What's behind the firm's 'low-priced but high-quality product' strategy?
This article is part II of our analysis on Miniso – check out part I before you read.
► Downside risks:1. Declined revenue and same-store sales showed a negative signal for Miniso's future operation. 2. Product quality control is more critical for Miniso to keep sustainable growth, especially when it was exposed to unqualified products. 3. Uncertainty brought by the epidemic may continuously slow down Miniso's international expansion, dragging down both revenue and profits.
► High P/S ratio, short-term fluctuated performance and fierce competition lead us to conclude that its upward share price potential can be limited.
The gross profit margin increased to 30.4%, rising 3.7% year-on-year due to the decrease in the value-added tax rate and increased IP-licensed products. However, this kind of growth that is not caused by brand premiums is difficult to sustain.
Moreover, the company's revenue growth is largely driven by the expansion of the Miniso store network, but the same-store sales revenue has been volatile. In the fiscal year 2020, income per Miniso store has fluctuated significantly, with a decrease of 19.8% to CNY 2.2 million. Besides, same-store sales in China fell by 3.8% and 32.6% year-on-year in the first half of 2019 and 2020. The epidemic can explain the decline in 2020, but the decrease in 2019 presents a lousy signal. With the same-store sales revenue already showing a downward trend, it is almost impossible to rely on store expansion to drive sustained revenue growth.
In terms of profitability, the net loss was slightly narrowed to negative CNY 260 million. However, the adjusted net profit under Non-IFRS was CNY 971 million, a year-on-year increase of 11.7%.
A common challenge that new China concept stocks will face when debuting on the public markets, as Xiaomi and Meituan have shown, concerns preferred stocks.
Preference shares that provide redemption at the holder's option give rise to a contractual obligation and therefore are classified as a financial liability under IFRS rules. The liability grows as the company grows and the fair value changes of preferred stocks will be redeemed as expenses, skewing the actual profit performance from a business analysis perspective. Miniso provided its non-IFRS net profit in the prospectus by adding back the expenses mentioned above and losses from discontinued operations, among others. We think it is not reasonable to add back the loss item, and our adjusted net profit suggests Miniso saw meaningful margin improvement despite the impact of COVID-19. The adjusted net profit increased to CNY 840 million in FY 2020 from CNY 564 million in FY 2019, with net margin growing to 9.36% from 6.01%.
Miniso's inventory turnovers were 63 days and 78 days in 2019 and 2020, respectively, showing it performing well among peers. The stronger the inventory turnover rate, the faster the inventory can be converted into cash or accounts receivable, indicating more vital monetization ability.
However, Miniso's price-to-sales was 4.86 as of October 23, 2020, while the PS of Costco, Wal-Mart, Yonghui Superstores, Doller Tree and Ryohin Keikaku were 1, 0.76, 0.81, 0.92 and 1.47, respectively. The absence of strong growth momentum for the offline retailer is too expensive to buy at the current price.
1. Insufficient momentum for sustained growth. The company's pricing strategy and product category are challenging to change substantially in the short term as the current prices are already low enough. Therefore, Miniso's growth in the next few quarters will mainly come from the number of new stores. However, the same-store growth sent negative signals, as stated above, mainly due to the outbreak of COVID-19 and partly due to the competition it faced in lower-tier cities and under-penetrated locations.
Besides, it is hard to predict the company's future growth, given the lack of quarterly and annual data about its store extension, churn and expansion plan. We will undoubtedly be watching to see these operation data. But from what it has disclosed now, the company proved its commitment to delivering the goal: it plans to open 6,000 stores worldwide by 2020, but Miniso claimed that international store expansion slowed down in the first half of 2020 due to the COVID-19 outbreak. And there is no assurance that store expansion will not continue to decelerate or even fail in the future, and overseas business could continue to languish in the coming months in the case of intermittent recurrence of the epidemic.
2. Miniso expanded rapidly through the franchise model in the early stage. Still, franchisees have to bear millions of financial pressures, including store decoration, product deposit, brand usage fees and 38% sales. Franchisees expect 12 to 15 months to recover the cost. Previously, Miniso provided financial support to franchisees through the P2P platform Fenlibao, which lowered the franchising threshold and created the right growth curve. However, Miniso stopped using the platform before listing, so it is uncertain whether the continuous influx of franchisees is unsure after the lack of loan channels.
3. Compliance risks and brand damage risks caused by product problems. The C2M model is not complicated, but it is difficult to strictly control every process over a long time. Food and cosmetics are prone to quality issues. Moreover, the moat and entry barriers of Miniso's business model are not high, and imitators like NOME have emerged. Therefore, maintaining long-term brand value is an essential part of Miniso.
In general, Miniso has successfully captured the needs of young consumers through cost-effective products and brand value. However, too many closed stores, declined same-store sales, the high valuation, short-term fluctuated performance, recent sales trends and fierce competition lead us to conclude that its upward share price potential may be limited. Over the medium term, much will hinge on the success of management efforts.