Miniso: Profitability hit a new level, is IP retail a "money printing machine"?

$Miniso(MNSO.US)$MNSO(09896.HK) On the afternoon of March 21, Beijing time, Miniso (9896.HK) released its Q4 2024 performance. The performance of Miniso itself is somewhat mixed, with both highlights and flaws. Although revenue slightly missed expectations, the overseas business, which the market is most concerned about, achieved high growth as expected, driving Miniso's quarterly profitability to a historical high.

Key points are as follows:

1. Overseas Revenue Achieves High Growth as Expected: In Q4 2024, the company achieved revenue of 4.71 billion yuan, a year-on-year increase of 22.7%, slightly missing Bloomberg's consensus expectation (4.81 billion yuan). The core driver was a 42.7% year-on-year increase in the overseas market, with direct sales and agency markets growing by 65.5% and 17.4% respectively. The direct sales market, represented by North America, experienced rapid growth, with overseas revenue proportion further increasing to 45% (compared to only 39% in the same period last year). Domestic revenue reached 2.58 billion yuan, with a sequential recovery in growth compared to Q3, where the Miniso brand grew by 10%, and TOPTOY continued its high growth of 42.7%.

2. Accelerated Expansion of Direct Sales Stores: In terms of the number of new stores, Q4 2024 saw a net addition of 182 overseas and 178 domestic stores, with overseas direct sales stores growing at a faster rate (mainly in North America), further increasing their proportion to 16.1% (the proportion of overseas direct sales stores has been increasing sequentially since Q1 2023). In terms of the whole year, there was a net addition of 631 overseas stores, achieving a historically high growth rate. The pace of new store openings in domestic markets remained stable in Q4, with increased efforts in opening stores in tier-3 and below cities, aligning with the company's refined store management strategy of "opening large stores, closing small stores, opening good stores, and closing poor stores."

3. Domestic Same-Store Sales Slightly Declined, Overseas Still Climbing: Thanks to the introduction of various consumer promotion policies, the marginal improvement in the consumption environment in Q4 led to a narrowing of the decline in domestic same-store sales compared to Q3, with first and second-tier cities recovering better than lower-tier cities; the overseas market, due to the currently low base of stores, is still in the climbing phase for single-store revenue, with the Harry Potter IP contributing significantly to overseas single-store revenue in Q4.

4. Gross Margin Reaches Historical High: Thanks to the continuous advancement of the IP retail strategy, the proportion of high-margin products in the IP series has been continuously increasing, coupled with the accelerated expansion of overseas direct sales stores (which have a gross margin about 20% higher than the agency market), and ongoing optimization of supply chain costs, Miniso's gross margin further increased to 47% in Q4 2024, reaching a historical high 5. The expense side remains stable. Although marketing expenses increased during Q4 for the overseas Christmas season, domestic companies controlled their expenditure, resulting in a slight decrease of 0.8 percentage points in the sales expense ratio. In terms of management expenses, due to the accelerated opening of direct-operated stores overseas, the management expense ratio increased slightly by 0.7 percentage points, keeping the overall expense side stable. Therefore, from a profitability perspective, the adjusted net profit margin increased by 1.6 percentage points to reach 16.8%.

6. Detailed financial data overview:

Dolphin Research's overall view:

In Dolphin Research's opinion, Miniso's performance this quarter is average. Although the two most concerning points in the market are—1. Whether the overseas market (especially Europe and the United States) can maintain high-speed growth 2. Whether the continuous advancement of the IP retail strategy can drive the company's profitability, the company has provided evidence through its financial report data. However, the flaw lies in the overall revenue growth rate not being as high as expected.

Regarding valuation, combining the management's guidance on future performance and Dolphin Research's predictions in Miniso: Has Shein Broken Down? The "Daily Necessities Version" of Shein is Thriving Offline, domestically, with small stores transforming into larger ones and refined operations maintaining steady single-digit growth, and overseas, the continuous expansion of stores at high growth rates, is not a big issue for Miniso's overall net profit growth rate CAGR to remain above 20% in 2025 and 2026. The current market value implies that Miniso's PE for the next two years is only 15x and 13x, which is undervalued.

Dolphin Research believes the most direct reason is that the current stock price implicitly reflects the adverse impact of Miniso's investment in Yonghui Superstores on Miniso (although it has not yet been consolidated, many investors in the market are not optimistic about Miniso's adjustments to Yonghui Superstores). Therefore, Dolphin Research would like to add some views on Miniso's entry into Yonghui for everyone's reference.

The market's doubts about this matter can be summarized as follows:

1) Occupying a large amount of cash flow: Miniso acquired Yonghui with 6.27 billion yuan in cash, but as of Q4 2024, Miniso only had 6.7 billion yuan in cash flow, and Miniso is currently in a phase of overseas expansion, especially direct-operated stores that require significant upfront investment, which may affect Miniso's development.

2) Weakening its own ROE: Yonghui Superstores reported net losses of -2.76 billion yuan, -1.33 billion yuan, and -1.4 billion yuan for 2022-2024. Assuming the adjustments do not meet expectations and continue to incur losses, in a pessimistic scenario, based on the average loss over the past two years, the impact on Miniso's net profit is approximately 400 million yuan, which would lower Miniso's own ROE by about 4% 3) Doubts about business synergy: Although both are in the retail industry, Miniso focuses on the niche track of "IP retail," while Yonghui is a traditional large comprehensive supermarket specializing in fresh produce, resulting in low overlap in business and weak complementary effects.

Regarding the first point, before Miniso invested in acquiring Yonghui's equity, Miniso's debt-to-asset ratio was only about 40%, far below the retail industry's average level of 50%-70% (light asset operation, which occupies a large amount of franchisee funds), therefore, although the cash acquisition of Yonghui's equity occupied a large amount of cash on Miniso's books, Miniso still has considerable borrowing space for business development.

On the 6th, Miniso issued $550 million in convertible bonds (approximately RMB 4 billion) for repurchase and overseas market expansion. According to Dolphin Research's calculations, with this convertible bond, Miniso's debt-to-asset ratio is only about 52%, so Dolphin Research believes that the risk of insufficient funds affecting Miniso's main business operations is relatively low.

The latter two points involve the effectiveness of adjusting Yonghui and whether the business synergy between Miniso and Yonghui can achieve the "1+1>2" effect. Dolphin Research believes that the "Fat Donglai model" optimizes product selection, eliminates intermediaries, enhances supply chain efficiency, increases the proportion of high-cost-performance private brands, and combines with excellent store service, making the success of this approach undoubtedly certain.

However, the key issue is that Fat Donglai is a regional "small but beautiful" enterprise, currently with only 13 stores nationwide, all focusing on third and fourth-tier sinking markets. Through long-term operations and rooting in local markets, it has formed a locally high-loyalty customer base.

Currently, Yonghui Supermarket has nearly 800 stores nationwide, most of which are located in new first-tier and second-tier cities, with a relatively high-end brand positioning. In high-tier cities, quality retail similar to the Fat Donglai model has already been laid out by Alibaba's Hema and JD's 7-Fresh, with a clear first-mover advantage (Hema currently has nearly 500 stores). Therefore, Dolphin Research believes that simply imitating the Fat Donglai model for adjustments in high-tier cities is quite challenging, and more opportunities may exist in the relatively scarce quality retail in sinking markets.

However, it is certain that once Yonghui's adjustments are effective and it turns losses into profits, Miniso's valuation will inevitably see a recovery, and Dolphin Research suggests maintaining a wait-and-see attitude.

The following is a detailed interpretation of the financial report:

1. Overseas growth as expected, but growth rate slightly below expectations

In Q4 2024, the company achieved revenue of 4.71 billion yuan, a year-on-year increase of 22.7%, slightly below market expectations (4.84 billion yuan) and slightly missing Bloomberg's consensus estimate (4.81 billion yuan).

The core driver is the overseas market, which grew by 42.7% year-on-year, with direct sales and agency markets growing by 65.5% and 17.4% respectively, with the direct sales market represented by North America experiencing rapid growth. The proportion of overseas revenue further increased to 45% (compared to only 39% in the same period last year). Domestic revenue reached 2.58 billion yuan, showing a recovery in growth compared to Q3, with the Miniso brand growing by 10% and TOPTOY continuing its high growth of 42.7%

With domestic growth slowing down, Miniso has bet its "second growth curve" on overseas markets, making the growth of its overseas business the primary concern for investors. At the 2024 investor communication conference, Miniso made a bold statement: Over the next five years, overseas overall revenue is expected to quadruple, corresponding to a CAGR of about 30%-40%. From this perspective, Dolphin Research believes that the overseas growth rate of 42.7% can be considered barely meeting expectations.

II. Opening stores remains the core driver

In terms of the number of stores, as of Q4 2024, Miniso added 360 new stores, bringing the total to 7,780, with net additions of 182 and 178 stores overseas and domestically, respectively. The proportion of overseas stores further increased to 41.6% quarter-on-quarter. In terms of the whole year, there was a net addition of 631 overseas stores, with the opening speed reaching a historical high.

The pace of store openings in domestic markets remained stable in Q4. Structurally, the company has increased its efforts to open stores in third-tier cities and below, which aligns with Dolphin Research's expectations, as the company's penetration rate in core business districts of first- and second-tier cities has already exceeded 50%, and the company will significantly enhance its review process for new stores.

From the structure of newly added overseas stores, the growth rate of overseas directly-operated stores is higher (mainly in North America), with the proportion further increasing to 16.1% (since Q1 2023, the proportion of overseas directly-operated stores has been increasing quarter-on-quarter).

In terms of same-store revenue, thanks to the introduction of various consumer promotion policies, the marginal improvement in the consumption environment in Q4 has narrowed the decline in domestic same-store sales compared to Q3. Among them, the recovery of same-store sales in first- and second-tier cities is better than that in lower-tier cities. Combined with the management's statements during the conference call, small stores with an area of less than 200 square meters have significantly weaker same-store sales performance compared to large stores. Moreover, large store types such as "IP co-branded stores," "themed stores," and "flagship stores" are mostly concentrated in first- and second-tier cities, which again confirms that the potential of large stores is higher than that of small stores.

Due to the current low base of stores in overseas markets, single-store revenue is still in the climbing stage, and it is expected that the newly launched Harry Potter IP in Q4 will contribute significantly to overseas single-store revenue.

3. Gross margin reaches a historical high, expense ratio remains stable

Thanks to the continuous advancement of the IP retail strategy, the proportion of high-gross-margin products in the IP series continues to increase, coupled with the accelerated expansion of overseas directly operated stores (which have a gross margin about 20% higher than that of the agency market), and continuous optimization of supply chain costs, the gross margin of Miniso further increased to 47% in Q4 2024, reaching a historical high.

In terms of expenses, although marketing expenses increased during the overseas Christmas season in Q4, the domestic company controlled its expense spending, resulting in a slight decrease of 0.8 percentage points in the sales expense ratio. Regarding management expenses, due to the accelerated expansion of overseas directly operated stores, the management expense ratio slightly increased by 0.7 percentage points, keeping the overall expense side stable. Therefore, in terms of profitability, the adjusted net profit margin increased by 1.6 percentage points to 16.8%.

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