Initial Report: Miniso Group Holding Ltd (MNSO), 35% 3-yr Potential Upside (VIP SEA, Xingyu MIAO)
We may all be familiar with the products from this brand. But how many of you know the business model and profitability of Miniso? Let's learn from Xingyu's analysis today!
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1. Executive Overview
This memo outlines an investment opportunity in Miniso Group Ltd, a leading retail company. The aim of this executive summary is to give an overview of the company and its edges by discussing key factors that make it attractive.
Currently, the market size for the total retail industry will reach 254.3 billion dollars in 2026, with a CAGR of +4.4% from 2022 to 2026, and the self-owned brand of the retail market will increase to 86.8 billion in 2026, with a CAGR of +12.6%.
After the pandemic, barriers to entry are higher than before, and differentiated products and brand effects lead to Miniso’s leading position. Compared to other competitors in the industry, Miniso possesses outstanding operating abilities in inventory turnover and debt paying. Thus, it is reasonable to believe that Miniso can keep its position and increase its market share in the retail market.
There are three major catalysts that will enable Miniso to beat the analysts’ expectations in the future: accelerated expansion and increase of average profits for each store, the potential of the North American market, and growth of TOP-TOY.
Based on the DCF Model, the stock price of MNSO is expected to reach $31.0/share, which implies a 35% upside for a 3-year target. However, with a plausible ratio comparable, the target price for this year is $27/share. In light of the investors’ overreactions toward the newest financial statement released for the 2023 fiscal year, I highly recommend investors wait until a low buying point and hold their position.
Associated risks may significantly impact the fluctuations in stock price. These may include macroeconomic risks, short-of-expectation risks, and overvaluation risks. It is essential to carefully evaluate these risks and consider mitigating strategies to prevent loss of investment.
2. Company Overview
MINISO Group Holding Ltd.(NYSE: MNSO) is a global leading brand variety retailer, offering lifestyle products with special IP designs through the MINISO Brand and TOP TOY Brand segments. While the MINISO Brand segment involves in design, buying, and sale of lifestyle products, the TOP TOY Brand segment includes in design, buying, and sale of pop toys.
2.1 Management
The company was founded in 2013 by Guo Fu Ye, the current largest stockholder with 64% shares and 77% voting rights. Due to Guofu’s experience with his first startup company “Aiyaya,” He gained an understanding of the retailing industry and partnership with suppliers, which built a solid foundation for following establishment of MINISO. During the last interview, he pointed out that the long-term target for the company is to reach 10,000 stores in the global market.
2.2 Geographic Customer Segments & Business Model
Thanks to different and complex cultures, business environments, and consumption habits in foreign countries, the company adopts flexible business models in various markets, including direct-sale mode, partnership mode, and proxy mode.
2.2.1 Direct-sale Mode-North America
For the North American market with a large population and high potential, MINISO tends to operate through a direct-sale model by opening experimental local retail stores to observe local customers’ preferences.
2.2.2 Partnership Mode-Indonesia
Indonesia is the representative of this type of mode. Due to the optimistic profitability of offline retail stores, the company has attracted a number of local partners, who are only required to provide the beginning capital, including maintenance margin, rent, storage fees, and salaries for workers, while MINISO will be responsible for the operation, management, design, pricing, training, and other operating activities.
2.2.3 Proxy Mode-other 80% stores
Via collaborating with foreign retailers owning abundant resources and experiences, the company is able to break the impediment of the local market to rapidly expand and elevate the scales. Compared to the partnership mode, this model guarantees the proxy has more autonomy toward operation under the supervision of the parent company. Nevertheless, failure to reach the target will lead to deprivation of the proxy rights.
3. Industry Overview
3.1 Market Size
The Miniso Group is positioned as a self-owned brand in the retail industry, which possesses high potential and superior growth. According to statistics provided by Euromonitor, the scale of the total global retail market has dropped by 1.5% to 207.5 billion dollars from last year, and CAGR from 2015-2022 is approximately 4.9%. Based on Euromonitor’s estimation, the market size for the total retail industry will reach 254.3 billion dollars in 2026, with a CAGR of +4.4% from 2022 to 2026, and the self-owned brand of the retail market will increase to 86.8 billion in 2026, with a CAGR of +12.6%.
3.2 Higher Barrier
Due to the pandemic, the retail industry just experienced a depressed market last year, especially for retail brands with lower scale and inefficient cash flow to undertake the negative impact caused by exogenous risk and systematic risk. While CR5 in the Chinese retail market slowed down its expansion during the pandemic, competitors, like “Nuomi,” even closed half of its offline stores, but MINISO maintained its rapid expansion in the global market. The pandemic indirectly filters potential competitors, elevates the barriers to entry, as well as guarantees MINISO’s leading position in the retail market.
3.3 Competitor Analysis
The following is a comparison of MNSO’s key competitors and their statistics:
3.3.1 Statistics Analysis
According to Frost & Sullivan’s statistics of global retail markets, Miniso, Daiso, MUJI, Flying Tiger, and Sanfu are 5 leading enterprises in self-owned brand retail companies in the industry, dominating 20.3% market share. Among CR5, MINISO, with the latest date of establishment and overseas expansion, owns the most rapid speed of expansion and the largest market share now.
MINISO has operating edges, superior to other retail competitors. The industry has an average payable payment period of 2-3 months, but MINISO with strong cash flow is able to provide its suppliers with a payment period of about 30 days. In addition, scale effect leads and digital operation with Huawei Cloud enable MINISO to effectively manage its inventory, shortening its inventory turnover period to 69 days, much lower than the competitor MUJI’s 165 days.
Compared to its competitors, MINISO’s comparable ratios, both PE and PB, are much higher than the industry average, which implies that the company’s price is relatively more expensive than its earnings and book value. Even though this company has the risk of being overvalued, the high comparable ratios suggest that investors hold an optimistic view of the company.
4. Investment Thesis
4.1 Sustainable Profitability Due to Expansion and Effectiveness
Given financial statements for the fiscal year ended June 30, 2023, while revenue was RMB3,252.2 million (US$448.5 million), representing an increase of 40.3% year over year and 10.1% quarter over quarter, gross profit was RMB1,295.6 million (US$178.7 million), representing an increase of 67.9% year over year and 11.5% quarter over quarter. The financial highlights were primarily due to both higher average store counts and growth in average revenue per store. With the conditions of sustainable expansion, I estimate that the total count of MINISO’s stores will reach 6600 in 3 years, and successfully accomplish the target of “10,000 stores” before 2030.
From the balance sheet, when the gross profit increased by 67%, SG&A only increased by 19.3%, whereas selling and distribution expenses even decreased by 10%. By collaborating with the HUAWEI CLOUD, MINISO utilized a big-data storage-computing separation solution to support higher bandwidth and greater concurrency, increase the cluster utilization rate from 40% to 85%, improve system security, and reduce operation and maintenance complexity.
4.2 Break into the North American Market
Dominating 16% of the total overseas revenue, the American market for MINISO has rapidly expanded in the last two years and contributed the most to overseas revenue. Dislocation competition is the strategy for MINISO to grab the market share from two absolute leading enterprises in the US market, Dollar General and Dollar Tree. While their target customers are mainly groups living in suburbs and countryside with relatively lower salaries, MINISO utilized its self-owned brand to provide uniqueness and differentiation of products for elevating its pricing power to monopoly the retailing market of products with 5-15 dollars.
Diverse options of operating modes and localization of assembly have turned the breakeven situation of the North American market into profitable. The combination of direct-sale and proxy modes allows the company to dig into the US retail market by discovering local customers’ demand and providing differentiated products with attractive IPs. The overseas market, especially the North American market, will be the major driver of future growth in gross margin.
4.3 Growth of TOP TOY
TOP TOY, an affiliate brand of MINISO, focuses on toy markets, contributing to an increase of 81.3% in revenue, which was the result of a 23.8% year-over-year growth in average store count and a 46.4% year-over-year growth in average revenue per TOP TOY store. Due to self-owned brand products collaborating with well-known Ips, the current gross margin can reach over 40%, which turns the breakeven situation into profitability.
In recent years, the young’s demand for entertainment has grown with their willingness to pay for fun products. According to Frost & Sullivan statistics, the CAGR of China's trendy toy market is expected to reach 24% from 2022 to 2026. Based on the GMV reported in 2021, the first domestic trendy player is Pop Mart, followed by Lego, HOT TOYS, and other brands. TOP-TOY has a relatively small market share, accounting for only about 1%. Currently, TOP TOY is positioned at the early stage of advancement, which indicates that it still has a large potential to grow and become the future driver of increasing revenue for MINISO.
5. Valuation
6. Risk
6.1 Macroeconomic Risk
Based on statistics reported on the Cleveland Fed website, it utilizes the change of yield curve to illustrate investors’ views toward the US macroeconomics and predict the future trend. Till now, the graph of the yield curve which implied the relationship between maturity and the yield curve is downward sloping, which is inverted and opposite to the theoretical one that the yield rate is positively related to maturity. All these data point out that investors hold pessimistic views toward macroeconomics. As shown in the graph above, the probability of a recession happening in April 2024 reaches 78.85%.
6.2 Short-of-Expectation Risk
With the rapid change in the Toy and Retail market, MINISO’s products may fail to continuously keep up with trends. Due to relatively low differentiations among retail products, failure to reach customers’ expectations or fulfill their demands will lead to a loss in market share. In addition, the operating mode in overseas markets largely depends on the proxy mode and partnership model, which implies the local retail business’ willingness to join may cause the failure of expansion to reach the expected count.
6.3 Overvaluation Risk
Currently, due to the outstanding performance reported by the newest financial statement of fiscal year 23, the stock is trading at a very high valuation. Even though the DCF model above has shown a 30% upside for the next 3 years, its PE ratio and other comparable ratios are obviously higher than the industry average. With the conservative comparable model, the stock price now $26 has already exceeded expectations. In light of the uncertainty and fluctuations of stock prices, I recommend investors hold their positions and stay tuned for any news reported by the company.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.