Miniso Conference Call: We cannot see a better opportunity than acquiring Yonghui

Date: September 23, 2024

Guests: MINISO CEO Mr. Ye, CFO Mr. Zhang, IRD Mr. Hu, etc.

Contact: Dongwu Shangshe, Wu Jincao / Yang Jing

Note: This article is a summary of the public conference call, with some deletions. For any doubts, please refer to MINISO. The content of this article does not represent the views of Dongwu.

I. CFO Mr. Zhang's Sharing

(Financial figures of the two companies omitted)

Transaction: Completed through agreement transfer at a price of 2.35 yuan per share. Pricing: According to regulations, it cannot be lower than the previous closing price by 10%. This transaction has a premium of 3.5% (compared to the average price of the previous few trading days) and a 3% premium over the previous closing price, in line with market practices. After the transaction, MINISO will become a majority shareholder of Yonghui, but the company will not control the board of directors, therefore will not become the controlling shareholder, and will not be consolidated.

It is expected that this transaction will be completed in the first half of 2025. The transaction consideration is 6.27 billion yuan. The company currently has nearly 7 billion in cash on its books, almost no interest-bearing liabilities; it can also obtain low-cost financing of 60% of the transaction consideration from bank channels in the future. The company's main business also contributes significantly to cash flow.

Yonghui maintained rapid growth before the epidemic. The company believes that Yonghui's losses are due to epidemic prevention and control, community group buying, and the impact of online shopping. In 2021, Yonghui adopted new leasing standards, resulting in a one-time increase in rental expenses of around 1.44 billion, which affected the net profit on the financial statements. Over the past 3 years, Yonghui has taken a series of measures to reduce losses, including adjustments, closing poor-performing stores, etc. MINISO believes that Yonghui has been profitable for many years in the past, only incurring losses for 3 years, and has the opportunity to return to profitability in the future.

The company will not consolidate Yonghui's financial statements, but will account for the investment income using the equity method.

From a retail perspective, the company is optimistic about Yonghui's prospects and believes in the future of the retail industry. MINISO can also help optimize Yonghui's shareholder and governance structure, jointly leverage the advantages of channel upgrades and supply chain integration. This investment will optimize MINISO's capital structure, increase the use of debt, and is expected to optimize MINISO's overall ROE.

The company's future management will continue to focus on MINISO's main business, maintaining the operating targets set at the beginning of the year.

II. CEO Mr. Ye's Sharing

(In this section, "I" refers to CEO Mr. Ye)

Why did we suddenly invest in Yonghui? On July 30th, I went to Zhengzhou, Henan to see the first store that Pang Donglai helped Yonghui adjust. I have been following Pang Donglai. Two years ago, when I first went to Pang Donglai, his products, cooked food, etc., left a deep impression on me. Pang Donglai's sales revenue doubled last year compared to the previous year, and he has been a very influential entrepreneur in the retail industry in the past 2 years, with a very successful business model.

On July 30th, I visited the Yonghui version of Pang Donglai in Zhengzhou. There were a lot of people at 4 p.m., and I sat there overnight. Later, I went to Kaifeng to inspect Pang Donglai. I returned to Zhengzhou on Thursday afternoon at 2 p.m., and there were many people. I was thinking how great it would be if this store were mine. I hope that Pang Donglai's model can go beyond Kaifeng and lead the Chinese retail industry into a new world. After that, I actively started thinking about this matter I visited the second Yonghui Superstores in August, on August 9th. It's approximately 500 meters away from the first one, and the business is just as booming. It left a deep impression on me, and I believe this is a huge opportunity.

1. Why invest in Yonghui?

I believe that domestic supermarkets are currently in a period of structural opportunities. In the future of retail, there are only two paths: either low prices or distinctive features. Miniso, Sam's Club, Costco are all distinctive retailers. I highly admire the Costco model and even wrote an article about it. In 2014, I led company executives to the United States to study Costco. I also studied Trader Joe's, which has the highest sales per square foot globally, with revenue exceeding $16.5 billion in 2020.

Later on, I found that the Pinduoduo model in China is even better than these American models. I strongly recommend everyone to visit Pinduoduo and the new Yonghui Superstores. This way, everyone can better understand Miniso's investment in Yonghui. Sam's Club, Costco, and Pinduoduo all place great emphasis on products, but the difference lies in Pinduoduo's customer experience, greater respect for employees, and no membership threshold. Pinduoduo is the best welfare, most efficient, and best-treated retail enterprise in China, and I agree with this observation. I believe that Pinduoduo's model is more suitable for small family consumption and the consumption of the general public in China.

Pinduoduo's employees have a basic salary that, after social security and taxes, amounts to over 8,000, which is twice the average. They also receive year-end bonuses and holidays. They respect their employees, who in turn treat customers well. When I bought roasted sweet potatoes in the store, the barcode was blurry, and after leaving it for a while, the staff actually took the initiative to exchange it for a new one because the old one didn't taste good anymore. Such excellent service really touched me. It's not that the retail model is outdated, but rather that the service and products are lagging behind.

We have witnessed the impact of foreign supermarkets and e-commerce in the past, but we have also witnessed the transformation brought about by domestic supermarkets like Pinduoduo. Yonghui, being personally taught by Pinduoduo, has the potential to stand out. Traditional offline supermarkets used to operate essentially as sub-landlords, mainly deducting points and earning entrance fees after the products arrived, without carefully selecting products that consumers like, thus deviating from the essence of retail.

In the past period, with over 20 years of experience, I feel very accurate about the projects, whether a store can make money, whether the model can succeed, I am very confident. The performance of the Zhengzhou store on the first day was 1.88 million, which is 14 times before the adjustment. The daily customer flow is 5.3 times before the adjustment. The turnover on the first day in Fuzhou was 1.1 million, with a daily turnover 6 times higher and customer flow 6.5 times higher before the adjustment. Both customer flow and turnover in the Xi'an store have also shown significant growth. The successful adjustment of these three stores fully demonstrates that this model can be replicated nationwide. By continuing on this path, Yonghui can undergo a transformation and create a new benchmark for the future.

After the adjustment by Pinduoduo, Yonghui's operating philosophy focusing on products, employment environment, and customers coincides with Miniso's culture. Miniso also needs to continuously learn from Pinduoduo; they are the role model for all retail enterprises in China.

1. How will Miniso operate and collaborate? In terms of channel upgrades and supply chain, MINISO has completed the first step of brand upgrade to secure a better position in commercial real estate groups by enhancing its image through IP, aiming for better positioning. Despite being recognized in the top 1000 shopping malls nationwide, MINISO's brand recognition is still not high enough. By leveraging Yonghui's brand, MINISO can also have a better influence on the business district, upgrade channels together with Yonghui's advantages, and secure the best position and rental conditions. This is similar to Zara driving other sub-brands of Inditex.

Having cultivated its own brands for over a decade, MINISO has rich management advantages and a product team that will assist Yonghui in developing better own-brand products, benchmarking against Sam's Club, Costco, and others.

1. How does investing in Yonghui benefit MINISO shareholders?

Yonghui's business has reached a turning point with significant success prospects, boasting a large scale, stable cash flow, and being undervalued by the market. As long as adjustments are made persistently, Yonghui will return to the ranks of great retail enterprises in the future. This investment by MINISO will create value for investors.

Yonghui will help MINISO supplement essential products and diversify the group's cyclicality, helping MINISO become a large, globally influential retail company.

It will help Yonghui establish itself as the "Sam's Club" of China and enhance MINISO's product capabilities.

In summary, it is believed that the acquisition will achieve a synergy effect greater than 1+1. This acquisition will not affect MINISO's 5-year plan and will continue to adhere to the innovation and product strategies of MINISO and Toptoy. The goal of maintaining revenue growth of no less than 20% over 5 years will be upheld.

Q&A

Q: Why not choose to personally invest first and then inject into MINISO?

A: It is believed that this business has reached a turning point, and after a detailed financial due diligence, there will be significant improvements in the next one or two years, and the timing is right. The company has a long-term perspective, with assets of 15 billion, including 7 billion in cash, which has dragged down the company's ROE. At this point, with new investments generating returns, it can enhance the company's overall ROIC.

Q: How does the company evaluate the success probability of Yonghui's adjustments?

A: Pinduoduo has already helped Yonghui transform 5 stores, which has been very successful. Pinduoduo will continue to help Yonghui with adjustments in the future. Once Yonghui's method is correct, it can be replicated. The stores in Xi'an and one in Fuzhou that Yonghui transformed itself have been very successful. Yonghui will further accelerate the business model of adjustments in the future.

Q: How did the company consider capital expenditures when evaluating this investment project? Will going overseas consume funds, and what are the considerations regarding capital allocation for the company?

A: CFO Zhang: The company has actually conducted years of research. Going overseas in the future may become a red ocean, as domestic replication is very fast. MINISO's future overseas strategy can maintain a growth rate of 30-40% without requiring too much investment. However, there will be a once-in-20-years structural opportunity in the domestic commercial sector. When everyone is not optimistic about domestic assets, we are very optimistic.

CEO Ye: We do not see better opportunities than Yonghui. Walmart, Costco have huge user bases and sales in the US. With a population of 1.4 billion in China, we have not seen a good retail giant company Now we see that Panda Mart is a very good example, with 3.8 billion in sales from 3800 square meters, even Sam's Costco can't beat it. Yonghui has 6 versions of Panda Mart, all achieving similar sales per unit area, which is also very outstanding in China. We see that China has a huge consumer population, and believe that the Panda Mart model can be very strong in China.

Q: Mr. Ye, will you help Yonghui with adjustments?

A: Yonghui's management team is very mature, and I believe they can make adjustments on their own to meet people's consumption needs.

Q: Will Yonghui see opportunities for new store openings?

A: After the store model runs smoothly, there will be opportunities for new store openings, and there is still room for Yonghui's store expansion.

Q: Will Miniso products be sold in Yonghui channels in the future, or will there be a shared supply chain?

A: The company will assist them in completing supply chain transformation and private label development.

Eason added: The merger is still in the early stages. There is a lot of synergy between the two in their own products. Yonghui's own products lack strong differentiation and have low profit margins, while Miniso is best at this. Miniso hopes to help Yonghui improve its private label products.

Q: Besides the effect of store adjustments, what information makes you (Mr. Ye) confident to invest in Yonghui in a short period of time?

A: Based on our long-term research on formats like Costco, after inspecting 3 stores, I believe the direction is right. We have seen Red Label, Green Label, Super Species before, and felt the models were not right, but this Panda Mart model meets the needs of the Chinese consumer industry. If Panda Mart expands from Xuchang to major cities, or replicates in other regions in China, there is a huge potential. The Panda Mart model is very suitable for Chinese household consumption. Their cooked food and bakery products (some stores sell 400k worth of baked goods a day).

When we visit Sam's, the dilemma is that the portions are too large. The Panda Mart model is very suitable for Chinese household consumption and has a broad market. When everyone thinks Yonghui has no chance, I think there is a great opportunity. I have personally done a lot of data tracking, and I believe this is a huge opportunity.

Miniso is currently optional consumption, while Yonghui is essential consumption. This investment will bring stable returns to the group's long-term competitiveness and business development.

Q: How do the Zhang brothers view Miniso's investment? How do you view the cooperation with the Zhang brothers?

A: The younger brother is traditional, the older brother is radical, with different management philosophies. Zhang Xuansong is currently in charge, while the other person is no longer involved in the company's operations.

Q: Why do you believe the Panda Mart model can empower the whole country?

A: Yu Donglai hopes his model can help more people, rather than just doing business nationwide. He sees Panda Mart as a school, hoping everyone can return to the essence of retail. Yu Donglai is currently personally helping Yonghui make a series of adjustments, and Yonghui has the ability to make adjustments on its own.

IV. CFO Summary:

We have cash on hand, see a very good prospect of Donglai helping Yonghui, and see great potential for integration and assistance from both sides.

Grass Uncle's research on consumption upgrade, original title: "[Soochow Business Society] Miniso's Proposed Acquisition of Yonghui Supermarket Equity - Conference Call Transcript Interpretation"