9896.HK MNSO.US
Miniso

The Chinese store chain is raising $550 million in convertible bonds to fund a deeper push into overseas markets, guided by an upbeat branding strategy 

Key Takeaways:

  • The proceeds from the equity-linked securities will be spent on expansion plans, brand promotion and share buybacks
  • The company’s international revenue has been growing fast, jumping 39.8% in the third quarter of last year

  

By Lee Shih Ta

As a seller of cute lifestyle goods, China’s Miniso Group Holding Ltd. (9896.HK; MNSO.US) markets itself as a fun playground for customers to indulge their inner child. However, it takes hard cash to fill an expanding store network with shiny toys.

The design-led brand, which sells cheap and cheerful products under a winking face logo, announced earlier this month it was raising $550 million (about HK$4.29 billion) in convertible bonds to accelerate its overseas expansion and fund share buybacks.

The equity-linked securities carry an annual coupon rate of 0.5% and are due to mature in 2032, the company said in a statement. The exercise price was set at HK$64.40, a premium of just over 26% above the pre-announcement stock close at HK$51.05.

Despite the price premium and share buybacks as a potential sweetener, investors responded with a sad face, worried about a dilution of equity value. Miniso Group’s share price fell 5.2% after the news and was nursing losses of around 12% for the week.

Analysts were divided about the longer term impact given the complicated terms of the debt issuance, which allow the company to settle up in cash or issue shares if the underlying stock rises in value.

Miniso said it would apply a mechanism called a call spread to hedge the risks, including a call option at the same level as the exercise price and a discretionary strike warrant at around double the pre-announcement trading price.

Half of the net proceeds, amounting to around $457 million or HK$3.55 billion, would be spent on expanding the group’s store network, strengthening the supply chain and boosting the brand, while the rest would be earmarked for repurchasing shares, Miniso said.

Analyzing the implications, Nomura said the funds would boost the company’s growth and deliver a return for shareholders over time. It raised the target price for Miniso’s U.S.-listed shares by 7% to $28.1 while maintaining a “buy” rating. However, Citi was less upbeat, saying the capital-raising framework, which could put higher-priced shares on the market in the future, might confuse investors and fuel short-term negativity.

Overseas business boom

Over the past six months, the group’s price-to-earnings (P/E) ratio has risen from 19 times to 24 times, topping the 22.5 times for the owner of the Muji brand, Ryohin Keikaku (7453.T), and the 23 times for BJ’s Wholesale Club (BJ.US), a membership-based store chain in the United States. On the whole, investors remain relatively bullish on the company’s performance prospects.

Miniso’s products range from cartoonish trinkets, novelty goods and toys to fashion accessories and homewares in bold or pastel colours, many of them pitched at budget prices in its more than 7,000 stores worldwide.

Business has been growing, boosted by fast overseas growth. In the third quarter, Miniso revenue rose 19.3% to 4.52 billion yuan from the year-earlier period, while adjusted net profit increased 6.9% to 680 million yuan. Gross margin rose 3.1 percentage points to 44.9% in the quarter. Mainland revenue grew 8.7% to 2.71 billion yuan over the three months while overseas turnover stormed ahead, surging 39.8% to 1.81 billion yuan.

In the first three quarters of 2024, Miniso added 773 stores to take its total to 7,186, with nearly 60% of the new outlets located outside of mainland China. The company has 4,250 stores on the mainland, with all but 29 of them operating as franchisted outlets. The group has 422 directly managed stores in overseas markets, and 2,514 franchised shops.

The growth appears to be at odds with weak consumption trends in China, but the company is tapping into apparently strong demand for quirky products derived from characters in comics and animation, under the strategic direction of CEO Ye Guofu.

A trend dubbed “Guzi”, derived from the English word “goods”, took off last year, as devotees of animation, comics, games, novels and cosplay, collectively known as the ACGNC fandom, snaped up cheap but collectible badges, figurines or cardboard cutouts.

Catering to special interests

Miniso has built its brand by tapping into a desire for an emotional or sentimental connection to goods, beyond mere price appeal, emphasizing the pursuit of joy and happiness in its advertising strategy.

The retailer originally positioned itself as a low-priced grocery store and was  accused of being a cheap clone of Japan’s Daiso chain. But it has morphed into a marketplace for branded merchandise featuring characters such as Snoopy, Barbie, Harry Potter, and Pokémon, with images produced under IP licenses on mugs, fluffy dolls, pillows, stationery and other small items.

The company found that global consumers were more wiling to splash out on goods associated with these recognizable trademarks. The average spend per guest in China is about 38 yuan but can be as high as 150 yuan in the United States, hence the plan to ramp up the international store network and enter into more IP partnerships.

If the expansion strategy is a hit with consumers, it could put a smile on the faces of Miniso shareholders.

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