from 2022 to 2026. Benefiting from China’s strong supply chain, MINISO, through global strategies, brand elevation, and the growth point brought by TOP TOY, achieved notable performance in the backdrop of post-pandemic recovery. The future outlook for affordable retail brands is optimistic. The growth potential in the current consumer environment and the “sinking market” is substantial. Meanwhile, there is considerable growth potential in overseas store expansions, and subsequent high growth is anticipated, reflecting an optimistic view of further profit enhancement on the basis of cost reduction and efficiency improvement. We project the company’s revenue for FY2024E and FY2025E to be ￥141.44 billion and ￥166.73 billion, respectively, with year-on-year growths of 23.28% and 17.88%. The net profit attributable to the parent company is expected to be ￥21.93 billion and ￥25.69 billion, with year-on-year growths of 24.02% and 17.10%. Based on the closing price on August 25, 2023, the PE ratios are 24.07X and 20.55X, respectively. We give a “Buy” rating.

Risk Warnings:

1. International trade frictions.

2. Industry competition risks.

3. Changes in consumer preferences.

4. Potential backlash against Japanese brands due to past controversies.

5. New product launches not meeting expectations.

6. Store expansion not meeting expectations.

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