MINISO Group Holding Ltd Q4 FY2023 Earnings Call

In Hong Kong Stock Exchange, we have prepared a PowerPoint presentation for today's call that includes financial and operational information for this quarter and fiscal year. If you are using Zoom Meeting, you should be seeing it now. It will also be available on our IR website later. Now, I would like to hand the conference over to Mr. Ye, and Mr. Wang will translate for him. Please go ahead, sir.

Hello, everyone, and welcome to our earnings conference call. Our overall performance once again reached new highs as we achieved breakthroughs in both revenue and profitability. Total revenues exceeded the RMB 3 billion milestone for the first time, increasing by 40% year-over-year to RMB 3.5 billion. GP margin reached 39.8%, an increase of 6.5 percentage points year-over-year. Adjusted net profit surpassed RMB 570 million, increasing by 156%. Adjusted net margin also hit a new high, reaching 17.6%, an increase of 8 percentage points year-over-year. I'll now walk you through business updates for our 3 major segments: MINISO China, MINISO Overseas, and MINISO TOP TOY. MINISO China showed resilience despite the challenging consumption environment. Offline sales of MINISO China achieved 40% year-over-year growth in this quarter, as well as according to the National Bureau of Statistics China, domestic retail sales increased by only 10%. Average transaction volumes increased by 18%, while average transaction value increased by more than 5% year-over-year. Entering July, nearly 1/3 of MINISO stores in China achieved new sales records, marking a strong start to the September quarter. GMV increased by over 25% year-over-year with GMV per store increasing by 14%. Average transaction volume and average transaction value increased by 10% and 3% respectively. For the first 7 months of 2023, GMV per store in China recovered to 2021 levels and around 85% of pre-COVID levels in the same period of 2019, in line with our expectations at the beginning of the year. Notably, we opened a total of 221 new stores on a net basis in China during the June quarter, including more than 90 new stores in Tier 1 and Tier 2 cities. This not only set a quarterly record for store openings for MINISO but also represents the highest quarterly new store openings in Tier 1 and Tier 2 cities since the pandemic. Meanwhile, the store closure rate in this quarter was only 1.0%, below historical averages. With the designed new store opening and closing reflecting the high confidence of our retail partners. As of June, the MINISO brand had over 1,000 retail partners with nearly 50% of stores owned by the top 50 franchisees. Among them, 40 have been cooperating with us for more than 6 years. In the past 4 fiscal years, about 50% of new stores in China are owned by our top 50 partners. The average number of stores owned by them increased steadily from 27 to 33. We have been recruiting new partners as our store network penetrates lower-tier cities. The total number of retail partners increased from 754 at the beginning of 2020 to 1,022 as of now. We are highly confident that we will achieve our target of opening 350 to 450 stores in China on a net basis in 2023. We are also optimistic that we will be able to expand our network in different tier cities across China. We now expect to have about 5,000 stores in China by 2027 compared to 3,305 stores we had at the end of 2022. Let's move on to overseas. Firstly, revenue was RMB 1.11 billion, a 42% year-over-year increase from a high base of last year, exceeding even our most optimistic expectations and setting a new record for the June quarter. Revenue from directly operated markets increased by 85%, accounting for more than 45% of our overseas revenue, up from 35% in the same period last year. Secondly, GMV in overseas markets increased by 41% year-on-year, including a 69% growth in directly operated markets and a 32% growth in distributed markets. Overall, GMV per store in the overseas market increased by over 25% year-over-year. Average store count increased by about 11%. Major overseas markets maintained rapid growth momentum, including 106% growth in North America and a 46% growth in Latin America. Third, overseas GMV per store in the June quarter recovered to 92% of the same period in 2019. This is meaningfully higher than the 77% and 68% recovery rates we saw in the previous quarter and the same period of last year. The distributed markets recovered to 95% pre-COVID levels, while the DTC market recovered to 85%. In our top 5 overseas markets, GMV per store in North America was nearly twice the same period in 2019. GMV per store in Latin America, Europe, the Middle East, and North Africa all recovered to about 90% of 2019 levels. Asia markets recovered to about 65%, which was the highest we have seen since the pandemic, and the recovery is still very fast. Capital-wise, GMV per store in Mexico is 10% higher than pre-COVID levels. In the first half of 2023, 4,000 new SKUs were launched in Mexico and became a major driver of its local sales. GMV per store in the U.S. was twice the pre-COVID level. Since the grand opening of our first global flagship store at Times Square on May 20, it has consistently been setting new sales records. Fourth, the profit margin of overseas business is substantially improving, thanks to operating leverage. In this quarter, overseas markets contributed more than 40% of total operating profit, meaningfully higher than the approximately 25% in the last quarter. Margin expansion was especially apparent in the U.S. market, along with rapid revenue growth and refined unit economics. About 9% of our stores there were already profitable in June, significantly driving up the operating profit margin for overseas directly operated markets. In the first half of 2023, 72 new stores were opened in overseas markets on a net basis. The second half of the calendar year tends to be a peak season for store openings and sales. Recently, store openings have accelerated. In July, we added 38 overseas stores. We remain positive about the target of 350 to 450 additions in the overseas market in 2023. Since the beginning of this year, I have spent the majority of my time in overseas markets. During this period, I had a lot of deep thinking about the new store value proposition, and I'd like to take this opportunity today to share with you. In the past 10 years since our inception, MINISO leveraged China's unmatched supply chains. We used to position our products at 3 highs and 3 lows, meaning high appealing, high quality, and high frequency and low cost, low margin, and low prices. We relied on this cost leadership strategy for very rapid growth. 2023 marks the first year of MINISO's brand upgrade. Its value proposition has never been clearer in my mind, facing new changes and trends both at home and abroad. We cannot survive by relying solely on cost advantages. In addition, we also need to differentiate our product offerings as much as we can to engage in global competition. So I have renewed MINISO's brand positioning to a global value retailer offering lifestyle products featuring IP design. So how should we think about this positioning? The first message I want to deliver is that we attach great importance to the design of every single product. We have developed a lot of trendy lifestyle products that resonate with young consumers by focusing on creating more interest-driven content, just like Nike has been doing in promoting better design in sportswear. In addition to that, we should become an IP powerhouse such as Disney and make lifestyle products more fashionable by featuring IPs. By leveraging consumer demand to right product design, we can always develop products that are truly unique or are believed to offer more value than similar IP products. Only in this way can we continuously design best-selling products and also resonate with our consumers. We are now cooperating with 80 IP licenses compared to 17 when we listed in the U.S. 3 years ago. Take the recent blockbuster Barbie series as an example. Half of the related SKUs we had in store were sold out within the first 5 days of launch. The collaboration generated immense buzz on social media platforms, including Xiaohongshu; well-related topics received over 13 million comments as well as reports. While the topic accumulated nearly 300 million views as it became another phenomenal IP co-branded event for us. Third, we will stick to the value-for-money proposition. MINISO believes in our Happy Philosophy as we offer creative and high-quality products to global consumers at affordable prices. This is in line with our commitment to make it easy for consumers to enjoy a happy and quality life. Leveraging China's efficient supply chain and design capabilities we have accumulated during the past 10 years, MINISO is able to offer global consumers budget-friendly products and build our customer-friendly image. This value-for-money proposition enables us to have great advantages in navigating through economic cycles. We have identified 2 product strategies for overseas markets, globalization and IP strategy. To accomplish these 2 strategies successfully, we need to consistently drive product and design innovations. That means we need to offer emotional resonance with consumers by providing good-looking, fun, and useful products, among which we believe 3 categories will be key to our success. These are big beauties, victories, and big IP products. This year, IP-related plush toys and IP-related buying boxes acted as key load categories and have generated explosive growth in overseas markets, opening up new avenues for our future growth. Lastly, we'll implement a super store strategy. I believe super stores play a key role in growing mind share among consumers and strengthening our brand as they contribute larger sales. For example, our recently opened flagship store on Beijing Road of Guangzhou refreshed the sales record for single-string China for years. This is particularly impressive given the ongoing weakness of consumption in China, in particular, the opening performance of the Times Square flagship store was unbelievably strong, and it has upgraded our understanding of our business, including for me and the whole management team. It helped us have a better understanding of the market potential in the U.S. and strengthened our confidence in further developing and making investments there. The super store concept is potentially a new path towards improving per store sales for us. Now let me brief you on recent developments from TOP TOY. TOP TOY revenue increased by 81% year-over-year with an increase of 46% year-over-year in per store sales, an increase of 24% of average store count. I believe that high-quality growth is just ahead of us. In the June quarter, TOP TOY's product mix has been optimized as our exclusive products accounted for 1/3 of total sales, reaching the goal we set about 2 years ago. Merchandise GP margin was about 46%, 5 percentage points higher than the same period last year. Accounting GP margin continued to increase to a comparable level of MINISO China one year ago. This is a reasonable comparison as both businesses employ an asset-light business model where we mainly attract partners to invest in stores. So when sales reach a certain scale, operational leverage will kick in and drive our profit. I'll now turn the call over to Eason for a review of our financial performance in the June quarter and fiscal year '23.

Thank you, Jack. Hello, everyone. Thank you again for joining us today. I'll walk you through our financial results for the June quarter. Please note that all numbers are in renminbi unless otherwise stated. I will also refer to some non-IFRS measures, which have excluded share-based compensation expenses. Revenue is RMB 3.25 billion, representing an increase of 40% year-over-year. Revenue from China was RMB 2.14 billion, up 39% year-over-year. The increase was driven by a growth of 42% in revenue from MINISO's offline stores and a growth of 81% in revenue from TOP TOY. The 42% year-over-year growth of MINISO offline business was the result of a 9% growth in average store count and 31% of growth in per store sales. However, on a more comparable basis, per store sales increased by about 25%, excluding the impact of store closures last year. The 81% year-over-year growth of TOP TOY was a result of 24% growth in average store count and a 46% growth in per store sales. On a more comparable basis, per store sales increased by about 30%, excluding the impact of store closures last year. Revenue from the overseas market was RMB 1.11 billion, up 42% year-over-year, driven by an increase of 11% in average store count and a growth of about 28% in average revenue per MINISO store in overseas markets. Revenue from distributed markets was about RMB 609 million, an increase of about 20% year-over-year. Revenue from directly operated markets was about RMB 506 million, an increase of about 85% year-over-year, accounting for 45% of overseas revenue as compared to 35% last year. Through fiscal year 2023, revenue was RMB 11.5 billion, up 14% year-over-year. Of this, revenue from the overseas market was about RMB 3.82 billion, up 45% year-over-year. Gross profit in the June quarter was RMB 1.3 billion, up 68% year-over-year. Gross margin was 39.8% compared to 33.3% in the same period of the last year. The year-over-year increase was due to 3 reasons: 1) GP margin in China increased by about 6 percentage points, thanks to our continuous effort in brand upgrade; 2) GP margin in overseas markets increased by another 6 percentage points, thanks to product optimization and higher revenue contribution from directly operated markets; and 3) GP margin of TOP TOY increased by 10 percentage points due to product optimization. SG&A expense as a percentage of revenue was 19%, down from 22.7% in the same period last year. Selling and distribution expense was about RMB 458 million, increased by 33% year-over-year, driven by increased IP licensing expenses, increased personnel-related expenses, and increased marketing expenses, mainly in connection with our strategic brand upgrade of MINISO in China. Going forward, we will continue to see marketing expenses increase for a while, but we are highly confident to ensure that total SG&A expense is maintained at a reasonable and controllable level of revenue. G&A expenses were RMB 161 million, decreasing by 10% year-over-year. Turning to profitability, operating profit was RMB 690 million, increasing by 154%. Operating margin in this quarter was 22%, the first time ever for us to reach such a high level. For fiscal year 2023, operating margin has reached nearly 20% too. Adjusted net profit in this quarter was RMB 571 million, increasing by 156% year-over-year. Through fiscal year, adjusted net profit was about RMB 1.85 billion, up 155% year-over-year. Adjusted net margin in this quarter was 17.6% compared to 9.6% in the same period of 2022. For fiscal year, adjusted net margin was 16.1% compared to 7.2% last year. As of June 30, 2023, we had a strong cash position of RMB 7.3 billion compared to RMB 5.8 billion one year ago. Turning to our capital allocation strategy, we have established a dividend policy of paying out no less than 50% of adjusted net profit in the future. For fiscal year 2023, the Board of Directors approved a cash dividend in the amount of $0.412 per ADS, about 50% of our adjusted EPS of $0.81. The aggregate amount of cash to be paid is approximately $128.5 million or RMB 931.7 million. MINISO aims to be a world-class company. Our capital allocation strategy in the future will balance new growth opportunities and our commitment to bringing stable returns to shareholders. The June quarter has witnessed too many breakthroughs and new hits in each major aspect of our operations. Looking forward into the September quarter, we expect our sales will continue to grow strongly on a year-over-year basis, driven by better store level performance and store network expansion. Meanwhile, our margin profile will continue to optimize on a year-over-year basis. Thank you. And this concludes our prepared remarks. We are now ready to take questions.

The first question today comes from the line of Michelle Cheng from Goldman Sachs.

I have three questions. The first two are for Mr. Ye. The first question is about the strong IP performance this year. Can you provide details on the sales contribution from IP products this year and any targets for the future? Regarding the cooperation method with partners, is there a difference between the domestic and overseas markets? My second question pertains to the China per store GMV, which is still about a 15% gap compared to pre-COVID levels. Do we have a specific strategy to drive further improvement? The third question is about the OP margin for overseas business. This quarter, we have 35% of our revenue from overseas and 40% of our operating profit from that segment. Can you share the drivers for DTC and the distribution model, and how we should consider the margin potential for overseas business?

Michelle, thank you for your first question. We will continue to enlarge our cooperation with strong IPs with global influence and in line with our strategic direction of brand upgrade, and that will be helpful in expanding our sales. Specifically in the overseas market, we will stick to our big IP product strategy and we will continue to fund the strong IPs in each important market we are in, and that is one of our focus too. For the target of IP sales, we do not have specific numbers at this moment. But my personal estimate is that in the near future, it will stabilize at about 25% to 30%. In the first half, the IP contribution was about 25%, about 1 percentage point higher than the same period last year. But compared to 2019, it has been a 10 percentage point increase. I would say, at least for a while, the percentage contribution will be 25% to 30%. But in the future, we will dynamically change the contribution from IP based on market changes. There’s no significant difference between our cooperation model in China and the overseas market. We specifically found that IPs in the U.S. or Japan have a global appeal among our customers. We will cooperate with our IP licenses in terms of product authorization, marketing, shopping experience, and store experience. In all these aspects, we will leverage IP to empower us in terms of branding power and product power. In terms of your second question, you are right that with the progress of our brand upgrade, we will stick to our big store strategy or flagship store strategy. By the end of June, the average store size of MINISO China store is about 180 square meters, and this number has been stabilized during the past several years. But with the improvement of our branding power and our product, it has created some conditions for big stores opening. As I shared earlier, only by opening big stores can we increase our mind share among our customers, as these big stores contribute to larger sales. By opening big stores or flagship stores is also a common experience that we have learned from advanced retailers in European countries and the U.S. In the first 6 months, we have opened dozens of big stores that have demonstration effects. For example, the flagship stores on Beijing Road and another flagship store. Now in our store portfolio, we have about 100 flagship or big stores. On average, the initial CapEx is about 2x of ordinary stores. In the first 6 months, the per store sales have been very great in these big stores because their sales cost is 3x that of ordinary stores with an ASP 7% higher, and the inventory turnover days are about 30 days less than the ordinary stores. So in general, regarding ROI and payback, these large stores will be far better than ordinary stores.

And Michelle, this is Eason. About your third question, regarding the OP margin of improvements: first of all, you have to know that this percentage in OP margin contribution is the one before the allocation of headquarter overheads because there are always some overheads in headquarters that cannot be allocatable to each P&L unit. In terms of the OP margin of overseas business, I would say, currently, it's between the 22% of the group level and about nearly 30% of MINISO China, somewhere between them. I’d say whenever the OP margin of the overseas business is above the average group level, its profit contribution will be higher than its revenue contribution. If you look at the comparison between this quarter and the last quarter, I'd say the source of improvement is mainly from operating leverage. If we look at the expense structure both in directly operated markets and distributed markets in this quarter, we will see that the expense ratio, the OpEx ratio decreased by several percentage points compared to last quarter. So in general, the OP margin of the overseas market in this quarter has improved by about 5 percentage points on a quarter-over-quarter basis. The last point I would add is, it’s not the first time we have seen OP margin contribution from overseas markets surpassing 40%. As we shared earlier, before the pandemic when the overseas market contributed about 35% or nearly 40% of revenue, we already saw nearly 40% or over 40% of margin contribution. I’d say that the directly operated markets of our overseas business are still picking up operational leverage. So the overall profit contribution from overseas market, I would say, you might not be surprised to see it fluctuate for a while.

The next question is from the line of Anne Ling from Jefferies.

My first question is on the super store strategy. Just a follow-up question regarding whether we will be opening a self-owned super store or how many of these stores in the future will be operated by franchises? And in the future, what is our target for the number of super stores in our 300 to 400 store openings for this year for both China and the overseas market? My second question is coming out from the U.S. market, regarding the percentage of U.S. sales in the overall overseas sales. And in terms of the per store performance, how different is it so far versus the China market? I remember that in the past, our sales have been gradually building up, which in the future will help drive the sales as well as profitability.

For your first question about the large store strategy, I'd say, we'll stick to the strategy. In my design, we have a blueprint that in the future we do believe that each city or each provincial city in China will have a flagship store that represents MINISO's brand image. So my best guess is, we should have 500 such stores. There's no such thing as these stores being directly operated or franchisee operated. The first and foremost important thing is finding the optimal location. We will suggest every MINISO's overseas market to open suitable flagship stores because, as I said, the big store strategy is critical for our future success; it can elevate MINISO's brand image and store performance to new heights. It will also have a demonstration effect for its peer stores among the sales markets. For example, in the U.S. market, our flagship stores there can deliver sales records of about 1.3 million to 1.4 million. For our Guangzhou Beijing Road flagship store, we may record sales of 5 million per month, and all these are new sales records for the MINISO universe. For your second question about the U.S. market specifically, I'd say that for the past 3 quarters, it has ranked first among revenue contributions in the overseas market in two of those quarters. In the June quarter, it was the second-largest contributor in terms of revenue. The revenue contribution from our overseas market is in the high teens, while its revenue contribution to our total sales is around the mid-single digits during the past several quarters. You are correct that we have a lot of potentials in terms of store operations, product optimizations, and unit economics in the U.S. in the near term. As I shared in our prepared remarks, the unit economics of U.S. stores have improved significantly; for example, the OpEx ratio of U.S. stores during the past 12 months decreased by about 20 percentage points, which has played a significant role in turning this business into a profitable one.

The next question is from the line of Lucy Yu from Bank of America Merrill Lynch.

So there has been mention in the announcement that China is targeting for 5,000 stores in 2027. So what's the allocation or geography allocation of those new stores? And do we have any mid-term plans for the overseas market which may have greater potential in the long-term? My second question is on the China store unit economics post-COVID. So what's the detailed GP margin of the expense breakdown as well as the payback period?

Okay. Thank you, Lucy, for the first question about the store opening potential. In China, our target is to have 5,000 stores by year-end of 2027. We have a strong track record, and we are highly confident to achieve that goal. In terms of our overseas potential, I would say from my perspective; we do not have any concerns about the store opening in the overseas market for at least the next 10 years. My personal observation this year is that in a lot of overseas markets, we can open at least 1 MINISO store for every 100,000 people. Eason, would you like to address the second question about the payback of domestic stores?

And Lucy, for your second question about the payback of the domestic stores, we strongly believe that the payback period for most of our franchisees has been shortened over the past several months. There are several reasons for this. The first is our better store performance during the first half of this year. The second reason is the optimization of their expense structures, i.e., the rent level has decreased, staffing costs have been optimized, and there have been other savings in their costs too. Our estimate is that our franchisees, on average, have seen significant improvements in their margin profiles compared to one or two years ago, especially in Tier 1 cities. This year, we have observed that in Tier 1 cities, our MINISO stores experienced a sales per store increase of more than 30% on a year-over-year basis, which is higher than the 20% average year-over-year growth. For the new stores in Tier 1 cities this year, we have observed that the average rent level has decreased by a single digit compared to the last 3 years. As Mr. Ye just shared, in the first half, we opened a batch of demonstrated big stores. The average payback period for these big stores is far less than ordinary stores. So I will say, as my last point to your question, the big stores will also help increase the ROI of our franchisees.

The next question is from the line of Samuel Wang from UBS.

So we saw from the announcement that our July sales are also very strong with domestic growth above 25% and overseas growth of 50%. So what are the reasons and drivers behind that?

Samuel, this is Eason. Yes, our domestic sales increased by more than 25% in the month of July, specifically between 25% to 30% driven by two main drivers. The first is that the per store sales of MINISO China increased by mid-teens during the same period. We have also seen a strong growth in numbers. So on a single store basis, the mid-teens per store sales increase was mainly driven by low-single-digit ASP hikes and a high-single-digit or about 10% traffic improvement. In the overseas market, we also mentioned in the earnings release that the GMV increased by about 50%. The overseas directly operated market still retained a continued high growth rate comparable to the June quarter. In the overseas market, we also see the drivers stem from increased traffic and ASP hikes.

The next question is from the line of Jingru Song from Industrial Securities.

I have two questions. The first question is about how to improve our supply chain and about the overseas supply speed and control inventory over SKU. The second question is how do we forecast the ASP? It seems like it increased by 3% year-on-year this time. But how do we forecast the overseas ASP for the next year and the domestic ASP for the next year?

Okay. Thank you for your questions. In terms of our overseas supply chain expansion plan, we have two points to add here. The first is that we will stick to our accumulated resources in China. So China will definitely be the major supply chain base, but we are still exploring new partners in Southeast Asian countries such as Vietnam and so on. The second point is that we will increase the percentage of direct sourcing in local markets such as the U.S. market. For example, we have been proactively increasing the percentage of IP-related snacks in the U.S. market. Regarding your second question about ASP in the overseas market, I'd say in China, it's around RMB 35, right? And now it's about RMB 37 in the June quarter. For the overseas market, I'd give a rough number that on average ASP in overseas markets is about 2x or a little bit higher than that of China's ASP. However, for specific countries like in European countries and the U.S., this number is about 3x or even higher than that of China. In our rapid growth markets such as the U.S. and Canada, we still see our ASP increasing at a very fast speed. Thank you.

Thank you once again for joining us today, and our conference call now comes to an end. If you have any further questions, please contact our IR team. Our contact information can be found on today's press release. We will see you in the next quarter. Have a nice day. Goodbye.