On Tuesday, BofA Securities adjusted its stance on Miniso (NYSE: MNSO), downgrading the stock from Buy to Underperform and slashing the price target to $13.00 from $26.00. The rating change follows Miniso's announcement of acquiring a 29.4% stake in Yonghui Superstore for RMB 6.27 billion, making it the largest shareholder.
The firm cites elevated near-term risk due to the acquisition, indicating that while Miniso's core business remains strong, the Yonghui transaction introduces uncertainties that could negatively affect investor sentiment. The analyst pointed out that China's hypermarket industry is currently disrupted and the macroeconomic climate is deteriorating, which has led to Yonghui's weak fundamentals over the years.
Despite Yonghui's recent initiatives to revamp its stores, which have shown promising results in six locations with the assistance of a well-known Henan-based retailer, BofA Securities remains cautious. The firm questions whether the success of these stores can be indicative of the entire chain's future performance.
Additionally, the analyst expresses skepticism about the potential synergies between Miniso's value retail model and Yonghui's food & beverage and general merchandise focus, especially in the near term.
The investment in Yonghui also brings up concerns regarding Miniso's capital allocation strategies. The analyst suggests that if there was strong conviction in Yonghui's prospects, a direct investment by the controlling shareholder might have been a more prudent approach, minimizing risks for Miniso's minority shareholders.
Lastly, the firm challenges Miniso's expectation that the deal will enhance its return profile by leveraging up the balance sheet. The analyst argues that there are alternative strategies to bolster returns, such as expanding the fast-growing overseas business or returning capital to shareholders, which may be overlooked in light of the current transaction.
In other recent news, Miniso Group Holding Limited has been downgraded from Buy to Hold by Jefferies, with the price target also being reduced to $14.91. This change in rating and price target is primarily due to concerns regarding Miniso's recent acquisition strategy. Jefferies has increased the equity beta from 1 to 3, indicating a perceived increase in risk due to potential less favorable or premature investments.
In line with these developments, Miniso has announced plans to acquire a 29.4% stake in Yonghui Superstores Co., Ltd., a prominent retail chain in China. This move will make Miniso the largest single shareholder of Yonghui. The acquisition is expected to be completed in the first half of 2025, financed through Miniso's internal and external financing, pending regulatory approvals.
Guofu Ye, CEO of Miniso, remains confident in the growth potential of this deal, anticipating shared resources, enhanced economies of scale, and consumer value creation. Despite the concerns raised by Jefferies, Miniso continues to move forward with its strategic plans.
InvestingPro Insights
In light of BofA Securities' recent downgrade of Miniso (NYSE: MNSO), it's important to consider the current financial health and market performance of the company. InvestingPro data reveals a mixed picture: On the positive side, Miniso boasts a strong gross profit margin of 41.18% over the last twelve months as of Q2 2024, signaling efficient operations. Moreover, the company's revenue growth is impressive, with a 39.43% increase over the last twelve months and an even higher quarterly jump of 54.0%, suggesting a robust demand for its products.
However, Miniso's stock price has experienced significant volatility, with a 1-week price total return of -10.33% and a 1-month price total return of -12.07%, reflecting the market's reaction to recent developments, including the Yonghui acquisition. Notably, the stock is trading near its 52-week low, at 49.23% of its peak, which could indicate a potential entry point for investors if they believe in the company's long-term prospects.
Two InvestingPro Tips that might be particularly relevant for investors considering Miniso include: the company's ability to cover its interest payments with cash flows, and the fact that it holds more cash than debt on its balance sheet, which could provide some financial stability in uncertain times. For those interested in a deeper analysis, there are an additional 10 InvestingPro Tips available, which include insights on dividend trends and analyst predictions. These tips can be found at InvestingPro, offering a comprehensive view of the company's financial standing and future outlook.
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