Miniso: On The Path To Recovery (NYSE:MNSO)

Elevator Pitch

My investment rating for MINISO Group Holding Limited’s (NYSE:MNSO) [9896:HK] shares is a Buy.

In my earlier article for MNSO written on November 8, 2022, I touched on MINISO Group’s share repurchases and its Hong Kong IPO. I offer a preview of MINISO Group’s upcoming quarterly earnings release and the company’s prospects for calendar year 2023 with this latest update.

MINISO Group’s Q2 FY 2023 (YE June 30) earnings announcement in February shouldn’t disappoint investors, while it could surprise the market in a positive manner with its 2H FY 2023 financial results. This leads me to raise my investment rating for MNSO from a Hold previously to a Buy now.

MNSO’s Q2 FY 2023 Financial Results Preview

MINISO Group is expected to announce the company’s financial results for the second quarter of fiscal year 2023 (the September 30, 2022 to December 31, 2022 period) in mid-February. The sell-side analysts think that MNSO didn’t perform as well in Q2 FY 2023 as it did in Q1 FY 2023, and I agree.

Based on the analysts’ consensus financial estimates taken from S&P Capital IQ, MNSO’s top line and bottom line are expected to have contracted in the second quarter of the current fiscal year. Specifically, the market forecasts that MINISO Group reversed from a +4.5% YoY top line expansion in Q1 FY 2023 to deliver a -2.0% YoY revenue decline for Q2 FY 2023 in local currency or RMB terms. The sell-side also expects MINISO Group’s earnings per ADS (American Depositary Share) growth (in RMB terms) to moderate from +126.7% in Q1 FY 2023 to +19.5% for Q2 FY 2023.

MINISO Group’s Mainland Chinese business operations are likely to still have been impacted by COVID-19 outbreaks and pandemic restrictions in the final quarter of calendar year 2022 (Q2 FY 2023). But MNSO’s domestic market weakness should have been offset by the strong performance of the company’s overseas businesses, which are expected to have benefited from a faster pace of reopening (relative to China) and festive spending (e.g. Christmas).

In my opinion, the consensus Q2 FY 2023 financial projections are reasonable, and MNSO should meet market expectations with its upcoming quarterly results announcement next month. Instead, investors’ attention is drawn to MINISO Group’s recovery prospects following China’s pivot away from its COVID-zero approach.

MNSO Could Deliver Positive Surprises In 2H FY 2023

I see MINISO Group registering a better set of results in the quarters ahead.

Goldman Sachs (GS) hosted its Greater China Consumer & Leisure Corporate Day last week, and it subsequently published a report (not publicly available) titled “Confident On 2023” on January 12, 2023 outlining takeaways from MNSO’s participation in the event. According to the report, MINISO Group revealed that its business in Mainland China witnessed “a sound recovery with domestic sales in the first few days of the year achieving 5% yoy growth.”

MINISO’s management commentary at the recent GS investor event implies that investors could be overly cautious about the pace of recovery for China’s retail market. Fitch Ratings noted in a December 22, 2022 research report that it expects “China’s retail sales to stay muted in initial reopening phase.” Separately, a January 8, 2023 CNBC news article cited comments from one of consulting firm Bain’s partners highlighting that “China’s consumer spending likely wouldn’t even return to 2021 levels.”

The mismatch in expectations between MINISO Group’s actual performance in early-2023 and analysts’ cautious outlook implies that there is a decent chance of MNSO’s actual 2H FY 2023 (first half of calendar year 2023) financial results exceeding market expectations.

The current sell-side consensus financial figures (source: S&P Capital IQ) for MINISO Group point to the company achieving positive revenue growth rates of +12.9% YoY and +27.4% YoY for Q3 FY 2023 and Q4 FY 2023, respectively in local currency terms. Although these are decent growth metrics, MNSO registered much better top line expansion rates of +28.1% and +20.7% in Q1 FY 2022 and Q2 FY 2022, respectively in YoY terms before pandemic cases surged and COVID-19 restrictions tightened.

In other words, the sell-side analysts seem to be still too conservative, which leaves room for MNSO to deliver positive surprises with its actual 2H FY 2023 results.

MNSO’s Valuations Are Still Reasonable

MINISO Group’s shares aren’t overvalued, even though its share price has rebounded by +27.1% in the last month. The market values MNSO at 23.4 times consensus forward next twelve months’ normalized P/E now according to S&P Capital IQ’s valuation data.

Analysts see MINISO Group generating healthy bottom line growth rates in excess of +20% and high-teens ROEs (Returns on Equity) for the FY 2024-2025 period. Separately, MINISO used to trade above 40 times forward P/E in the first six months of its US listing (October 2020), before the COVID-19 pandemic situation in Mainland China worsened. Taking into account MNSO’s financial metrics and historical valuations, it wouldn’t be unreasonable for the stock to trade at a forward P/E multiple closer to 30 times.

Closing Thoughts

I am rating MINISO Group’s stock as a Buy now. There is room for MNSO’s share price to rise further, as its financial performance improves over time.