MNSO (09896) acquires shares in Yonghui Superstores meeting: Yonghui Superstores is currently attractive in valuation, and is not expected to control the majority of seats on the board of directors.

On the evening of September 23, MNSO (09896) announced on the Hong Kong Stock Exchange that it plans to acquire 29.4% equity of Yonghui Superstores for 6.3 billion RMB, including 21.1% held by the original shareholders of Yonghui Superstores, Niu Nai Company, and 8.3% held by JD.com. At the investment promotion meeting of MNSO in Yonghui Superstores, MNSO stated that after investing in Yonghui Superstores, it will become its largest shareholder, but will not control a majority of the seats on the board of directors, therefore, it will not consolidate financial statements, but instead account for the investment using the equity method. MNSO is bullish on Yonghui's prospect of transformation and believes that the current valuation is attractive, with low investment cost premium and high safety margin. At the meeting, MNSO mentioned that the future development direction of retail globally is low-cost retail and specialty retail, and Yonghui Superstores can achieve strategic synergy in this area. After the successful transformation of Yonghui, it can become a supermarket that attracts customer traffic, which will also be helpful in upgrading Miniso's channel and help Miniso secure better positions, making its layout more comprehensive and diversifying its business risk. MNSO will also assist Yonghui in developing more own-brand products. MNSO believes that Yonghui's business is at a turning point, as long as it persists in learning from the successful model of Pandao, it has a good chance of success. The acquisition will not affect Miniso's 5-year plan, as it will uphold its strategic goals. The text of the meeting is as follows: Q: Why did MNSO decide to invest in Yonghui Superstores? A: The main reason for MNSO's decision to invest in Yonghui Superstores is based on the positive outlook for the offline supermarket market in China, believing that it is facing a once-in-20-years structural opportunity. After visiting the first store of Yonghui that was transformed with the help of Pandao in Henan, the impressive transformation led to a significant increase in sales. Miniso has always been interested in successful business models like Pandao, and believes that Yonghui Superstores has huge development potential in such a model. The efficiency and productivity of Pandao are also among the highest in China's retail sector, and we believe that Pandao's model is more suitable for China's family sales model. Based on this, we want to reshape the pattern of offline supermarkets in China, the significant improvement in the performance of the 3 transformed stores made us confident that this can be replicated across the country. In addition, MNSO believes that the future development direction of global retail is low-cost retail and specialty retail, and Yonghui Superstores can achieve strategic synergy in this area. Once Yonghui's transformation is successful, it can become a supermarket that attracts customer traffic, which is also very helpful for the upgrading of our Miniso channels and can help secure better locations, making our layout more comprehensive and diversifying our business risks. We will also assist Yonghui in developing more own-brand products. We believe that Yonghui's business is at a turning point, as long as it persists in learning from the successful model of Pandao, there is a great hope for success. The acquisition will not affect Miniso's 5-year plan, as we will uphold our strategic goals. Expected Impact: After the completion of the transaction, we will not control the board of directors or consolidate financial statements, and the investment income will be accounted for using the equity method. It will also help Yonghui optimize its shareholder and governance structure, jointly realize value, optimize the use of our debt, and improve our capital structure. Overall, we will maintain our previous goals, and continue to focus on Miniso. The project signing was completed today (the acquisition price meets regulatory requirements), and the transaction is expected to be completed in the first half of 2025. Q: How did MNSO price the investment transaction with Yonghui Superstores? A: MNSO acquired 29.4% of Yonghui Superstores' shares at a price of 2.35 RMB per share through an agreement transfer. This price is based on regulatory requirements and cannot be lower than 90% of the closing price on the trading day prior to the signing of the agreement. The closing price last Friday was 2.28 RMB, so the price of 2.35 RMB represents a premium of 3.1%. In addition, this price represents a premium of 3.5% compared to the volume-weighted average price of Yonghui Superstores over the past 20 trading days, in line with market conventions. Q: How does MNSO expect the investment in Yonghui Superstores to affect its financial situation? A: MNSO expects that after investing in Yonghui Superstores, it will become its largest shareholder, but will not control a majority of the seats on the board of directors, therefore, it will not consolidate financial statements, but instead account for the investment using the equity method. MNSO is bullish on Yonghui's transformation prospects, believing that the current valuation is attractive, with low investment cost premium and high safety margin. MNSO's entry will optimize Yonghui's shareholder and governance structure, support its current business direction, and create greater value in channel upgrades and supply chain integration. MNSO's capital structure will also be optimized, with the potential for improved return on investment. Q: How does MNSO plan to raise funds for this investment? A: MNSO plans to raise the required 62.7 billion RMB for this investment through various channels. The company's cash on hand is close to 7 billion RMB, with interest-bearing liabilities of only 6.4 million RMB, a debt ratio of 0.04%, and sufficient space on the balance sheet. In addition, the company expects to obtain low-cost financing from external channels such as commercial banks amounting to no less than 60% of the transaction amount, approximately 40 billion RMB. MNSO's main business is stable, with ample cash flow from operating activities, with a cash flow of 1.3 billion RMB in the first half of 2024 and 2.33 billion RMB for the full year 2023. Q: What is the financial situation of Yonghui Superstores? A: Founded in 2001, Yonghui Superstores went public on the A-share market in 2010 and is one of China's top 500 companies. From 2007 to 2020, its revenue grew from 3.7 billion RMB to 93 billion RMB, with a compound annual growth rate of 28%. Net profit attributable to shareholders increased from 130 million RMB to nearly 1.8 billion RMB, with a compound annual growth rate of 22%. Starting in 2021, it started to incur losses, primarily due to the impact of the pandemic, e-commerce competition, and changes in accounting standards.Net profit attributable to shareholders for the year was a loss of 3.9 billion yuan, mainly due to factors such as normalization of pandemic prevention and control, a decline in consumer spending, and the low-price expansion of community group buying, resulting in a 2.3% decrease in revenue, a 1% increase in costs, and a 2.7% decrease in gross profit margin. Changes in accounting standards increased lease expenses by 1.44 billion yuan. In recent years, the company has reduced losses by measures such as closing underperforming stores, and the business has gradually stabilized, with losses gradually narrowing.310CostcoAfter the reform of Yonghui, we continue to track and believe that there are many opportunities after changes in other places.Q: Why doesn't Mr. Ye take down this business himself and then inject it later? Investors don't seem to like this offline model very much right now. A: I still firmly believe in the model of Pangdonglai and believe in the revamped store model. We are looking at the long term and believe it can be successfully replicated in other provinces. I suggest everyone to experience the revamped stores on-site. Q: Why do you believe Pangdonglai can empower Yonghui and help it turn around its loss-making situation? A: Pangdonglai's model has already been proven successful in the Chinese market, with outstanding performance in fourth and fifth-tier cities. We believe this model can cater to Chinese household consumption and has vast market potential. Pangdonglai's experience and model can provide new growth momentum for Yonghui. Q: What is MNSO's development plan for the next five years? A: MNSO's core business has not been affected in any way, and the company still has a positive outlook on its development plan for the next five years. We plan to optimize the balance sheet, utilize existing cash and financing capabilities, and seize new market opportunities. We believe there is room for integration between the model of Pangdonglai in channels and supply chains and MNSO's core business, which will help improve the return on investment.