2023-05-18 08:31:54 ET
Summary
- MINISO constantly rolls out aesthetically pleasing designs, quality, and affordable products.
- China is recovering from the global pandemic, and consumer purchasing power is increasing the company's foot traffic, so offline sales and GMV will hike.
- MINISO's roadmap for establishing a superior Chinese consumer brand is sustainable.
- The company's financial position has proven profitable and resilient.
Investment Thesis
MINISO Group Holding (MNSO) is a Chinese lifestyle product retailer. It offers household goods, cosmetics, food, and toys. Its reportable business segment includes the MINISO brand and TOP-TOY brand. The MINISO brand segment generates more revenue. Geographically, it operates from China with oversaw footprint in America, Asia, and Europe.
As China is recovering from the pandemic, its economy is rebounding swiftly, reflected in the Q2 2023 fiscal year results, which recorded significantly positive results. In addition, the company outperformed the market, as shown below, and greatly added 50 more stores in the December quarter, particularly in China. Such performance banners its confidence in its growth prospects.
The growth is levered on two strategies: Innovation of new products in the strategic category and the IP strategy. While these drivers keep the business competitive, the company is futuristic and envisions being a super brand. The low financial leverage flags a healthy financial position. I'm bullish on the stock and rate it a buy.
The Domestic Business Outlook in 2023
In Q2 2023, the foot traffic in the MINISO China retail store declined by nearly 30% YOY and a 28% drop in its total revenue operations. While the Overseas revenue increased by almost 40%YOY, significantly offsetting the adverse impact of the domestic pandemic.
However, according to The New York Times, currently, China is gradually recovering from the global pandemic. Following the lift of the restriction measures in December 2022, the economy has grown by 4.5%, according to China's National Bureau of Statistics. As the economic environment further stabilizes, the average consumer spending is expected to be on an upward trajectory, enhancing its revenue.
The third quarter started with a solid sales performance in China fueled by the 7-day Chinese New Year holiday. The holiday saw offline sales increase by nearly 40% YOY in January. Moving forward, the company is eyeing increasing its store count by approximately 250 and 350 stores in China after successfully launching 56 more stores early in December . On the overseas front, MINISO projects nearly 350 to 450 new stores. Given this optimistic outlook, the company's foot traffic, offline sales, and GMV will hike, enhancing the profit margin of the company.
Bolstering Growth
To leverage growth, MINISO capitalizes on its IP strategy, where the company collaborates with superior brands to comprehensively produce playful crossover products for customers. The IP-innovative products drive an emotional attachment to the customers. The strategy has successfully proven beyond doubt to improve sales while enhancing innovation. For instance, the company introduced an IP product featuring Sanrio's Cinnamoroll dog to help people celebrate the cute puppy character's birthday. The product was well received and sold out the limited edition on the same day it hit shelves. Another product is the hanging PenPen, MINISO's IP character. Which fans are receptive to and consequently gained popularity on TikTok. The strategy is yielding results since, according to the company's database, customers who purchase innovative IP- based products have nearly 28% higher shopping frequency . The increased shopping frequency, in return, enhances customers' foot traffic fostering loyalty in the long run.
Secondly, the company is investing in product categories that offer strategic value. The company considers strategic value categories to have these criteria:
- Emotional resonance. To mean products that offer MINISO's value proposition of a better lifestyle.
- Global appeal, meaning the product should be fashionable.
- High growth potential.
MINISO has identified perfumes, mugs, fragrances, and accessories to meet these criteria. In these regards, perfume is China's strategic value category.
Miniso Holdings
Over the years, the company's perfume sales growth is at a CAGR of 60 %, leading as the best perfume brand in China. Encouraged by its successful milestone, the company collaborated with suppliers and master perfumers to set up a master's aroma lab to produce globally competitive and quality products.
Future Sneak peek
MINISO is positioning itself to become a super brand in the future by empowering its product platform. It aims to achieve this through several strategies , including establishing international global centers (U.S., Japan, China, and South Korea) and investing in top-tier market research institutions to monitor customer trends and behavior that shape tailor-made product development processes. Such a move guarantees customer satisfaction. Additionally, MINISO will adopt a backward integration scheme where all players, from the raw material suppliers and technology personnel, work hand in hand to ensure the quality of the products along the value chain.
Further, the CEO outlined a roadmap for establishing a superior Chinese consumer brand during the company's Global Brand Upgrade Conference. He spelt out three strategies for this goal ;
- It is upgrading the company from a channel brand to a product brand with its channels.
- Move from a retailer to an interest-driven company.
- Upgrade the MINISO experience from consumption to passion, enhancing our customers' loyalty and converting them into friends and users.
From a forward valuation, I remain confident in the strategies as they are sustainable.
A Solid balance sheet
The company's healthy cash position ($889.05M ) can offset the total outstanding debt($98.83M), leaving the company with net cash of nearly $791M. The free cash is available for re-investment and expansion of the company.
The in the last three years, the economic environment has been bleak, especially in Mainland China. However, in the previous 18 Quarters, the company's average adjusted net margin was 8.6%, out of which 12 quarters laid within the pandemic era . In the remaining more stable 6 Quarters, the company's average adjusted net margin was 10.7%. Amidst economic distress, its financial position has proven profitable and resilient.
Risks
Despite MNSO being a good investment, there are risks associated with investing in the company. Below are some of these risks;
- Economic Downturns: The corporation relies on discretionary income, which fluctuates with the economy. During tough economic times, customers can be less willing to spend money on non-essential items like the ones the company provides.
- Intense Competition: Many reputable merchants are battling for the same target demographics in the fiercely competitive retail sector. To sustain market dominance and profitability, the business must outcompete its fierce rivals.
- Intellectual Property violations: As a business specializing in designs, the possibility of intellectual property violations might result in legal battles and have a detrimental effect on the company's profits and reputation.
Conclusion
As MINISO bolsters growth and eyes on being China's super brand, it is financially disciplined to monitor costs while generating cash flow and resilient profits as a vote of confidence to investors to cash in on this promising company.
For further details see:
Miniso: Future Looks Secure