MINISO Group Holding Limited
Q4 2021 Earnings Call Transcript

Published: 19 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to MINISO Group Holding Limited Earnings Conference Call for the Fourth Quarter of Fiscal Year 2021 that ending June 30, 2021. At this time all participants are in a listen-only mode. After the managements' prepared remarks, we will conduct a question-and-answer session. Please note this event is being recorded. Now I'd like to hand the conference over to your host speaker today, Mr. Eason Zhang, Director of Investor Relations. Please go ahead, Eason.

[Eason Zhang:]

Thank you, Monroe. Hello, everyone, and thank you all for joining us on today's call. The company has announced its corporate financial results earlier today and earnings release is now available on the Investor Relations website at ir.miniso.com. Today, you will hear from our Chairman and CEO, Mr. Guofu Ye, who will start the call with an overview of our business. He will be followed by our CFO, Mr. Saiyin Zhang, who will address our financial results in more detail before we take your questions. Before continuing, I'd like to refer you to the safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Please also note that we will discuss non-IFRS measures today, which we have explained and reconciled to the most comparable measures reported under the international financial reporting standards in the company's earnings release and filings with the SEC. With that, I will now turn the call over to Mr. Ye. Please go ahead, sir.

[Guofu Ye:]

Hello, everyone. On this call, I will five give you an update on our operations in June quarter and full fiscal year 2021, and then share our development strategy for the full year 2022. We closed fiscal year 2021 with a solid fourth quarter. Revenue was RMB2.4 billion, up 59% year-over-year and within company's guidance. Adjusted net profit was RMB145 million, up 242% year-on-year. In terms of regions, domestic revenue was RMB1.95 billion, up 43% year-over-year. Overseas revenues were RMB526 million, up 179% year-over-year in terms of business units MINISO, our flagship business recorded a revenue of RMB2.36 billion, up 57% year-over-year accounting for 95% of our total revenue. Meanwhile our business recorded a revenue of RMB110 million, up 136% year-over-year. MINISO experienced a tough operating environment in June quarter as the rapid spread of the Delta variant triggering a new round of pandemic in Guangdong province and some overseas markets. In China, thanks to strong measures taken by the government. The spread of the pandemic was effectively limited in Guangdong and completely withdrawn by early July. As a result, domestic operations of MINISO brand recorded a revenue of RMB1.83 billion, up 39% year-over-year. Revenue from international operations in this quarter was RMB526 million, up 179% year-over-year although the overall situation was better than that of the same year in 2022 for our international operations. Some of our overseas such as those in there experienced a revenue decline sequentially in this quarter due to the impact of Delta variant. Our distributor countries, on the other hand, experienced revenue increase sequentially despise lower than expectation. China, we added 127 MINISO stores during this quarter, compared to a net decrease of two stores and a net addition of 38 stores during the same period of 2020 and 2019, respectively. This was an encouraging development for us and we should give credit to support our retail partners here. By the end of June, we had 820 retail partners, increased by 80 year-over-year, with each partner adding 3.5 MINISO stores average flat year-over-year. Despite resurgences pandemic in China to bring short-term pressure, however, MINISO’s long-term potential in China remains unchanged. For example, as we continue to unlock new opportunities in China's low-tier cities. 50% new stores were from this market, in this quarter. We have many cities in our list to be entered or to further develop. We opened 35 new stores in overseas markets on net basis this quarter, 40% of which were located in Europe. In Italy, MINISO opened three stores consecutively in April affecting lines of consumers who waited outside the stores for a long time. This is the latest example of MINISO’s initial success in European markets as represented by Italy, France, and Spain, and so on. We look forward to continue to serve European customers as MINISO's relaxing, shopping environment and shopping experience. We also entered three overseas markets in this quarter besides Italy, mark our entry into 98th overseas markets. During this quarter, the average numbers of store suspensions in overseas markets was about 300. We had 200 in the previous quarter, mainly due to this spread or the Delta variant this quarter. On the other hand, suspended stores were at a quarterly low of 205 by the end of June down from 208 a quarter ago. However, the recent resurgences of pandemic since July is expected to continue to impact international operations. We have adopted several measures to assist our overseas partners in tackling the new challenges caused by pandemic resurgences. First of all, we have connected them to local channels such as supermarket and online channels to boost sales, clear inventory and get cash back. For example, Morocco NTLM set up flash stores in the Philippines COVID with supermarkets. Our specialized team as enabled operations in about 50 overseas markets to move part of their sales online by providing useful suggestions. Secondly, we launched a new business process management system this quarter, which helped distributors better integrate the whole business process with its standardized and visualized features. This system has helped improve overall efficiency and satisfaction of distributors. Totally by allowing the use of proceeds such as that letter of credit or payments, we help relieve a part of distributors’ cashflow pasture. Last but not least, we continue to help distributor partners control their costs in areas such as improving average employee ARPUs and negotiating more favorable wins and deductions. As we pointed out on our last call, MINISO has average with managed strong partners in its overseas markets who have strains in cash position, shareholder background and bargaining power. Now more resilient to the uncertainty is caused by the pandemic. We remain confident about MINISO’s long-term prospects in overseas markets, large strength in supply chain products we don’t know how the business model remain outstanding. We'll continue to collaborate with overseas partners to overcome the challenges together. Move to our online business, e-commerce revenue was around RMB200 million, up 133% year-over-year, mainly attributable to the June 18 Mid-Year Shopping Festival. In total online business, including e-commerce and O2O contributed 12% of our revenue. As of June 30, members who have made at least one purchase during the past 12 months or about 33 million, up 9% year-over-year and 10% sequentially. We continue to expand our IP library and this quarter has seen great success in our corporations with top IPs, such as TOY stores, the MBA and Minions with IP sales up 79% and 59% driven over the same period in 2020 and 2019 separately. In addition, the plan to leverage MINISO’s global store network introduce more popular products, such as blind box overseas markets. At the first half, we have achieved encouraging results in Southeast Asia and Middle East in this quarter. For example, in its first five days in Singapore, sales of blind box accounted for more than 20% of total store sales. We will target more markets in Europe and Latin America by this year. Now TOP TOY, first of all, channel expansion on track, during this quarter, our TOY open in four stores, bringing total store 233 by end of June, including 63 more stores and 27 collection stores. Just last weekend, our TOY machine co-branded by Top Toy and the celebrated its grand opening, bringing TOP TOY’s stores to a grand total 54 and recorded total sales more than RMB1 million in its first day. We’re also preparing for TOP TOY’s first, our toy commuter exhibition with the China International Comics Festival in Guangzhou in early October. This 10,000 square meter exhibition will include top brands such as Bandai and will be a great opportunity for us to both promote TOP TOY and accumulate the relevant experience. Secondly, TOP TOY’s business model is improving with its brand expansion in this quarter. TOP TOY’s revenue increased by more than 180% sequentially, TOP TOY is still in early stage of capacity building and brand promotion. And this gross margin level has huge room to improve. Going forward, we expect that TOP TOY’s gross margin will improve well its operating leverage will be gradually released driven by the expansion of its scale and the maturity of its proprietary IPs. Thirdly, we continue to operate our product structure as planned. TOP TOY’s proprietary products, including six of its proprietary IPs, now account for more than 5% of total sales, with higher gross margin than those of third-party products. Our proprietary IPs launched just three months ago, have gradually caught on in the market. For example, sells of Twinkle and double Tumbler have stabilized within our top 10 at use. Sales of Tammy's series stabilized within top 20. Move on to fiscal year 2021. Despite the continuous impact on global retail industry caused by the pandemic, we still recorded a positive growth with revenue reached RMB9.07 billion. Domestic revenue was RMB7.29 billion, up 21% year-over-year. And overseas revenue was RMB1.78 billion, down 39% year-over-year. In this year, we continued our overseas expansion adding an additional 121 MINISO stores in overseas market and entering our 90 days overseas market, despite the great uncertainty caused by the pandemic. We also continue to see the market potentials in China's low-tier cities with 60% of net, 106 new MINISO stores in China located in this market segment. Additionally, we successfully completed our initial public offering unveiled our X strategy and launched TOP TOY. We're moving towards our vision of becoming a leading global new retail platform. Looking ahead into the fiscal year 2022, we remain committed to pursuing the following strategies. Firstly, we'll continue to expand and upgrade our store network and deploying our business model. Secondly, we're continuing to focus on product and supply chain as well as introduction of more popular product to fully leverage our strengths in product design and cost control. We'll also continue to execute our IP strategy and expand our IP library to fully utilize the brand awareness and appeal of top orders. Thirdly, we will continue to depend consumer engagement and drive the omnichannel experience. We also improved our ability to operate private traffic through mini programs, its capabilities, launching products, exclusive online and improving our recommendation algorithm. Fourthly, we'll continue to closely monitor the pandemic development and adjust our business plans dynamically by continuing to cooperate with our overseas partners in various aspects will help them save energy, future development. Finally, we'll continue to leverage our strengths and core capabilities to explore new business opportunities. This concludes my prepared remarks. I’ll now turn the call to our CFO for financial results.

[Saiyin Zhang:]

Thank you. I will start my remarks with a review of June quarter financial results and then provide additional color regarding the September quarter. Please note that I will be referring to non-IFRS measures which have excluded share-based compensation expenses. Revenue was RMB2.07 billion, increased by 59% year-over-year and 11% quarter-over-quarter and above the midpoint over the company's guidance range of RMB2.3 billion to RMB2.5 billion. The year-over-year increase was primarily driven by the growth of the company's domestic operations and a recovery of international operations. Revenue generated from the company's domestic operations was RMB1.95 billion, increased by 43% year-over-year. Revenue generated from domestic operations of the MINISO brand was RMB1.83 billion, increased by 39% year-over-year, mainly driven by a year-over-year increase of 14% in average store count and a year-over-year growth of 23% in average revenue per store in China. Revenue generated from the company's international operations was RMB526 million, increased by 179% year-over-year, reflecting the recovery of the company's international operations from the same period of 2020. From a quarter-over-quarter perspective, revenue from company's domestic operations increased by 9% driven by a sequential growth over 60% in MINISO’s offline sales in China and a sequential growth of 15% in e-commerce business due to June 18 Mid-Year Shopping Festival. Revenue from international operations increased by 19% sequential. According to the National Bureau of Statistics in China in the first half of 2021, retail sales of supermarket, convenience store, department store and a special store increased by an average of 22% compared to the same period of the 2020, and then 7% compared to the same period of 2019. Over the same period, MINISO’s growth sales increased by 54% and 8% separately, better than the industrial average. And it was achieved against the background of the pandemic resurgence in Guangdong province, which lasted for nearly 50 days. During that day, the estimated loss in GMV was about RMB50 million. Gross profit was RMB639 million, increased by 68% year-over-year and 2% quarter-over-quarter. Gross margin was 25.8% as compared to 24.4% a year ago; and 28.1% a quarter ago. The year-over-year increase of gross margin was primarily due to an increase in revenue contribution from the Company's international operations, which typically has a higher gross margin than the Company's domestic operations. Revenue from international operation account for 21% of Company's total revenue compared to 12% in the same period in 2020. The quarter-over-quarter decrease was mainly attributed to increased promotion activities during the June 2018 Mid-Year Shopping Festival; and second, inventory clearances in certain cities that aimed to tackle the negative impacts caused by reoccurrence of the pandemic in Guangdong province. Selling and distribution expenses was RMB264 million increase by 15% year-over-year, but decrease by 4% quarter-over-quarter. The year-over-year increase was primarily attributable to increased personnel related expense and marketing expenses as with the year-over-year revenue growth and brand awareness improvement of both MINISO and TOP TOY. The quarter-over-quarter decrease was primarily attributable to rent deductions related to COVID-19 in certain international markets. G&A expenses were RMB188 million increased by 59% year-over-year and 20% quarter-over-quarter. The year-over-year increase was primarily due to first, increases in personnel related expenses and IT expenses for our new initiatives such as TOP TOY; and second, we took necessary measures to reduce our general and administrative expenses to tackle the challenges caused by the pandemic during the same period of 2020, resulting a low comparison base for these expenses. The quarter-over-quarter increase was primarily due to increased professional service fees. Turning to our profitability. Operating profit was RMB188 million compared to a loss of RMB30 million in the same period of 2020 and a profit of RMB161 million in the previous quarter. The year-over-year improvement in operating profit was primarily due to our business recovery both in China and overseas market, while the quarter-over-quarter improvement was due to the reduction in foreign exchange loss and credit reversal in this quarter. Adjusted net profit was RMB145 million increased by 242% year-over-year and flat quarter-over-quarter. Adjusted net margin was 5.9%, compared to about 2.7% a year ago and 6.7% a quarter ago. Adjusted basic and diluted earnings per ADS were both RMB0.48 in this quarter, compared to RMB0.15 a year ago and RMB0.52 a quarter ago. Turning to our balance sheet, as of June 30, 2021, the combined balance of the company's cash, cash equivalents, restricted cash, and other investments was RMB6.8 billion, compared to RMB2.86 billion a year ago. Turning to working capital, turnovers of inventories and trade receivables remain flat sequentially. The Board of Director has approved a dividend of about RMB300 million and I want to take this chance to share the company’s capital allocation strategy here. When deciding the total amount of the dividend, we have considered the level of profitability that we have achieved in fiscal year 2020, and could have achieved in fiscal year 2020 without a pandemic. Our capital allocation strategy is new in the future. We'll prioritize new growth opportunities such as new strategic initiative and the new store expansion. We will also remain community to bring return to share holder through anticipated dividend payments. Looking ahead into quarter-over-quarter of 2021, we expect our total revenue to be between RMB2.45 billion and RMB2.65 billion which represent an increase of 18% to 28% year-over-year. The latest resurgence of the pandemic from Nanjing in China has spread to several provinces and is still evolving. We currently estimate that its sales will continue to be pressured by the lingering effects of the pandemic in the short-term, which will lead to a reduced traffic or even the temporary closure of the Company store. We will continue to focus on those elements of the business that are under our control, such as

[Operator:]

We will now begin the question-and-answer session. Your first question today comes from the line of Michelle Cheng from Goldman Sachs. Go ahead.

[Michelle Cheng:]

So two questions for management. One is can you just please share the quarter-to-date trend for both China and a few like important international market situation. And secondary for TOP TOY, management mentioned that the gross margin upside will come from better product mix. So, can you share with us the IP development and other product mix enhancement strategies going forward? Thank you.

[Guofu Ye:]

Okay, thank you for the questions Michelle. In terms of the pandemic influences our mass business, so this round of pandemic began at around July 2020s, although we have taken active measures such as to increase our online promotions and other strategies to deal with it. It has somehow impacted our business. Based on our track recently, the influence is across the board in the three tier cities. For tier-1 cities, the estimate loss in GMV for those influenced stores were about 10% of its daily normalized level. And for tier-2, the impact is estimated to be more than 20% and for tier-3, it's below 10%. And we currently estimate that the overall impact for the GMV is about 15% for our domestic business. And in terms of province or regions, the most impacted were provinces such as Zhangzhou, Henan and Honan. For these three provinces, loss was about 30% to 40% of its daily online level. And we currently estimate that the impact of the – that impact nearly one month on overall performance is diminishing with the – strict control by the government and the overall impact is diminishing to as the pandemic is gradually brought under control. And the based on the past experience in China, it usually takes about four to five days to control the whole situation. And we believe at this time that it will happen for this round of pandemic two. In terms of the recovery in overseas markets in June quarter, the overall recovery rate was about 55% compared with the same period in 2019. And the recovery rate was about 55% in April, 60% in May and respectively. In terms of region, Asian market, our largest of the market is our – about 40% of overseas growth has lagged behind peers. The overall recovery rate during June quarter was about 35% to 40% of its pre-COVID level in the same period in 2019. For Latin America, our second largest, so it is about 50% of our stores are down. The recovery rate was about 60%. And on other hand we have synergies in other markets such as Middle East, and North Africa, and Europe too, or Middle East, and North Africa, there are recoveries of about 70% and for Europe it was 77%. And these two areas saw a strong growth in Germany too, for Middle East and North Africa it increased by about these 92% compared to same period of 2019. Europe as a whole increased 77%. But these two areas again our emerging market and these temporarily do not have many stores there. And in terms of countries, if we look at the top 10 countries in terms of sales Mexico recovered to around 70% from the same period 2019. While Asian countries, including our subsidiary countries, such as Indonesia and India were about 50% and 55% respectively. Stores opened in Middle East countries such as Saudi Arabia, which saw 64% increase over the same period in 2019, Israel saw 51% increase. And Morocco which saw 9% increase in the number of stores up overall these areas I mentioned now, the recovery is overall below 80%. For your second question, Michelle Top Toy, in terms of sales per store, our dream work stores we are not talking about core stores on the last product we have eight now, beyond that we have more than 40 connection stores now. So, the average performance is quite stable with Dreamworks’ monthly sales stabilized at RMB2 million and for collection stores it stabilized at RMB600,000 overall average sales per Top Toy store is more than the RMB900,000. In terms of product, so far, we have collaborations with about 200 suppliers and developed more than 3,300 SKUs, of popular products. And the only 500 of them have been sold out. And about 80% of sales of Top Toy now is contributed by its top 21%, 20% best sellers. And as we share before Top Toy now has eight categories and more than 120 sub-categories. And in terms of consumption of consumers let me show few figures. First is ASP. So average ticket size, for Top Toy is relatively high as RMB 150; for Dreamworks as high as RMB 200. And second is Top Toy MINISO has strong holiday back. And, for example, this year we had six public holidays, first half accounting for 60% of holidays, but its revenue contribution during these six holidays were about 13%. And the sale of proprietary IPs, now we have six SKUs, this gross margin of about 60%. And average revenue of our proprietary SKUs is all times that of Top Toy’s average. And during this quarter, we also launched our function, a program that was a huge success, for example, we launched three to four SKUs every month with each of their sales three fourth the average of Top Toy’s, and the turnover is extreme high, it's extremely fast that can be sold out within 10 minutes after launch. So, all-in-all, we ask may that our proprietary products, including our proprietary IPs, co-branding IPs, and exclusive IPs will account for 20% to 25% of total SKUs in one year and 30% to 40% in two years. Merchandise gross margin for TOP TOY is now at 43% incur to less than 40% six months ago, and then due to increased revenue contribution from proprietary products and our improved bargaining power with the buyers, because personally all of our third-party products such as action figures and were all purchased in small quantities. But in the second half, this will change, the percentage of the large orders will increase, so will our toys merchandise gross margin. Thank you.

[Operator:]

The next question comes from the line of Lucy Yu from Bank of America. Your line is open. Please go ahead.

[Lucy Yu:]

So, considering that COVID-19 is going to be lasted for at least relatively longer time, so how should we think about the development in both domestic market as well as overseas market, especially in terms of marketing and the channel development? And also, in terms of new retail format development, is there any update that could be shared with us? And the second question is on the margins, GP margin declined or contracted a little bit on Q-on-Q basis. So, can we break that down into promotion activities and inventory clearance? So how much of the margin contraction is due to each factor? And going into the next quarter, which is September quarter, how should we think about a margin trends? Thank you.

[Saiyin Zhang:]

This is Steven and I’ll address your first questions. Channel expansion, for our online business, we have experienced a rapid growth during the past one, two years, and now it's around revenue contribution is about 12%, but if we look at the past one or two years the year-over-year growth was more than 100%. So as an important part of our omni-channel strategy that will lead in invest into online continuously including our outdoor business, DTC, e-commerce and so on. The e-commerce ecosystem has changed a little bit a lot in the past year or two such as live streaming, showing and quite show. And we are also actively following up on this thing, but we will not burn cash by GMV as we share in our platform, instead, we will insist our profitable and health redevelopment of our business. So, it has been, and so it will be – for example we are more focused digitalization here to reach and active all users in a lower cost, but more efficiently.

[Guofu Ye:]

Hi, Lucy. This is Guofu Ye. And in terms of our customers about a new business, as we share that our vision is to become a global leading new retail platform. So, we definitely had some source and some internal integration and so on. But we do not think that this is a blind time to sell and we'll definitely share more when we have some major announcement on this. Hi, Lucy. In terms of your questions on GP margin, in this quarter, as we explained that the two reasons have resulted a sequential decline versus the Mid-Year Shopping Festival. We have increased promotions to maintain our market share. And the second is due to the pandemic in Guangdong and we have made some inventory clearance to tackle the challenges. So, overall, these two reasons have decreased our GP margin of about 1.5%. And if we look at the next quarter, the September quarter for e-commerce, we do not see any influence in this side because there were no major investors during this quarter. But for the second that the pandemic, since late July, the pandemic broke from Nanjing has spread in many provinces in China. So, we estimated that based on past experience, it's going to be completely controlled at least 45 days. And so, in short term, we see some gross margin pressure here. And we will continue to do some inventory clearance to tackle this Nanjing pandemic. So, we estimate that the GP margin for the September quarter maybe it will improve sequentially from this quarter, but it will be still lower than our normalized during the past several quarters. Thank you.

[Operator:]

Okay. Thank you. The next question comes from Jerry Yang from CITIC. Please go ahead.

[Jerry Yang:]

[Guofu Ye:]

Hey, Jerry. This is Guofu Ye. Thank you for question. In terms of your question on product, the revenue contribution of our 11 categories are relative – evenly distributed and relatively stable. During the past two years, categories such as toys and snacks have grown rapidly. For example, sales TOP TOY is now account for about 7.9%. And sales of snack account for about 8.9%. Another category personal care was the star of the first half of revenue share now reached about 10%, compared to 7% in the same period of 2020. If we look at the category structure, the 11 categories, the structure, they are relatively stable. And we do not see the change in the future. But we do think that there exist opportunities in some categories such as toys and – such as toys and snacks one-year ago. In the future, we do not think – we do think that culture and creative products will have their markets because young people love it. And this is the same for personal health products, and for IT products, which we are very good at. As we showed earlier in my prepare remarks, sales of IP products increased 59% compared to the same period in 2019 and accounting for 25% of our sales. Thank you.

[Rebecca Hu:]

Okay. I'll translate to myself. This is Rebecca from Haitong International. And I just have one question about MINISO oversea business. And could you please assure that our current revenue mix of three overseas models, they directly operated distribution and a franchise. And also, could you please give us more color on the resulting setters and trend of the distributors? Thanks.

[Saiyin Zhang:]

Hi, Rebecca, thank you for a question. This is Saiyin. Now in terms of GMV, our distributor market usually account for 60% to 70% similar with its share of our other stores and subsidiary countries account for, now another 30% to 40%. And before the COVID-19 such as in the second quarter of 2019 that the GMB in our subsidiary companies share was about 30%, but in the – in this quarter, in the June quarter; one, because of the delta variants, GMV in our countries accounted for only. And in terms of revenue, this quarter, it's 70%, 30%, so the 70% is from distributor country. And in terms of merchandise delivery amounts of distributor order. So in the first seven months, one, total shipment order decreased 30% to 40% compared the same period 2019; and increase about 60% compelled to the same period in 2020. And as you mentioned, our overseas distributors as our CEO shared in prepared remarks that we have with many strong overseas partners in our overseas markets. And if I remember right, the CR 10, that means the concentration rate of our top 10 distributors in our international operations has been stabilized at 60% during the past few years. So, these major distributors, they are very – they have strength. Our cash position in shareholding structure power. So, we do believe that we are more resilient at all the difficulty times during the pandemic. And this is also true that our user market is stable. Okay. Thank you.

[Eason Zhang:]

Okay. Thank you everyone. Thank you once again for joining our conference call today. So, if you have other questions, please do not hesitate to contact me or the investor relations team, and our contact information can be found on today's press release. So, we will see you next quarter. Have a nice day bye-bye.