MINISO Group Holding Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3.5/5

MINISO is a global retailer offering a variety of design-led lifestyle products primarily targeted towards young consumers, with a focus on affordability and a diversified supply chain strategy.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: MINISO operates as a global retailer offering a wide array of design-led lifestyle products. Its offerings include goods spanning categories like toys, home decor, fashion accessories, and cosmetics. The company is especially popular among younger demographics due to their affordable prices and products that are often designed to appeal to trending tastes. The company’s business strategy centers on maintaining a global supply chain that allows for efficient manufacturing, sourcing, and distribution. MINISO employs a blend of self-operated stores and partnerships with distributors and other retailers to expand its reach.

Revenue Distribution:

Direct retail sales: The majority of MINISO’s revenue is generated through direct sales in its retail stores, including directly-operated and franchisee locations.
Sales to distributors: MINISO also derives revenue from sales to its distributors and retail partners around the world.
Licensing: Licensing agreements with third-party companies for product design and manufacturing bring in additional revenue.

Trends in the Industry

Global retail market growth: The global retail sector, particularly in lifestyle goods, continues to expand, driven by increasing consumer spending and the influence of social media.
E-commerce growth: The increasing popularity of online shopping poses a competitive threat to traditional brick-and-mortar retailers. Companies have to adapt to the changing shopping landscape by building an e-commerce presence, or partnering with established e-commerce platforms.
Focus on affordability: Price-conscious customers are seeking more value for money. This trend has favored retailers that provide fashionable products at affordable prices.
Emphasis on social media marketing: Companies are increasingly relying on social media as a channel for attracting and retaining consumers.
Demand for unique experience: Increasingly, modern consumers want more from a brand than just cheap products. They want to become part of a lifestyle and a brand culture.

Competitive Landscape MINISO operates in a highly competitive industry with several types of competitors:

Direct Retailers: Other specialty retailers and branded consumer product sellers.
E-Commerce: Online marketplaces like Amazon, and Taobao and others.
Department Stores: Larger department chains that sell a variety of product categories and compete with other retail chains.
Low-Cost Players: Businesses that offer similar products at low prices, such as low quality dollar stores.

What Makes MINISO Different

Value Proposition: MINISO offers design-driven products at low prices, creating a blend of fashionable and affordable goods.
Fast product cycle: The company has a very short product cycle which allows it to quickly adapt to new trends and consumer demands.
Diverse product range: MINISO has a very diverse product base spanning multiple categories, including lifestyle, home goods, and beauty products. This diversity allows the company to better capture a larger customer base.
Global presence: The company has a very large global presence in over 50 countries, giving it a large global reach.
Hybrid retail approach: MINISO has both direct retail stores and partner-operated stores, which allow it to capitalize on the knowledge of the local market.

Financial Analysis
Revenue Growth: MINISO experienced an increase in revenue in 2022 and 2023, with the six-month data ending December 2022 and 2023 showing increases in revenue from China and overseas markets. However, this growth rate slowed from 2022 to 2023.
Gross Profit and Margin: MINISO’s gross profit has also been increasing. The gross profit in 2021 was at 23%, whereas in the first 6 months of 2023, its gross profit was at 42.3%. While gross profit has increased, cost of sales has also increased over this period.
Expenses: Selling and distribution expenses have increased while general and administrative expenses have decreased.
Net Income/Loss: The company has recorded losses in the previous years, but profitability has improved in recent quarters. For the year ended June 2021, MINISO had a net loss of RMB1.4 billion; for the year ended June 2022, it had a net loss of RMB1.4 billion and a net profit of RMB683.7 million, and for the six months ended December 2022, the net profit was RMB338.2 million and for the six months ended December 2023 the net profit was RMB 1217.5 million.
Share Repurchase Program: MINISO has been undertaking a share buyback program to increase the value for the shareholders. It repurchased shares worth approximately USD 186.5 million between July 2022 and September 2023.
Debt: The amount of debt on the balance sheet is small relative to its market capitalization.

Moat Analysis:

While MINISO has established itself as a notable brand, it’s competitive advantage isn’t very high, as a high percentage of its products can be produced by competitors. Competitors could also easily replicate the retail model, and establish a competing distribution network. Given the competitive landscape, I would give MINISO a moat rating of 2 / 5.
The company’s business benefits from a strong brand in its target market, and a large and efficient global supply chain, however these two are not too difficult to replicate by another business. This indicates that MINISO has a small moat which could be eroded very quickly.
The company’s expansion is also hindered by high operational and supply chain risks, that makes them less likely to get strong and sustainable returns.

Legitimate Risks that Could Harm the Moat and the Business Resilience

Competition: Because there is no real product differentiation, competitors could steal sales from MINISO by selling at a low price.
Changing consumer preferences: The company’s products rely on consumers liking the product, a change in trends and consumer preferences can make existing products irrelevant.
Reliance on Supply Chain: Any disruption in MINISO’s supply chain will affect operations and reduce revenues.
Regulation: The company is also subject to local regulations in the different operating markets, changes in such regulations can materially impact profits and value.
Geopolitical factors: As MINISO’s largest market is China, geopolitical issues can severely affect its earnings and growth trajectory.

Understandability Rating: 3 / 5 The business model is relatively easy to understand. The company sells products to consumers. Understanding the supply chain and specific accounting and financial details is more challenging, which is why the understandability score is 3 / 5.

Balance Sheet Health: 3.5 / 5 The company has a reasonable amount of cash and manageable levels of debt and liabilities. However, given the inconsistent profitability, and the risks associated with the Chinese markets, the balance sheet health of MINISO can be rated at 3.5 / 5.

Recent Controversies

Accounting Irregularities: MINISO has stated that a new SEC rule is threatening its listings on the New York Stock Exchange. PCAOB’s findings from its inspections in the company’s home market in China and Hong Kong have increased uncertainty and costs.
Audit Concerns: MINISO has been under scrutiny from US regulators due to the location of its audit firm in China and Hong Kong, which has been labeled as “Uncooperative”, and could possibly lead to delisting from the US stock exchange.

Management’s Stance: Management has stated that it will adhere to all reporting requirements and is taking steps to reduce any risks to their listing in US markets. It has also stated that it plans to continue to develop and grow the brand in China and globally, while seeking to expand to new and less uncertain markets.