Julien Viry
Elevator Pitch
I continue to assign a Hold investment rating to MINISO Group Holding Limited’s (NYSE:MNSO) [9896:HK] stock.
I previously discussed about regulatory and policy headwinds for MNSO with regards to Chinese ADR delisting and the sale of blind boxes in China with my prior April 21, 2022 article for the company.
My Hold rating for MNSO stays unchanged taking into my Neutral view of the company’s shares. On the positive side of things, MINISO’s ADR delisting risks have been reduced thanks to the completion of its Hong Kong listing, while its undemanding valuations are validated by the company’s new share buyback plan. On the negative side of things, I am pessimistic about MNSO’s Q2 FY 2023 (YE June 30) prospects, as an increase in the number of COVID-19 cases and pandemic lockdowns in Mainland China will hurt the company’s performance.
Corporate Actions In The Spotlight
There are several corporate actions relating to MINISO that investors should watch closely.
At the company’s Q4 FY 2022 earnings briefing in late-August, MNSO mentioned that it is now a “dual primary listed company in the U.S. and Hong Kong.” MINISO has already successfully listed its shares on the Hong Kong Stock Exchange on July 13, 2022.
Bloomberg reported recently on November 4, 2022 that “US audit officials completed their first on-site inspection round of Chinese companies ahead of schedule.” This suggests that the probability of MNSO and its US-listed Chinese peers being delisted is now much lower. More importantly, even if the delisting risk for Chinese ADRs eventually materializes in the worst case scenario, MINISO is in a better position than a lot of its peers given that it has completed its Hong Kong listing.
Separately, MINISO announced on September 29, 2022 that it has “a new share repurchase program” to “repurchase shares up to $100M in value over a period of 12 months.” On the same day, MNSO also disclosed that the company’s “CEO Guofu Ye plans to buy up to $5M of its stock” within the next one year period.
MNSO’s planned share buybacks and its CEO’s indication of his intention to do stock purchases imply that the company’s shares are most probably cheap. Notably, MINISO’s stock price rose by +38% from $4.98 as of September 29, 2022 to close at $6.89 at the end of the November 7, 2022 trading day since its announcement on share repurchases and insider purchases.
Nevertheless, MINISO’s shares have still fallen by -55.9% in the last one year, which is far worse than the S&P 500’s -19.0% correction in the same time frame. In terms of valuations, MNSO currently trades at a consensus forward next twelve months’ normalized P/E multiple of 14.3 times as per S&P Capital IQ’s valuation data. In comparison, MINISO’s average forward P/E multiple since its US listing in October 2022 was a much higher 32.1 times.
In conclusion, I view MNSO’s recent corporate actions in a favorable light. The company’s new share buyback program sends a strong message to investor that its shares are undervalued, while its successful Hong Kong listing mitigates the delisting risk for its ADRs.
Q1 FY 2023 Earnings Preview And Q2 FY 2023 Outlook
MINISO is expected to disclose its financial performance for the first quarter of fiscal 2023 in the following week on November 14, 2022 prior to trading hours.
The market’s consensus financial forecasts for MINISO point to the company turning around from a -6.3% YoY top line contraction in Q4 FY 2022 to achieve a positive +1.7% YoY for Q1 FY 2023. The sell-side analysts also expect MNSO’s normalized earnings per share or EPS to increase by +22% QoQ from $0.72 for Q4 FY 2022 to $0.88 in Q1 FY 2023.
I take the view that the strength of MINISO’s overseas markets would have allowed the company to deliver a decent set of financial results for the first quarter of fiscal 2023 that is line with consensus estimates. MNSO had previously mentioned at its Q4 FY 2022 investor call that it has observed “strong demand growth from distributors” with overseas markets in “the post pandemic era” now.
In a nutshell, I don’t expect any surprises when MINISO reveals its Q1 FY 2023 financial results next Monday.
However, I am less optimistic about MNSO’s performance for the second quarter of fiscal 2023 (October 1, 2022 to December 31, 2022 in calendar year terms). Mainland China’s pandemic situation appears to have gotten worse in the past week, and this is negative for MINISO’s Q2 FY 2023 outlook.
According to a November 7, 2022 research report (not publicly available) titled “20 Charts To Take the Pulse Of China’s Economy” published by Nomura (NMR), the cities in Mainland China under lockdowns as a proportion of the country’s GDP grew from 9.5% as of October 31, 2022 to 12.2% yesterday. The increase in Chinese cities experiencing lockdowns came about as average daily confirmed COVID-19 cases in Mainland China rose by +140% week-on-week to 3,731.
In summary, MNSO’s Q1 FY 2023 financial results should be in line with expectations. But I think that the company’s Q2 FY 2023 outlook (as indicated by management’s comments and remarks at the upcoming Q1 earnings call) might disappoint the market.
Concluding Thoughts
In my view, a Hold rating for MINISO is fair. Investors need to consider both the positives associated with the company’s recent corporate actions and the negatives relating to its weak outlook for Q2 FY 2023.
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