IPO Launch: MINISO Group Seeks $532 Million U.S. IPO

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MINISO Group Holding (MNSO) intends to raise $532 million in an IPO of its ADSs representing underlying Class A ordinary shares, according to an F-1 registration statement.

Guangzhou, China-based MINISO was founded to create a retail store network that sells stationery and gifts, cosmetics, toys, snacks, textiles, accessories, electronics and personal care products.

Over 50% of the firm's GMV in 2019 was derived from selling in-house branded products.

Management is headed by founder, Chairman and CEO Mr. Guofu Ye, who previously had significant industry experience in the fashion products industry.

Below is a brief overview video of a MINISO Group store in Japan:

Source: Smile With Shrabs

MINISO has received at least $115.9 million from investors including the company founder, Mini Investment, Tencent and others.

The firm obtains customers through a combination of retail store walk-by traffic, and online and offline media advertisement.

MNSO has over 2,500 stores in China and 1,680 stores in over 80 countries.

The company has achieved growth partially through its Retail Partner program where partners invest in opening a store while the firm retains inventory ownership until products are sold in-store and receives a portion of the sales proceeds.

As of June 30, 2020, the company had a total of 742 retail partners, of which 488 'had invested in MINISO stores for over 3 years.'

Selling and Distribution expenses as a percentage of total revenue have risen as revenues have decreased.

The Selling and Distribution efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Distribution spend, was negative (0.7x) in the most recent reporting period.

According to a market research report by Frost & Sullivan commissioned and paid for by MINISO, the Chinese market for lifestyle products by GMV increased from $368 billion in 2015 to $523 billion in 2019.

This represented a CAGR of 9.4%, exceeding China's overall retail CAGR of 8.3% for the same period.

The main drivers for this expected growth are younger demographic consumers are purchasing products that more reflect their individual preferences.

Also, the global branded variety retail market is estimated to grow at a CAGR of 11.4% from 2020 to 2024, in terms of GMV.

The branded variety retail market has thousands of competitors of various sizes, both direct retail competitors as well as major e-commerce sellers and platforms, so the industry is extremely competitive.

MINISO’s recent financial results can be summarized as follows:

  • Contracting topline revenue
  • Increasing gross profit and gross margin
  • Lower operating profit and operating margin
  • Reduced cash flow

Below are relevant financial results derived from the firm’s registration statement:

minisopl

Source: Company registration statement

As of June 30, 2020, MINISO had $419.7 million in cash and $905.8 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $117 million.

MINISO intends to raise $532 million in gross proceeds from an IPO of 30.4 million of ADSs representing underlying Class A ordinary shares, offered at a proposed midpoint price of $17.50 per ADS.

Class A shareholders will be entitled to one vote per share and Class B shareholders, who are the founder and the vice president, will be entitled to three votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $5.0 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 10%.

Management says it will use the net proceeds from the IPO as follows:

approximately 30% to expand our store network;

approximately 30% to invest in our warehouse and logistics network;

approximately 20% to invest in technologies and information systems; and

the balance for general corporate purposes, which may include investing in sales and marketing activities, expanding and upgrading our office space and facilities by acquiring land to build an office building, funding working capital needs and potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Goldman Sachs and BofA Securities

Commentary

MINISO is seeking U.S. public capital investment for its global expansion plans.

However, the firm’s financials show revenue contracting in the most recent fiscal year ended June 30, 2020, likely a result of the Covid-19 pandemic on operations and sales.

Selling and Distribution expenses as a percentage of total revenue have risen sharply; its Selling and Distribution efficiency rate has swung to negative territory, likely a result of reduced topline revenues from Covid-19’s economic effects.

The market opportunity for branded variety retail is expected to grow in the coming years, but that assumes the end of the Covid-19 pandemic.

Additionally, competition in the industry is fierce. In response, management has done well to focus its efforts on self-branded products which has likely contributed to growing gross margin.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 62.9% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, compared to a basket of publicly held Retail (Special Lines) companies aggregated by the noted valuation expert Aswath Damodaran at the NYU Stern School as of January 2020, the basket had an Enterprise Value / Sales multiple of 1.19x.

So, MNSO is proposing an EV / Revenue multiple of 3.91x, or more than three times the basket, which was aggregated before the Covid-19 pandemic influenced retail operations and related multiples.

While the company has pursued self-branded products, it has suffered from the ongoing effects of the global pandemic.

Uncertainties as to how long the pandemic will continue combined with high IPO pricing assumptions lead me to be NEUTRAL on the IPO.

Expected IPO Pricing Date: October 14, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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