Core views

The world's largest private label lifestyle and home comprehensive retailer, and also owns two brands, Mingchuang Premium and TopToy. As of 24/03/31, the company has opened 6,630 Mingchuang Premium stores around the world. The number of stores in and outside China was 4034/2596 respectively, an increase of 651/465 over the previous year and 108/109, respectively. It is still in a period of rapid expansion. The company plans to increase the net number of stores by 900-1100 every year for 24-28 years, which will double the number of stores in 28 years compared to the end of 23.

Benefiting from the increase in the number of stores, the increase in single store revenue, the company's performance has steadily improved. Revenue for the year 23/24Q1 was 13.84/3.72 billion yuan, YoY +39%/26%, net profit to mother 2.25/0.58 billion yuan, YoY +112%/25%. The company plans a compound annual revenue growth rate of no less than 20% for 24-28.

The company's share of IP product revenue is expected to increase, improving overall profitability. China has a lot of room for growth in the per capita annual consumption of IP retail sales. In 2023, it was only 51 yuan, which is about 1/4 of the global average and 1/60 of the US average. With the vision of “becoming the world's number one IP design retail group”, the company regards Super IP as the company's core product capability, and currently cooperates with 80+ IP copyright parties around the world. IP products bring higher added value. According to the company's Investor Day data, compared to non-IP users, IP users spend 163% more per capita and spend 76% more frequently; IP represents the company LEGO, and gross margin has stabilized in the 68% -71% range in recent years. The company plans to increase its share of IP product revenue from 26% in '23 to 50% in '28.

The company's efficient supply chain system ensures the high cost performance ratio of products and makes global expansion a reality. At every step of the supply chain, from product development to sales management, the company has corresponding systems and configurations to ensure its competitiveness in this field. For example, the sales planning and procurement module of the supply chain management system automatically generates orders and reorders on a scale suitable for suppliers based on real-time inventory levels and store sales forecasts; the automatic replenishment module manages the store replenishment process and calculates the timely adjustments required for slow-selling SKUs in each store to reduce inventory risk and optimize product combinations. As of 2023FY, Mingchuang Premium's inventory turnover was 68 days, lower than that of its main competitor.

Depending on the local business environment and strategic importance, different regions choose the right business model. There are three main models of single store management: partner/agent/direct management. The domestic model is mainly a partnership model. Judging from the growth rate of the three models, the overseas direct management model is the fastest. We believe that this model has the highest risk (heavy assets, more inventory risk), but the monetization rate (revenue/GMV) is the highest, and there is a lot of room for improvement in profitability. It is expected that the revenue share of the direct management model will increase in the future. The US is a typical example of a company operating in an overseas direct management model. We expect the share of revenue from overseas direct sales markets to increase in the next 2 years.

Investment advice

As the world's largest private label lifestyle comprehensive retailer, domestic/overseas stores are still expanding at a relatively rapid pace. The revenue share of IP products is expected to continue to increase, and the overseas direct management model with high gross margin is developing rapidly, driving an increase in overall profitability. We expect that the company's net profit for 24-26 will be 2.81/3.52/3.96 billion yuan, corresponding to EPS 2.23/2.80/3.14 yuan, corresponding to PE 14.3/11.4/10.2, according to the closing price on October 9. It is covered for the first time and gives a “buy” rating.

Risk warning

Risk of opening overseas stores falling short of expectations; risk of macroeconomic downturn; risk of inventory backlog;