2023-07-26 20:38:43 ET
Summary
- After a 90% rally YTD, MINISO Group still appears to be undervalued and a good investment. The company's financials suggest a strong position for aggressive expansion in domestic and overseas markets.
- Despite a slowdown in China's retail sector, MINISO can maintain growth by expanding globally.
- Fast-growing markets like Latin America and North America have shown high demand for the company's products.
- The company's intrinsic value calculation shows it is still slightly undervalued at $22.28 a share.
- The next earnings report will reveal whether the company has been more aggressive in overseas market.
Investment Thesis
After rallying around 90% YTD, I wanted to take a look at MINISO Group ( MNSO ) to see if it is still worth investing in the long term. To my surprise, even if we model for conservative assumptions, the company still seems to be undervalued and is a good buy at these levels. I will briefly touch on the outlook of the company going forward and talk about the company's financials and come up with a financial model to see what the company might be worth.
Outlook
There’s no doubt that the company benefited greatly from China’s easing of covid restrictions. It is tough to say what the government’s going to do in the future, but I’d say the country is not going back into lockdown anymore, since most if not all the world is pretty much done with any sort of restrictions.
If we look at China’s recovery post-lockdown restrictions, it has been not as robust as many analysts have expected it to be. It seems that Chinese people aren’t rushing back to the stores as many have believed and last month saw only 0.8% GDP growth for the quarter. The retail part of the economy has also slowed down massively over the last month, which tells us that people are not back to their normal spending habits yet, or maybe even have shifted their habits completely. The retail numbers for June came in at 3.7% growth, for May the growth was 12.7% while for April, growth was at 18.4%, so it is quite a drop-off.
So, the company cannot rely solely on China’s spending habits, which seem to be dwindling. The best way I see for MINISO to keep high top-line growth numbers is to keep aggressively expanding its footprint globally, and of course, keep expanding in China. As of the latest quarter, the company opened 74 new stores in the last three months and 401 year-over-year. The company aims to open 250- 350 stores in calendar 2023. This number is slightly lower than the previous couple of years when the company managed to open over 500 from 2020 to 2021 and 450 from 2021 to 2022, however, the previous years called for a more aggressive expansion to make up for the lack of people going shopping in the stores, so I think that the 250-350 store opens is a good amount to aim for now that China is unrestricted. I don't believe this slowdown in retail numbers is going to last long and the growth will pick up once again.
I also think the company should shift focus away from China a little bit and focus on fast-growing markets like Latin America and North America, which experienced 60% and 100% growth in gross merchandise volume (or GMV). Clearly, there is a demand for the products that the company sells. The company opened only 16 stores q-o-q in overseas markets, and I think the management needs to ramp this up so the company is less reliant on the domestic market which is quite unpredictable in terms of future lockdowns and other restrictions that the government may oppose.
Financials
As of Q3 ’23, the company had around $929m in cash against essentially no long-term debt. The company is in a great position to keep aggressively expanding into domestic and overseas markets with such a cash pile and no debt obligations to worry about. The company turned a profit in FY22 and is expected to make around 78 cents of profit per share in FY23 which is coming next month (mid-August). So, the following graphs will show a couple of historical figures and a couple of forecasts that I made in the financial model to give a sense of where the company may be in the future.
The company's current ratio has been very healthy over the last couple of years, and I don't see this changing anytime soon, so there's no need to forecast this. The company does not have any liquidity or insolvency issues currently.
In terms of efficiency and profitability, MNSO made a profit in FY22, so these have started to improve, and my model suggests that ROA and ROE will get even better in the following years. The below graph is a forecast of what these may look like. These are respectable numbers and are above my minimum figures of 5% for ROA and 10% for ROE.
A similar story can be said about the company’s return on invested capital or ROIC. This improved only slightly in FY22, but with further improvements in operations that the company is expecting to see in FY23, I could see the competitive advantage improving to around my requirements, which is 10% for ROIC. Here’s what it may look like in the next couple of years.
Overall, if the model is correct, the financials are looking much better than they have been in previous years and the company will be in a very strong position to keep expanding and gaining a decent competitive advantage in the future.
Valuation
The company reported great numbers in the latest quarter, which saw revenue growth of 26% y-o-y, gross profit growth of 64% and other high-double-digit y-o-y increases below, however, I will approach the valuation with a conservative mindset.
For the base case, I will grow revenue at around 11% CAGR for the next decade, which I think is quite conservative. It is hard to compare to previous years because of the pandemic distortions.
For the optimistic case, I went with around 15% revenue growth, while for the conservative case, I went with a 9% CAGR for the next decade.
I also wanted to keep it conservative on the margin side of things, so for the base case, I improved gross and operating margins by 100 bps or 1% over the next decade from FY23 projected margins. I will also add a 25% margin of safety to the final calculation to be even more conservative. With that said, MNSO’s intrinsic value calculation shows that the company is still slightly undervalued. The intrinsic value is $22.28 a share.
Closing Comments
I am a little surprised that even after an almost 200% rally in the last year, and with what I think are conservative estimates, the company is a buy. The company has a lot of potential and if it can continue expanding overseas, it will be less dependent on the domestic market, which is in my opinion a little riskier and more unpredictable as I mentioned earlier.
The demand for the variety of products the company sells is robust globally and I believe that it will keep growing at a fast pace for a couple more years if we don't see another similar situation like the pandemic in the last 3 years.
In the next earnings report, which will be FY23, I would like to see how the numbers of overseas stores ended up and whether the company will be more aggressive outside of the domestic market in terms of expansions.
For further details see:
Miniso: Still A Buy After An Incredible Rally