Ladies and gentlemen, thank you for standing by, and welcome to MINISO Group Holding Limited Earnings Conference Call for the Third Quarter of Fiscal Year 2022 that ended March 31, 2022. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will conduct a question-and-answer session.

Please note this event is being recorded. Now I'd like to hand the conference over to your host speaker today, Mr. Eason Zhang, Director of Capital Markets. Please go ahead, Eason..

Thank you. Hello, everyone, and thank you all for joining us. We have announced our quarterly financial results earlier today. The earnings release is now available on our Investor Relations website at ir.miniso.com. Joining us today are our Founder and CEO, Mr. Guofu Ye; and our CFO, Mr. Saiyin Zhang.

Before continue, I'd like to refer you to the Safe Harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements.

Please also note that we will discuss non-IFRS measures today, which we have explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in company’s earnings release and filings with the SEC. With that, I will now turn the call over to Mr. Ye. Please go ahead..

[Foreign Language] Thank you. Hello, everyone, and welcome to MINISO Group's March Quarter 2022 earnings conference call. In March quarter, the pandemic once again gripped China with major cities, including Shenzhen and Shanghai, consecutively adopting strict lockdown control measures since February.

The domestic retail industry was challenged and stroke by the most stringent restrictive measures taken by local governments since 2020.

According to our estimates, nationwide footprints to our MINISO stores decreased by about 2%, a 14% and 34% on a year-over-year basis from January to March, respectively, due to the strict control measures by local governments.

Despite the ongoing challenges of the pandemic, we delivered another solid quarter with revenue reaching RMB2.34 billion, up 5% year-over-year. TOP TOY's revenue increased by nearly four times year-over-year, and MINISO's offline business delivered positive year-over-year growth, which again demonstrated the resilience of our business model.

[Foreign Language] So as we have emphasized in our earnings conference call over the past few quarters, the pandemic will weigh on consumer demands and thus, our near-term results.

However, our business model has demonstrated its great resilience and flexibility on the extreme market environment over the past two years, according to a report from Frost & Sullivan, MINISO's leadership position has been further consolidated. Our market share in global branded variety retail market has increased from 5.2% in 2019 to 6.7% in 2021.

During the same time, our market share in China has also increased from 10.9% to 11.4%. [Foreign Language] I'm pleased to see several positive trends in our business, and let me share with you. Firstly, in China, we continue to execute MINISO's brand upgrade as plan by integrating the concept of interest-based consumption into product development.

Our newly launched products, which feature appealing, useful and playful have higher gross margin compared with our traditional lifestyle products. As a result, gross margin for this quarter reached 30.2%, up to 110 basis point year-over-year. And we are pleased to see this trend of year-over-year increase in gross margin continued in April.

[Foreign Language] Secondly, benefit from the pandemic control in many overseas countries and regions, MINISO's overseas business continued to recover. Revenue for March quarter was RMB520 million, up 17% year-over-year. Our globalized operations provided us more space and flexibility of future growth compared to peer companies.

[Foreign Language] Thirdly, global retail industry is challenged by cost pressure as many countries, including the U.S. are entering one of the highest inflation in four decades. Many retailers are challenged by ongoing pressures in cost and inventory.

Consumers tend to look for value in such a high inflation environment, which is a very good opportunity for us. [Foreign Language] To tackle all the global inflation, we will continue to leverage our core capabilities in supply chain and ensure the value proposition of MINISO product globally.

Specifically, our deep cooperation with more than 1,000 qualified suppliers, our strong bargaining power and flexible cost-plus pricing model. MINISO is better positioned than peers to cope with the rising cost pressures. [Foreign Language] Meanwhile, we are capable to maintain a healthy inventory level.

Inventory turnover days worldwide for MINISO have returned to around 60 to 70 days, which is industry-leading and a relative normalized level of pre-pandemic. [Foreign Language] In March quarter in China, revenue of MINISO brand was RMB1.69 billion, on which off-line stores recorded revenue of RMB1.56 billion, up slightly year-over-year.

E-commerce business recorded a revenue of RMB113 million and healthy margin profile. [Foreign Language] MINISO added 29 stores on a net basis during March quarter in China compared to 44 stores a year ago. Typically, our store opening in China has seasonality with March quarter, the lowest season due to the long vacation of Chinese Lunar New Year.

In 2022, another drag of new store opening was the pandemic. In coming quarters of 2022, we'll adjust the pace of store opening in China dynamically according to the development of pandemic control and reduce operational risks of MINISO retail partners.

[Foreign Language] In our earnings call last quarter, we introduced the roadmap of the strategic upgrade for MINISO brand. There are some updates. In March quarter, we have accomplished the refreshment in substantially all of MINISO stores in China as planned.

This refreshment features MINISO's new slogan of light of one life in 99 countries and regions, together with our brand-new and interest-based products. We offer data shopping experience to our customers. We continue to execute our IP strategy well with gross margin of new IP products improved by low single digits year-on-year.

In the coming quarters, we also dynamically adjust our marketing plans according to the situation of Chinese consumer markets and to pursue healthy ROI. [Foreign Language] MINISO is strategically committed to depending consumer engagement and driving repurchases by providing improved omnichannel experience to them.

As you know, we have been actively exploring various possibilities for the membership operations. Last September, we launched MINISO's paying membership program and has achieved preliminary progress. Members now only need to pay an annual subscription fee of RMB79 to enjoy a bunch of exclusive rise.

For example, we can receive a package of coupons, enjoy additional discounts and exclusive products, among others. As these rights can be enjoyed in every MINISO store in China, and our [Vision Mini] [ph] program. This program has been warmly received by our fans. We have rapidly accumulated more than 1 million payment vendors.

Based on our AB testing, the average incremental spending of customers of the becoming payment merits is encouraging. [Foreign Language] Moving to overseas operations. Revenue for the March quarter was about RMB520 million, up 17% year-over-year.

During the March quarter, we observed an encouraging year-over-year sales growth in overseas market as a whole. Total GMV increased 30% year-over-year. GMV growth in distributor markets were even higher. By regions, Europe as a whole increased by 85% year-on-year. North America, 65%; Latin America 45%; the Middle East and North Africa 20%.

Asian countries, excluding China, was 10%. By countries, we saw year-over-year growth of about 80% in the U.S., 60% in Mexico and nearly 30% in India and 20% in Indonesia. [Foreign Language] We added 39 stores on a net basis in the March quarter compared to 29 stores a year ago.

We have been relatively restrained in opening overseas stores during the pandemic in the past 2 years in order to control risks. Now observing the stable recovery trend in the past several quarters, we plan to speed up the pace of opening overseas stores this year. We are quite confident to open more overseas stores in this year.

[Foreign Language] In overseas markets 74 stores or 4% of our total overseas stores have not resumed operations as of March 1, that quarter-over-quarter. The majority of such stores were concentrated in Asian countries, excluding China and Latin America. It reflects the lingering effect of the pandemic on our operations in these two regions.

[Foreign Language] Our efforts in product never stopped. During the past 2 years, we made a full year of the time window to strengthen our core capabilities. One of them is product localization. As its preliminary results, we have accelerated product launch in major overseas markets in this year. Latin America as an example.

We successfully launched 1,100 new SKU in the March quarter and contributed directly to 45% year-on-year gen growth there. We will continue to strengthen our overseas design capabilities and offer more localized products to consumers overseas in a timely and accurate manner. [Foreign Language] Now let me introduce the development of TOP TOY.

The pandemic has inevitably impacted capital short-term performance, and we continue to follow our established strategy in this quarter and made a steady progress.

On the revenue side, off-line revenue increased by three times year-over-year, where online business ramped up quickly and contributed more than 10% of revenue this quarter from NEO last year [ph]. [Foreign Language] In the long term, we see huge potential of TOP TOY market.

According to a report by Frost & Sullivan the size of TOP TOY market in China has increased rapidly at a CAGR of 34% from 2017 to 2021 and is estimated to grow at a CAGR of 24% from 2022 to 2026 before its size reaches RMB110 billion.

[Foreign Language] The fast growth of TOP TOY market in China is laid on four pillars, diversified products, sales channel expansion, increasing importance of IP incubation and co-branding and growing band base.

TOP TOY is strategically committed to develop its portfolio diversified products such as toy bricks with Chinese elements and to explore omnichannel strategy to improve capabilities in IP incubation and operation and to understand more about the Generation Z.

Going forward, TOP TOY will follow its own way of interest-based consumption in TOP TOY business. [Foreign Language] In March quarter, merchandise gross margin of TOP TOY reached a healthy level of 45%, improved sequentially.

Merchandise gross margin on TOP TOY's proprietary [ph] products stabilized at around 65%, and revenue contribution has surpassed 10%. [Foreign Language] Taking Sario [ph] MINISO's long-term partner of IP co-branding as an example. TOP TOY launched co-branding IP products with Sario since day 1 and achieved encouraging sales performance.

A new product of TOP TOY's new - newly incubated IP, strong Lockecat [ph] became the best-selling SKU during this quarter. [Foreign Language] In addition, TOP TOY continued to focus on potential categories such as toy bricks.

In March, TOP TOY launched original Vintage home appliance series on the label China Bricks, and these original sales became top sellers and was posted by many Generation Z consumers on their social media accounts because it reminded them their childhood. That is why we believe TOP TOY bricks has huge addressable market and growth potential.

TOP TOY has several toy bricks products in pipeline, and we'll continue to explore the potential of China Bricks and to offer diversified toy breaks to young consumers. [Foreign Language] Thank you. That concludes my prepared remarks. I'll now turn the call over to our CFO for financial review..

number one, increase of personnel-related expense, number two, increase the license expense in related to our newly launched IP product and number three, increase of promotion and advertising expense in relating to refresh of the MINISO store in China, partially offset by decreased logistic expense.

The quarter-over-quarter decrease was due to decrease in logistics expense, license and traveling expenses. General and administrative expense were RMB191 million increased by 22% year-over-year and decreased by 11% quarter-over-quarter.

The year-over-year increase was primarily due to increased depreciation and amortization expense in related to a land use right of our headquarter building project and increased personnel-related expense and tax surges.

The quarter-over-quarter decrease was primarily due to decreased personnel-related expense and decreased the financial and legal service fee. Turning to profitability. Operating profit was RMB141 million compared to RMB161 million in the same period of 2021 and RMB255 million in the previous quarter.

Operating margin was 6% compared to 7.2% a year ago and 9.2% a quarter ago. Adjusted net profit was RMB111 million compared to RMB149 million in the same period of 2021 and RMB205 million in the previous quarter. Adjusted net margin was 4.7% compared to 6.7% in the same period of 2021 and 7.4% in the previous quarter.

Adjusted basic and diluted earnings per ADS were $0.36 in this quarter compared to $0.52 a year ago. Turning to cash position. As of March end, the combined balance of our cash, cash equivalents and restricted cash and other investments was RMB5.49 billion compared to RMB5.37 billion as of end December 2021.

Our strong cash position and ample operating cash flow has positioned us where to cope with any kind of challenges. Turning to working capital. Turnovers [ph] of inventory improved year-over-year and stabilized quarter-over-quarter. Trade receivables remained stable on both year-over-year and quarter-over-quarter basis.

Looking ahead into June quarter of 2022, we continue to operate in significant uncertainty in regards to timetable of pandemic recovery in China and some Asian countries. In China, our business suffered more in April than in March with average 380 MINISO stores were temporarily closed and total revenue down about 10% sequentially.

Although we have observed sequential improvement in May, it is more related to seasonality. As it is difficult to predict when the lockdown measure will come to end, we remain cautious in our outlook for the June quarter. We currently expect our total revenue to be between RMB2.1 billion to RMB2.4 billion.

The midpoint of the range represents a decrease of 9% year-over-year. Our margins have been and are expected to be pressured during this wave of pandemic outbreak, primarily due to the sales deleverage.

As we have shared in CEO's prepared remarks, we have not faced any material cost headwinds, thanks to our strong bargain power and our flexible pricing strategy.

However, we have taken necessary actions such as controlling operating overheads, reducing personnel-related expense and adjusting marketing plans in order to ease short-term impact from the challenging we face on our bottom line.

Although we have been experienced this tough challenge, we are confident with our competitive advantage and optimistic about our growth potential in inflation types. The fundamentals of our business remain unchanged. We will continue to focus on those elements of our business that are under our control to drive growth and pretax margins.

Thank you, and this concludes our prepared remarks. Operator, we are now ready to take questions..

Thank you. We will now begin the question-and-answer session. Your first question today comes from the line of Michelle Cheng from Goldman Sachs. Line is open. Please go ahead..

[Foreign Language] So I have two questions for management. The first one is regarding inflation and cost. So given some retailers calling or high pressure on the cost inflation.

So what is the management observation on the cost inflation rate on our business? And how do we manage that? In particular, we have very strong margin expansion first - in the March quarter. So how sustainable it is? And my second question is regarding the store expansion.

So can management give us some update regarding the extension plans for China and the overseas market? Thank you..

[Foreign Language] I will translate our CEO. So thank you for your question, Michelle. Yes, we have noted this situation. The recent cost pressure based by retailers concerns everybody in this industry. Let me share with you our views. So to sum up, the recent cost pressures of retail industry, I think they come from the following aspects.

The first is the rising transportation and freight cost, including the rising oil price and the rising shipment cost. Second is to come from the supply chain side, including the rising price of raw materials and commodities. And also, we saw the transmission of cost pressures from suppliers.

And the third is the impairment of inventory will lead to the reduction of gross profit. In the current turbulent market government, the real - the hotel retail industry has been facing more uncertain consumer demands and higher seasonalities. And this has to make many companies face the difficulty to reorder or phase a prolonged reorder lead time.

And there is more and more freight pressures coming on the way. So some companies are choosing to keep more inventories. But because consumer demand nowadays it's more and more to predict. So at this time, - on the market, if your forecast goes around, it can be troublesome and can lead to inventory over store.

So this has become a common challenge for the retail industry. For MINISO, we currently do not feel much pressure on the cost side, and it has been supported by our recent rising gross margin during the past quarters, and I think it's mainly due to the following reasons. First, I would like to expand our expense structure.

So in the whole process, the freight cost paid [ph] by MINISO is from the supplier to MINISO’s warehouse. This part only accounts for a rent more proportion of the total freight cost.

And the fleet from MINISO’s warehouse to the domestic MINISO Retail Partner stores or over-distributed stores, they are charged to corresponding retail partners, our distributors.

So the rise in trade cost will not have material influence on our P&L or retail partners and distributors because they use the price of products using cost plus markup strategy. So the rising freight cost will also have no impact on their gross margin, too.

Secondly, in the supply chain side, our large procurement volume as a result of our more than 5,000 stores worldwide have provided us with tremendous cost advantages. And our long-term mutually beneficial relationship with our suppliers has enabled us strong and enough marketing power to consolidate our cost advantages.

So therefore, thanks to our black spot pricing strategy and our terminal end pricing rise, so be it freight cost or the commodity pricing rise, we can all transfer these incremental cost or price. And promise that - make sure that we have - we can achieve our established gross margin target. And third is we always count inventory.

As I shared earlier, the inventory turnover this range is at 60 to 70 days and very close to our pre-COVID level, specifically in FY '19, our inventory turnover days was up 63 days. And in FY in fiscal year 2021, it was about 78 due to the COVID. Thanks to our continuous efforts during the past year.

In the past three quarters, our inventory turnover days has recovered to 68 days, which is very close to pre-COVID level. And at this moment, China is the least and the latest to be affected by the global inflation, and this has positioned so well.

But of course, the global cost rising, it has certain - it has some transmission mechanism, and we'll pay more closer attention to the changes and continue to do a good job..

[Foreign Language].

I will translate for CFO. Yes, for your question on store expansion. Let me start with the overseas market. Now we still maintain our guidance of net addition of 350 stores in calendar year 2022.

For China, it's a more complicated story here because everyone has - everyone knows that what happens here and the whole restrictive measures has been for a while. And as Mr. Ye shared in his prepared remarks, we will dynamically adjust our store openings in China based on the pandemic control in China.

And the basic - the transport here is that we will focus on the long-term tariffs of the whole MINISO system and grow based on that we adjust our store openings there..

Thank you. The next question is from the line of Lucy Yu from Bank of America Merrill Lynch. Line is open. Please go ahead..

[Foreign Language] The market is concerning about China spending power deterioration. In the near term, we might face consumption downgrade or more conservative spending, it might take some time to restore consumer confidence. Meanwhile, MINISO has raised the price for certain products since second half of last year.

How should we think about potential impact on sales in the consumption down cycle? And will you consider to adjust this strategy? And second question is on the sales situation in both China and overseas during the second quarter so far.

And following that, China sales has been quite soft lately, how should we think about the inventory destocking pressure in the second quarter or third quarter? Thank you..

[Foreign Language] I'll translate for CEO. So thank you for the question, Lucy. One thing I want to point out here is that so many countries are facing the inflationary pressure at this moment. And consumers, they tend to look for value more in such a high inflation impairment, which is a very good opportunity for us because that is our advantage.

With our experience and core capabilities in supply chain, inventory management and our pricing strategy will continue to leverage our value proposition and cost advantage and get more capacity position in this downturn for consumer. For a long time, MINISO has always all of our pricing strategy of taking around 50% merchandise gross margin.

And starting in 2021, our new product pricing margins are represented by these IP products have increased by at least 5%. But it needs to be emphasized that this price increase are just for the 30% interest-based products. For the rest, 70% of MINISO products, we will stick to our value proposition. And I can share a saddle numbers.

In the past 3 or 4 years, the average selling price per MINISO product in China market has been slowly decreasing from RMB12.5 to less than RMB12. And during the same time, our margin in China market stabilized.

So we won't raise MINISO product price completely, but we'll do that based on our value proposition and do some differentiated pricing to meet the more diversified to events. As of today, I think this strategy, it influenced our gross margin is positive.

And in the future, there will be not many changes for our promotion strategy - so it will still be for the 30% interest based products and only for new products.

And as we communicated in the last quarter's earnings call, I really hope that after the brand upgrade when consumers come to our store, we want to feel that we get more expensive, but we have more value..

[Foreign Language].

I'll translate for CFO. I will answer your second question. So your first part on the recent recovery in April and May. So first of all in China, currently, April is even worse than the situation in March because we had a more stricter measures.

So sequentially, the GMV in April has down 10%, mainly due to number one, the temporary store closure is even higher. So in April, there was about 380 stores closed and number two, good traffic in and to our stores also decreased in April. And for the - the operations in May in China, we saw some kind of recovery versus some kind of recovery.

But our judgment is that it's more related to seasonality or made it's traditionally a strong month for resold - but on the other side, we also saw that the store closures May in China [Technical Difficulty] is much better than in China.

If we look at the first - the March quarter's year-over-year growth rose 30% or so, entered into the June quarter, we have seen apparently acceleration in the whole recovery in overseas markets. For example, India and Indonesia, our average saw more than 60% year-over-year growth, especially in the Indian market, so more than 100%.

And for your second part question on the inventory. My first guess, my first impression here, is based on the situation, we observed here is that we're justifying are good on the inventory because during the past 2 years, we have fund every chance every chance we get to control our imagery team over days.

And we also very spend in our whole inventory management for sales. So in the - in March due to COVID and matters our inventory was negatively affected a little bit. But the inventory turnover days for China was still at the low level of 60 days. In fact, I want to express here that our whole control of the inventory level is quite good.

So we are very confident for this side. Thank you..

[Foreign Language] Thank you. The next question is from the line of [indiscernible] from Credit Suisse. Your line is open. Please go ahead..

[Foreign Language] So how is our latest development in our overseas market, especially in North America? Have we seen a stabilizing store economics in the U.S. And also in which overseas countries have we enter at the stage of having a stabilized or economics and ready for further mass expansion. Thank you..

[Foreign Language] Thank you, Meradco [ph] So generally speaking, since we only officially launched our net tenant under program in North America since the last - faster year in the fourth quarter. Everything went quite well in North American market. I would take America, to the U.S.

market, as an example, since has taken the majority part of the Kenan [ph] business. But as of the end of March, we had before MINISO stores in America and mostly directly operated and the store number increased by 70% year-on-year.

In terms of average store performance, average store sales in March quarter, we have seen 100 recovery to the pre-COVID level. And if we look at the high season, the peak season of December quarter last year, the average store performance was 10% higher. And of course, it has a large part of the whole recovery of the U.S. retail - the U.S.

retail market. But beyond that, we also have accomplished a lot of internal management improvement such as the localization of our products such as the solution to our supply chain and so on. So during the past seven quarters, we have seen more and more profitable stores in the U.S.

market, and we are more and more close to see relatively stable store model. And we really hope we can have this job down in the year of 2022. So except the U.S., we will also try Canada market in the second half of. And except the North American market, we also had other several subsidiary markets.

I would say that many of them have already had a store model there, especially in the next year. So for the whole Southeast Asian market, including in this year, the major problem of them is the pandemic. It's still there. So it has still lingering effect on our sales there.

So we do really hope that in 2022, the impact of the COVID in this market will be - will fade eventually so that we can improve substantially our P&L for the subsidiary markets. Thank you very much..

Thank you once again for joining us today. If you have any further questions, please contact to Investor Relations team. Our contact information can be found on today's press release. We will see you next quarter. Have a nice day..