MNSO quickly clarifies "being shorted", what are the market concerns? | Insight Research

In recent days, MNSO has been hit by market rumors of short-selling reports against the company, coupled with two instances of insider selling by the executive team, including Executive Vice President Li Minxin and Dou Na, which has led to a significant drop in the company's stock prices in both the US and Hong Kong, with a cumulative decline of 25% in just three days.

In response to such turbulence, the company's management held a conference call on the evening of the 5th to address the market's concerns in detail, stating that the insider selling by the two executives was based on their own considerations, and that the content of the short-selling report was completely groundless. This helped to calm the storm to some extent.

Although the short-term concerns have been alleviated, from a long-term perspective, MNSO's dependence on mature overseas IPs has not changed significantly. The uncertainty surrounding the expansion speed and store quality of the overseas markets, which the market has high hopes for, has also cast a shadow of uncertainty over its long-term development prospects.

Three key members of the management team are planning to increase their holdings

Cost-effectiveness and efficiency improvement have been the main themes in various industries this year due to the weak macro environment. MNSO, as a company known for its low prices and supply chain efficiency, has performed particularly well among Chinese concept stocks this year.

The core of its business model lies in optimizing supply chain costs and improving efficiency to enhance price competitiveness. The advantage of the supply chain has further manifested itself in the overseas market, where the high growth rate has once again opened up MNSO's potential.

However, recently, this "small commodity empire" has attracted a lot of controversy, and various market rumors and unfavorable factors have caused its stock price to plummet by 25% in just 3 days. The core factors affecting the stock price are: first, the insider selling by company executives; second, an upcoming short-selling report.

To stabilize the stock price, the management of MNSO quickly held a conference call on the evening of December 5th to provide detailed clarification on the above concerns.

• Regarding the insider selling controversy

Regarding the insider selling by Executive Vice President Li Minxin, the company pointed out that he has retirement plans. It is not uncommon for executives to reduce their holdings at certain stages of their careers due to personal planning or financial needs.

As for the insider selling by Dou Na, it is a continuation of the collar financing that took place in September. Under the collar structure, shareholders can lock in a certain percentage of the current stock price and have the option to buy back the pledged stocks from investment banks in the future. This operation actually reflects her confidence in holding the company's stock for the long term.

In addition, the company also emphasized the long-term confidence of its management team in the company's business value and business model. CFO, Vice President of Overseas Agent Markets Huang Zheng, and Vice President of MINISO China Operations Yao Jianzheng plan to purchase a certain number of shares in the next month.

• Regarding the "short-selling report"

Regarding the yet-to-be-released "short-selling report," the company stated that the content of the report is completely groundless.

In particular, the report mentioned that the Pakistani market is a regulator of the company's overseas revenue and profit. However, according to the company's data, the shipment volume to Pakistan from the beginning of the year until now accounts for only 0.3% of the company's overseas shipment revenue. Based on this fact, it is unrealistic to claim that the company uses such a small market to regulate its overseas revenue and profit.In response to this, the company stated that it is prepared to deal with the short-selling report and is ready to use its stock repurchase plan of up to $200 million to protect the legitimate rights and interests of existing investors.

The overseas direct sales market is particularly promising, but there is still uncertainty in the expansion speed.

In the long term, the company's development prospects still depend on whether revenue growth can consistently exceed expectations and whether profit margins are still on an improving path. Especially whether the overseas market can contribute significant incremental value to the company, similar to how TEMU contributed to Pinduoduo, this is the market's greater expectation.

According to the latest Q4 performance guidance revealed by the management, MNSO's overall revenue growth is about 50%, with domestic market growth at about 60% and overseas market growth at 40%-45%. Among them, the performance of the direct sales market is particularly impressive, with a year-on-year growth of nearly 80%, falling within the upper range of the original guidance of 60%-80%; while the agency business grew at a low double-digit rate year-on-year.

The overseas direct sales market, with its high gross profit margin, is a key area of focus for MNSO's expansion. According to MNSO, due to the lower management efficiency in overseas markets compared to domestic markets, in regions such as the United States, improving basic stocking and inventory actions alone can drive sales by more than ten percent, and there is still room for improvement in terms of store opening quantity, per-store sales, store operational efficiency, inventory accuracy, product sell-through rate, and product accuracy.

As for the slowdown in the growth rate of the overseas agency market, the company explained that the overseas agency covers 80 markets and plans to open about 20 stores in each market, totaling nearly 1,500-1,600 stores. The penetration rate is still far from reaching its full potential, which means there are still opportunities for further store openings.

However, it is worth noting that the company's expansion speed and quality in overseas markets may be significantly affected by economic cycles. The expansion speed is closely related to local foot traffic, preferences of overseas residents, and market competition, and these factors may bring more uncertainty in the context of an economic downturn.

Moreover, the expansion speed in overseas markets has always been difficult to compare with the domestic market. Compared to the domestic market, which achieved its annual target in the third quarter, the overseas market has only completed half of its task.

Looking back at the domestic market, MNSO's GMV (Gross Merchandise Volume) growth in China is in line with expectations, with offline GMV growing by 80%, and the daily average GMV per store in the first 11 months recovering to nearly 100% of the level in 2021 and 80-85% of the level in 2019, which is consistent with the outlook for store performance at the beginning of the year.

In terms of gross profit margin, the company stated that it reached a new high in October and continues to improve. The final store operating gross profit margin is around 20%, and the group's net profit margin is around 16%.

One key strategy to improve gross profit margin is to focus on interest-driven consumption, such as beauty, popular IP, and toys. The gross profit margin of these products is often higher than the average, at around 60%. In the third quarter, about 60% of the sales in China of products with sales exceeding tens of millions came from interest-driven consumption.MNSO's performance in the interest consumption sector can largely be attributed to its collaboration with well-known IP. By combining blind boxes, toys, and other products with popular IPs, MNSO not only commands higher premiums but also attracts a wide range of IP enthusiasts. In the third quarter, the joint products with Barbie and Loopy were best-sellers and played a significant role in driving revenue growth.

However, at the same time, there are concerns in the market about the potential fluctuations in MNSO's sales due to the quality and quantity of IPs. When the popularity of Barbie and Loopy declines next year, sales are expected to decrease accordingly.

In response to this concern, MNSO has stated that it is expanding its range of IP collaborations. The company has partnered with new IPs from South Korea and plans to launch them in the global market next year. Additionally, the company is also exploring the promotion of relatively niche IPs to ensure a sufficient quantity of diversified IP resources.

Nevertheless, the company's reliance on external IPs has not shown any signs of change, and based on the data from the third quarter, the proportion of sales from MNSO's self-developed IP brands is declining.

The market is eagerly anticipating MNSO to have its own "Loopy".