The lifestyle retailer's first-quarter report showed impressive headline profit growth, but a closer look reveals the increase owed to stock investment gains

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Key Takeaways:

  • Miniso reported its first-quarter profit nearly tripled year-over-year, but much of the rise was due to investment gains unrelated to its core business
  • The lifestyle retail operator's Top Toy chain recorded more than 50% revenue growth during the quarter to 515 million yuan

The latest financial report card from Miniso Group Holding Ltd. (9896.HK) (NYSE:MNSO) looks quite eye-catching at first glance. The operator of retail chains selling lifestyle and pop toy products reported its revenue grew 28.5% year-over-year to 5.69 billion yuan ($839 million) in the first quarter, while its profit nearly tripled to 1.25 billion yuan.

Benefiting from a high-single-digit increase in same-store sales, revenue from the company's core China operation rose 29.6%, while its overseas revenue also rose by 21.9%. Top Toy, the company's pop toy subsidiary, saw an even greater year-over-year surge of over 50%, as revenue reached 515 million yuan.

Miniso's progress in expanding its store network also looks impressive. At the quarter's end, the company's store count reached 8,565 outlets, up by 797 from a year earlier, with a net addition of 80 stores in the first quarter alone. Overseas the company currently operates 3,617 stores, up by 404 year-on-year, with a net 34 new additions year-to-date.

The strong performance led founder and Chairman Ye Guofu to boldly proclaim that Miniso's current valuation has yet to reflect the company's true potential. That remark comes as the company's stock price has shown little sign of life these days. Despite the seemingly strong first-quarter results, the company's Hong Kong-listed shares unexpectedly dropped 6% the day after the announcement, closing at HK$24.36.

Lackluster operating profits

A deeper dive into the company's financial results shows that, excluding foreign exchange gains and losses, the company's adjusted operating profit rose just 14.3% year-over-year to 838 million yuan in the first quarter. Furthermore, its adjusted net profit, also excluding foreign exchange gains and losses, grew by an even smaller 8.1% to 633 million yuan. Such increases are far less dazzling than the headline net profit growth on its income statement.

Closer examination also reveals the steep surge in the company's first-quarter profit came entirely from an investment in AI company MiniMax, whose stock has soared since its Hong Kong IPO at the start of this year. As a result, Miniso logged 875 million yuan in fair value changes of its investments during the quarter, resulting in its huge profit increase for the period.

In addition, supermarket operator Yonghui (601933.SH), which Miniso acquired last year, brought the company income of 77.5 million yuan during the first quarter. In other words, stripping out paper gains from investments and contributions from other non-core businesses, Miniso only recorded average profit growth for its own core business, despite its nearly 30% revenue growth during the period.

The slower rate of profit growth compared with revenue owes primarily to a significant surge in Miniso's expenses during the period. Its general and administrative expenses totaled 297 million yuan, up 22.7% year-on-year. Its selling and distribution expenses jumped by an even larger 44% to 1.47 billion yuan.

Lackluster IPs

As growth for its core lifestyle stores slows, Miniso has turned to Top Toy as a second growth engine. The chain applied for its own separate listing in Hong Kong last year, but failed to complete the deal within the required six-month timeframe. And while Top Toy's first-quarter revenue growth was quite strong, we should point out it still accounted for less than 10% of the company's total, meaning its scale remains too small to make a meaningful impact.

Part of the problem lies in trendy toy sensation Pop Mart (9992.HK) whose big success has changed people's understanding of toys. What were once playthings for children are now imbued with a halo of emotional value, even considered works of art, resulting in a sudden, exponential leap in the toy values. A single figure from Pop Mart's popular Labubu series could fetch more than 1 million yuan at auction at its height, valuing such products more like artworks than toys.

Pop Mart's huge success has drawn a steady stream of imitators hoping to copy its example. With his strong background in the market, Ye Guofu was clearly hoping to get a piece of the action with his launch of the Top Toy brand back in 2020. At the same time, he leveraged Miniso's own extensive network of stores and suppliers to buy and sell products with an eye to developing his own intellectual property (IP).

And yet after six years as a standalone entity, Top Toy has yet to create a single blockbuster toy of its own. The company's relatively well-known Nommi characters surpassed 200 million yuan in sales last year. But that IP came under the company's umbrella only after Top Toy acquired a 51% stake in HiToy, the character's creator, in the middle of last year.

Meantime, Top Toy's "Yoyo" series, which was launched last year, has yet to achieve sales of 100 million yuan. When compared to Pop Mart's "Monsters" series, which includes Labubu and raked in an astronomical 14.1 billion yuan last year, Top Toy's proprietary IP looks quite piddly.

Reliant on licensed IPs

Top Toy's gross margin was only 32% last year, exactly half that of Pop Mart's, which owes to its lack of blockbuster breakouts, as it relies primarily on licensed IPs from established names like Disney and Sanrio. That means it not only has to pay considerable licensing fees, but must also compete directly with other retailers who have licensed the same IPs, limiting the premiums it can charge for its products.

The bottom line is that even though Top Toy expanded to 355 stores in the first quarter, with revenue up 50% to over 500 million yuan, it's still most likely viewed as a pop toy retailer that makes its money selling licensed IP toys. In effect, it's merely a distributor rather than banking on its own creativity, limiting its growth potential to opening new stores rather than charging premium prices like Pop Mart's.

As the recent speculative hype around pop toys subsides, Pop Mart's stock has fallen to trade at a forward price-to-earnings (P/E) ratio of just 14 times. Bloks (0325.HK), which uses mostly licensed IPs, trades a little higher at about 17 times. Miniso is below both of those with a P/E ratio of just 12 times, making it look quite cheap. That could hint at some potential upside for the stock if the company continues to show steady improvement throughout the year.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.