Miniso (09896.HK) saw its stock price plunge this morning (24th), with the latest price dropping by 26% to HK$24.45. Miniso announced the acquisition of 29.4% stake in Yonghui Superstores (601933.HK) from Dairy Farm and JD.com-SW (09618.HK), involving approximately 2.668 billion shares, for a cash consideration of RMB 6.27 billion (approximately HK$6.916 billion).

Goldman Sachs stated in a report that while the Miniso management expects Yonghui to turn losses into profits, bringing stable returns, and acknowledges potential synergies in the supply chain and distribution channels with Miniso, the bank also anticipates that investors will raise some concerns. Firstly, there are concerns regarding capital allocation, with the industry expected to record net profits of RMB 0.359 billion and RMB 0.637 billion in 2025 and 2026 respectively, which implies return on investment rates of only 1.7% and 3%, while current bank deposit rates are 2% to 3%. Despite Miniso and Yonghui both being offline retailers, the bank believes their business models and focuses are significantly different (Miniso is a global IP/diversified retailer, while Yonghui operates supermarkets/hypermarkets and has a higher exposure to grocery business).

The bank noted the market's previous negative reactions to Haidilao (06862.HK) and Li Ning's (02331.HK) non-core investments. While Miniso's core business prospects are strong, the primary consideration for the future use of cash flow will be crucial.

Secondly, there is profit risk: Yonghui's profitability has shown significant fluctuations in recent years. Although the COVID-19 pandemic has hurt the profits of mainland offline retailers, foot traffic in most physical retail stores has been weak since the beginning of the year. While Miniso will become Yonghui's largest shareholder, it will not become the controlling shareholder or control the board of directors, which may weaken its ability to drive business transformation.

Goldman Sachs stated that thirdly, the overseas risk exposure is relatively low: Given Miniso's increasing overseas sales and profit contributions, investors are increasingly favoring Miniso's consumption potential in non-Chinese markets; this deal may increase its profit risk on the mainland.

Goldman Sachs maintains a 'buy' rating on Miniso with a target price of HK$52.