MINISO Group Holding Limited

Ladies and gentlemen, thank you for standing by and welcome to Minnesota Group Holding Limited September Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Mr. Jack Wang, Vice President of ICR and the company's investor relations partner. Please go ahead, Jack.

Thank you, operator. Hello, everyone. Thank you all for joining us on today's call. The company has announced its quarterly financial results earlier today. The earnings release is now available on our investor relations website at ir.minnesot.com. Today, you will hear from our chairman and CEO, Mr. Guo Fuye, who will start the call with an overview of our growth strategies and initiatives. We will be followed by our CFO, Mr. Steven Zhang, who will address our financial results in more detail before we take your questions. Before we continue, I would 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 are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standard in the company's earnings release and filings with the SEC. I will now turn it over to Mr. Ye, Chairman and CEO of Miniso. Please go ahead, sir.

Thank you, Jeff. Hello, everyone, and welcome to Miniso's first earning conference call as a U.S.-based company. This is Stephen Zhang, CEO of Miniso. I will now speak on behalf of our Chairman and CEO, Mr. Guo Fuyi. Despite the disruption caused by the outbreak of COVID-19, we successfully completed our listing on the New York Stock Exchange in 2020. Our transition to a publicly listed company will provide us with the necessary resources to fuel our growth energy, fortify our shareholder base, and ultimately deliver more of our design-led lifestyle products to customers from all over the world. On behalf of everyone here at MISO, I would like to express my gratitude to each and every one of our shareholders for their support of our business model, management team, future growth prospectus. Looking ahead, we remain confident in our ability to continue deliver shareholder value, attracting and enabling all people to better enjoy life's little surprise. Now turning to our quarterly results for the September quarter of 2020. During the period, the progressiveness of the COVID-19 continued to hinder our business growth in overseas markets, especially in Europe and North America. Nevertheless, in spite of this short-term headwind, We remain focused on our long-term goals, fortify our leadership at home, and optimize our sole network. Such effort is a positive result, helping us to not only improve our financial performance on a sequential basis, but also further augment our market share in turn. First, starting with our operation in China. During this quarter, we continue to focus on accelerating the recovery of our domestic business. With the expanding backlog of municipal retail partners that are eager to open and operate municipal stores, we are able to grow the total number of municipal stores in China to 2,633 as of September 30, 2020. from 2,053 as of June 30, 2020. In first and second tier cities, we continue to work diligently to maintain our industry-leading market share, refine our store network in order to further expand our market penetration and broaden our coverage over high tier cities. In addition, we also focus on penetrating low-tier cities during the quarter. So far in 2020, we have organized 14 business development conferences for potential municipal partners in low-tier cities across China. The positive reception we collected from our local retail partners during this event showcases a strong momentum of our partners' interest, which we will leverage to further expand our store network going forward. Now turning to our progress in international funds. During this quarter, the pandemic continued to negatively impact our international operations. As a result, we proactively adjusted our globalization strategy to speed accelerating our overseas store expansion and help our partner to mitigate their risk. The decision not to open more new stores during the pandemic will provide us with more time and resources to analyze the different region markets and we will be able to select the optimal location for new store opening by leveraging this insight once the pandemic is fully contained. Additionally, we also utilize the time to focus on reducing our inventory abroad Although winning down the speed of our overseas extension will delay our growth in short term, we believe that such measure will ultimately lead to more robust growth over the long term. In fact, our global brand influence and strong value proposition are recognized by an increasing number of overseas partners and distributors. During the December quarter, we successfully expanded into five additional countries and regions, bringing the total number of our overseas stores to 1,697 as of September 30, 2020, compared to 1,689 as of June 30, 2020. e-commerce front, we further accelerate the development of our online initiatives to supply and manage our store network in a proven manner. Through our WeChat mini program and other third-party e-commerce platforms, our customers are now able to place product orders which has helped to both decrease user purchasing friction and improve the customer overall shopping experience. The outbreak of COVID-19 in 2020 has highlighted the complementary nature of online and offline sales channels. As such, our e-commerce segment contributed to more than 5% of total revenue, in the same quarter of 2020, compared to less than 2% of our total revenue in the same quarter of 2019. Going forward, we will remain focused on increasing the thickness and repurchase rate of our only channel customers. Lastly, I would also like to provide everyone with an update on our new initiative. As many of you are now aware, we celebrated the launch of our top toy retail store brand today, and the grand opening of our flagship top toy store experienced a blast of food traffic, resulting from a balance of the customer enthusiasm and excitement. Specializing in blind box action figures, And more, PopToy is our new retail store brand dedicated to PopToy. The grand opening of PopToy further demonstrates our platform's capabilities to incubate our business initiatives with strong growth potential. In summary, we achieved solid progress at home as China has successfully eliminated all but the last trace of the COVID-19 virus. Consequently, we further expand our store network coverage across more low-tier cities and further boost our market share leadership in high-tier cities. Internationally, we remain focused on reducing our inventories and helping our overseas partners to mitigate the risk from the resurgence of the pandemic. Meanwhile, our new growth initiatives has also yield encouraging results, and we plan to continue cultivating this initiative going forward. Overall, as we continue to see positive news concerning the vaccine for the COVID-19, we believe that the world of the pandemic is behind us. Our potential growth has illustrated the speed of our recovery, and our efforts over this quarter has laid a solid foundation for us to sustain our growth, fortify our market leadership, and deliver more lasting value to our shareholders over the long term. This concludes the remarks of the CEO, Mr. Ye. Now, as the CFO of Minnesto, I will provide an overview of our September quarter financial results. Before I start, please note that all numbers are in RMB terms, unless otherwise noted. Revenue in the September quarter of 2020 decreased by 30.7% year-over-year to $2.07 billion from $2.99 billion in the same quarter last year. The decline was mainly due to a 70.5% decrease in our revenue generated from the international market as a result of the COVID-19. On a sequential basis, our revenue grew by 33.4% as our strategy to boost our revenue per minute of store and accelerate our store network expansion start to year result. In fact, as our overseas operating continue to recover from the impact of the pandemic, our revenue generated from international market increased by 85.7%. and our revenue per minute sold increased by 31.9% quarter over quarter. Cost of revenue was 1.55 billion compared to 2.05 billion in the same quarter of 2019 and 1.17 billion in the previous quarter. Growth profit was 522.4 million, representing a year-over-year decrease of 44.3% from 937.2 million in the same quarter of 2019, and a sequential increase of 37.7% from 379.4 million in the previous quarter. Additionally, Growth margin was 25.2% compared to 31.4% in the same quarter of 2019 and 24.4% in the previous quarter. The year-over-year decline in growth margin was mainly a result of lower revenue contribution from our overseas business in this quarter, which has a relatively high margin. In addition, we also record an impairment loss of inventory as a result of a decrease in value of personal protective equipment. Other income was 36.0 million compared to 3.1 million in the same quarter last year and 33.7 million in the previous quarter. The year-over-year increase was driven by a sequential amount of government grants that we received in September 2020. Selling and distribution expense was $286.7 million compared to $306.1 million in the same quarter of 2019 and $273.2 million in the previous year. Excluding share-based compensation expense, our selling and distribution expense was $230.4 million compared to $283.5 million in the same quarter of 2019 and $230.1 million in the previous quarter. Due to the impact of the COVID-19, we had a low logistic expense as well as payroll and employee benefits, which results in a year-over-year decrease of our selling and distribution expense during the September quarter of 2020. General and administrative expense was $252.1 million, compared to $212.8 million. in the same quarter of 2019 and $175.9 million in the previous quarter. Excluding share-based compensation expense, our general and administrative expense increased to $155.3 million from $151.4 million in the same quarter of 2019 and $118.4 million in the previous quarter. The year-to-year increase was primarily attributed to the increase in accounting and the legal service fee related to our IPO. Other net loss was $15.7 million compared to other net income of $14.2 million. $8 million in the same quarter last year, and the net income of $18.5 million in the previous quarter due to the appreciation of RMB against the U.S. dollar, which resulted in a net foreign exchange loss. As a result, our operating loss was $2.1 million compared to an operating profit of $426.6 million in the same quarter of 2019 and an operating loss of $29.7 million in the previous quarter. Loss from continued operations was $1.68 billion compared to $20.3 million in the same quarter of 2019 and a $74.6 0.8 million in the previous quarter. Our loss from continued operations in this September quarter of 2020 includes fair value change of paying capital subject to induction and other presidential rights, which is resulting in a quarterly loss of 1.63 billion. Excluding fair value change of paying capital, subject to redemption and other presidential rights, as well as share-based compensation expense, loss from discontinued operating and impairment, loss of non-current assets, our adjusted net profit from continued operations in the September quarter of 2020 was $102.1 million. compared to $402.5 million in the same quarter of 2019 and $42.4 million in the previous quarter. Basic and dilute loss from continual operations per ADS were both 7.08 RMB compared to 0.12 RMB in the same quarter of 2019 and 0.36 MB in the previous quarter. Adjusted basic and dilute net profit per ADS were both MB 0.4 compared to 1.52 MB in same quarter of 2019 and 0.12 MB in the previous quarter. Turning to our balance sheet, as of September 30, 2020, we had a cash and cash equivalent of $2.96 billion. Looking ahead into December quarter of 2020, we expect our revenue to be between $2.2 billion and $2.4 billion. Please note that this is the forecast. reflects our current and preliminary view on the market and the operational conditions, which are subject to change. This concludes our prepared remarks for today. Operators, we are now ready to take questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. When asking a question, please say your question in Chinese first, then immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. Our first question comes from Michelle Chang with Goldman Sachs. Please go ahead.

Hello, Mr. Ye, Mr. Stephen. I have three questions. I'll start with the Chinese one. The first question is, can you tell us a little bit about Quartet Today, which is the recovery of the domestic and overseas key areas. And the second question is, in the GP margin part, you mentioned that there is Inventory Impairment Loss. Can you tell us how big the impact of Inventory Impairment Loss is? And the third one, I also hope to hear Mr. Ye talk about our top toy strategy, including the overall position of the door, the price, and the target of the number of electricity. So I'll repeat my three questions. My first question is, can management comment about the recovery path for China and the major areas for overseas market? And second question is, on the gross margin level, we talk about there's an inventory impairment loss. So how much is that? And thirdly, can Chairman talk about the top choice strategy? Thank you.

Okay, I'll answer both questions. The first is the recovery situation. Your question is up to now. The current situation is like this. The country has basically recovered more than 95%. But there is a reflection in individual regions. For example, in recent times, like the Chengdu region, because of the epidemic, there are many buildings that cannot recover normally. So it has some impact. But overall, we have recovered more than 95%, more than 95% of normal status. Overseas, it is still the same as what we shared before. The recovery rate of each country and region is different, but in terms of the overall global average, there are less than 100 stores that are unable to operate, while the recovery rate of the opening stores is between 60% and 70%. Individual areas are still relatively poor, for example, Europe was relatively poor a while ago, because many countries in Europe have been closed. It's probably such a situation. So you talked about the second impairment loss. The main reason is probably because of this. This amount is about 40 million yuan, mainly because of the epidemic. Because the impact of this new epidemic is really hard to predict. So some, especially when the epidemic came very suddenly, some masks, some protective equipment. So he is now at the current price. The difference between the current price and the current price. We are from this point of view. So we have a total of about less than 40 million yuan. This is two points.

I'll quickly translate the first two questions. Number one, first question on the comps performance as well as the recovery trend for both China and overseas. So based on the most recent data for the China business, the comps performance has recovered to 95% across the board. But please know, given that in China, there were isolated cases happening here and there, for example, Chengdu in the past few weeks, but we do see some temporary or short-lived impact to our store performance. But we all believe the overall, in China, the COVID-19 situation was well under control. For the overseas market, the performance varies across region to region. On average, the COMP's performance has recovered to 60% to 70% compared to pre-COVID-19 level. But it's also worth noting that, for example, in the past few weeks in Europe, there was another wave of COVID-19, so the impact was more pronounced there. From the global overseas store perspective, roughly 100 stores remain unopened. The remaining have resumed operations globally. So that's the answer for the first question. For the second question, with respect to the inventory impairment, as we mentioned in the prepared remarks, it was due to the slight decline in the value of our protective personal hygiene equipment, for example, the masks. We took a very conservative approach and took less than 40 million RMB of impairment charges. Fourteen stores. Fourteen stores, right?

OK.

We now have high-quality suppliers. More than two stores provide us with seven core products. So we want to use this value to determine a new ChaoWan retail platform. We also independently release IPs. We also signed more than 20 design studios. To build this ChaoWan joint store with us. Then we are ready to open offline stores, robot stores, small software stores, e-commerce stores, three places, and community e-commerce stores. We will do it in four different ways.

In addition, I would like to add that we actually have seven types of products. He is not just a blind fox, the blind fox is just one of the types. In fact, he also has, for example, hand-made flat models, chicken and dog toys, gold and yellow toys, and big toys. In general, we want to make it into a play-by-play, a collective platform. Through the several ways that Mr. Ye just mentioned, including online and offline, and digital drive, to connect the upper IP designers and the lower public chain, and then use the famous and traditional Right, so the answer is for the third question.

For the third question on top toy, we just had the grand opening of our first top toy store in Guangzhou today, and it was a blast. We currently target to open an additional 14 stores in this month, and we'll continue to expand our footprint of top toy stores. So top toy stores is more the store concept infused with pop cultures and pop toys. So basically it has seven categories in addition to blind box. We also have action figures, BJDs, as well as garage kits. So basically, it is a concept, and it's also a brand. We want to connect not only the designers' IPs, as well as the suppliers, but we really want to use the core competencies we developed through Minnesota brands, our product development capability, our resources with the Minnesota retail partners to use all that to create a new brand that catering to the emerging consumers. And for the overall strategy, there will be a social element embedded in it. So it will be an omnichannel strategy going forward. So you will see our presence not only on WeChat mini stores, e-commerce, as well as offline stores and the private traffic, social elements embedded in it.

In addition, I would like to clarify that the 14 stores mentioned by Mr. Ye are the stores that we are planning to open. We are going to use these 14 stores to run the single model, to train our awareness of this track, to verify all our previous assumptions, to try different product combinations, and to build our team. I would like to clarify that. Sign the contract. Yes, we have already signed the 14 stores.

The signing may take place in two months.

Right, so for the 14 stores we target to open in the next month, so basically those 14 stores we have already secured or signed contract with. And with that 14 stores, we intend to use that to continue to refine our business models to further optimize our product mix and as well as training the teams working on this top toy concept.

Thank you, Mr. Ye. Steven, I have a follow-up question. Will these stores also use the joint model? Or will we use the direct electricity model? Thank you. It's possible. There are also joint stores and direct electricity stores.

So the question is, with respect to top toy stores, are we going to do a self-operated model or a franchising model? The answer to that question would be it's going to be a combination of both. As Stephen mentioned earlier, we'll use that 14 stores to continue to refine and further fine-tune our business model.

Thank you. We have no other questions. Thank you.

As a reminder, if you have a question, please press star the 1 to be joined in the queue. Our next question comes from Lucy Yu with Bank of America. Please go ahead.

Good morning, Stephen. I'm Lucy from Merlin. I have three questions for you. There are two questions about this number. First, Stephen, you mentioned that the number of people infected with COVID-19 is less than 40 million people. This epidemic reduction will still appear in the future? If so, how much of this value will need to be reduced? This is the first question. The second question is about the income of the next quarter. This prediction is about 22 to 24 billion. That's about how much we include in China's income, how much overseas income. What kind of opening speed does China have? Because in fact, I saw that the number of points opened in China this quarter is still a lot higher than expected. I will translate my three questions first. So the first one is regarding the inventory impairment loss of personal protective equipment, which amounted to less than 40 million RMB this quarter. So will this be, is there any further impairment in the following quarter? And the second one is on the more elaboration on the next quarter revenue guidance. And the third one is on BABA is going to open many one dollar uh shop and also their launching uh the one dollar e-commerce uh festival on october 10th so uh what's your view on that thank you

So for the future and the next quarter and the future, we think there are very important products that need to be cut. This is the first. The second is about income. About income, let's talk about the opening speed first. In fact, the demand for opening is still very, very active. You can see that this quarter we actually opened 100 stores. But now, we still have a lot of proposals and opening applications from our partners. So, we think the probability that we will exceed the previous share in July and August is between December 31 and June 30, which is the new opening of 150 stores. It will exceed the probability. In terms of revenue, it is because when we first started, First question, as we mentioned earlier, we took a conservative approach

and took out less than 40 RMB, 40 million RMB as the impairment loss for protective equipment. So going forward, we believe our impairments will be sufficient, so there will be no meaningful impairment going forward per our analysis. For the second question, so we've seen a very strong demand from Minnesota Retail Partners for opening new Minnesota stores. And as you can see in our earnings results, we opened roughly 100 stores in the third quarter, in the September quarter alone. And we believe that we will surpass the previous target of opening 150 mini-source stores in the second half of 2020. So we expect that momentum will continue into 2021. and primarily driven by the strong performance and the meaningful stores. As we mentioned earlier, it has recovered to more than 95% of pre-COVID-19 level across China.

Okay.

Regarding the e-commerce store, I want to talk about it. Because we don't have a lot of information about e-commerce stores. Currently, He advertised a lot, but the actual effect is not very effective at the moment. Secondly, e-commerce seems to have no impact on us.

I would like to add that we have always wanted to go to Ali's e-commerce to learn. I know that now it seems that I have not heard who can really learn. Because it seems that this store has not really opened yet.

Right, so with respect to your third question, there is very limited information on these dollar store concepts or physical dollar stores in the public domain. And we've been always trying to locate these dollar stores and see how things run, what's the product mix, et cetera, but we actually failed to do so. So, I mean, based on the limited information, we don't see there will be a meaningful impact to our overall business.

Our next question comes from Jianing Liu with Flowering Tree Investment Management. Please go ahead.

The first question is also about the opening. We also saw that in the quarter of September, 100 stores opened in China and 100 stores opened abroad. We also saw some news that we also entered several European countries. I would like to ask about the fourth quarter of December, which is the fourth quarter of 2005. What is our overseas opening goal? If overseas to 2021, to start a normalization that can start smoothly. This is the first question. The second question is also about TopToy. I don't know much about the field of Chao. I don't know whether TopToy's corporate culture, gene and name creation are compatible, or we may need a separate independent management because of a different brand or corporate DNA. So I would translate my question. The first question is regarding the store opening as well. So in September quarter, we saw that in overseas, there is no new store opening. So I just want to know what is the store opening in fourth quarter 20. whether the stock in the overseas market will be normalized in 2021. That's the first question. The second question is regarding the top toy. I'm not sure whether the pop toys industry share the same DNA as the brand new variety retail. So I just want to seek Mr. Ye's opinion whether the top toy will be independently managed from and how will this brand be operated and managed in the future? Thank you.

Okay, let me answer the first question about overseas opening. As Mr. Ye said before, in fact, for this year, especially in the case of COVID-19, our overseas strategy is to keep our strength. Don't let our carpenters and our own team waste bullets and resources. So for us, in 2020, from September to December, we didn't set a particularly strong opening KPI. Of course, you can see that when it comes to 630 to 930, our overseas doors are also growing slowly. It's because all of our overseas partners and our own teams are actually always locating these Optum stores. If, for example, it's the first time, we will also open some, but we don't really go for KPI. We don't want to force our overseas partners and teams to open more places in the event of the epidemic. As for when it can return to a normal opening speed, we think that after the first quarter of next year, there may be a clear improvement this year. But as for 100% recovery, it should still be after June next year. Compared to the current epidemic judgment, this is the first point.

right so um with with respect for first question uh for the um overseas expansion strategy will stay vigilant and prudent uh for the remainder of this year given uh the there will be ongoing uh coffee 19 cases and and it has not come to an end so um you'll see um we the store count has has Growing slowly in the September quarter, it's more of the results of our local partners securing optimal locations and opening up Minnesota stores. And looking at December quarter, we may add a few stores, but the overall strategy for the remainder of 2020 will be very prudent. We'll see some meaningful progress starting in the first quarter next year, 2021. But as we previously discussed, the overall expansion will not normalize until June 2021, starting maybe in the third quarter next year.

This question is about the details. To be exact, we decided to call it Chao-Wan-Qi-He, which includes Mao-He. Mao-He is one-seventh of them. We also have Mao-He, Ping-Tu, Chao-Liu-Wan-Ju, and various other products. First, this is an independent company. The front desk is an independent company, which means that the product development and e-sports are also independent. After that, the brand, marketing, finance, logistics, There is a lot of human resources to share with Mingchang. Through this, we can create a platform-based new business model. We hope to have a big back-end and a small front-end. That is, the back-end can share and the front-end can separate. This is the business model.

In addition, I would like to add that regarding the channel, TopToy is still not as safe as Mingchang. Because TopToy, we are going to carry out our marketing and sales in three ways. The first is, of course, offline. At the same time, we will also have robot shops. At the same time, we will also have OMI Channel, including small programs and various online malls. At the same time, we will also have a exhibition. So it is a comprehensive marketing and sales strategy.

To answer your second question, the TopToy concept is more like our push to create a platform business to really leverage our core competencies in suppliers as well as product development as well as our relationship with Minnesota Retail Partners. And as we mentioned earlier, that top toy will be a separate team running this concept. So in charge of product development and identifies potential store locations. But it will share the same middle office, which includes marketing, HR, and also other supporting functions. So going forward, our vision is really to strengthen our infrastructure, i.e. the middle part, and to really have different sets of front office that are running different types of brands under the Minnesota Group. And one thing really to add is the distribution for Top Toy is slightly different versus the Minnesota brand. Top Toy runs in omni-channel strategy, so you will not only see our offline stores, but you will see vending machines who are selling Top Toys. And then we also have these online presence where you have WeChat mini program, our e-commerce business, as well as those big conference conventions where we are marketing our products. So it's more like an omni-channel strategy versus the mini store is still very offline heavy.

Can I add one more question? Okay. I just want to ask about the construction of a joint-stock building for a joint-stock company. I just want to know, because the amount of money involved is quite large. Although Mingchang needs to pay 20% of the cost, I want to know what the main consideration is for building a joint-stock building with so much money. And then, because this is a joint-stock company-built building, I have a follow-up question regarding the JV investing in the headquarters. I just want to know what's the business consideration behind this relatively large investment? and also whether you're involved in more connected transactions in the scenario where the list call has to pay a rental to the JV, et cetera? Thank you.

Let me answer that. Yes, we sent a notice a while ago. We built a JV and then prepared to build a Mingkang headquarters. In fact, in the past few years, Mingkang has been focusing on the expansion of the business. So in fact, Mingchang does not have its own property now. All of our domestic employees are actually distributed in several places. One is a rented property. It was okay in the early days. But as Mingchang grows bigger and bigger, it continuously attracts high-level talents to increase the satisfaction of the employees of the company. In fact, we have found that there are many problems in this regard. For example, we are now advocating this kind of 996. and even talk about all-in-one investment work for the company. But in fact, our hardware facilities are not enough to meet these requirements. So, all kinds of such needs have led to us actually considering to provide the employees with a relatively more comfortable environment so that the employees can invest all-in-one into the work environment. So, in fact, we actually, so in the past, we have built a gateway and prepared to build a private headquarters. The position of the headquarters is relatively good, so the total investment of the entire construction cost will probably be more than 28 billion yuan. In order to ensure that the ROE of the listed companies is particularly low, the assets have become too heavy, so we did not say that the listed companies should all hold this property. but by the YJF controlled by Mr. Ye. The listed companies are all stocks. Through this kind of trading structure arrangement, the listed companies can actually achieve a relatively low cost for employees to provide a comfortable working environment for employees. Probably like this. Of course, this building, because this YJF will hold this land and this new building built, this building will be rented to the listed companies of Mingchang. There will definitely be a related transaction. Thank you very much. Thank you.

Right. So to answer your follow-up question, so in the past few years, Miniso has been really focused on business expansion. So if you ever get a chance to visit our headquarters, you'll see Miniso employees working at different locations. So, really, the arrangement of forming a joint venture and building the headquarters for Miniso actually comes twofold. Number one, we think this will help us to further attract talent, which we think is critical for Miniso's next leg of growth. And number two is really try to provide a comfortable working environment for existing employees. As we mentioned earlier, it will be on a joint venture basis. So we believe this arrangement will also help us strike a balance that allowing Minnesota to achieve the goals we mentioned earlier and also not consolidating these big heavy assets on Minnesota's balance sheet as we are running a very asset-light business model. And with this agreement, there will be ongoing connected transactions for the rental expenses as Minnesota will lease this property from the joint venture company. But we don't expect to see there will be meaningful increase in rental expenses going forward.

Our next question is a follow-up from Lucy Yu with Bank of America. Please go ahead.

Thank you. Why do you want to do the... toy shop, and why this is the right time to do that, and what are your competitive advantages over the peers? Thank you, Mr. Ye.

We, as a designer, have discovered that toys grow faster every year. Now we think that the toy market is relatively large, so we want to make an independent product. Previously, we talked to everyone about making a This new product is the first level, the level of toys. This is one of the things that we have always had this idea and this foundation. What we are going to do with the bubble toilet is that the bubble toilet is only made of rubber. We, it is a rubber shop, and we are a straw bowl shop. We think that this rubber, I think straw bowls may be more inclusive. Straw bowls can cover men and women, and the rubber is only for women. Then we are inside now we have a box of small stores are seven or eight square now stores are more than two hundred square to three hundred square inside the box is standing we have about one-third we still have more than one-third there are a lot of hand-made machines and children's toys so we also see this year in recent years in China growth is very fast so we found this kind of this kind of toy the next trend of toys will have a new branch and growth point in China This is the difference between us and POM. And we are open-source. We have 70% of external AP in the future. 30% is our exclusive AP and the most advanced development. POM and MATLAB all have their own AP and product development. This is also where we share with them. I would like to add that there are two more advantages of Miniso. The first is the resources of IP.

We have 17 world-class IPs. This means that we have more IP resources than our other competitors. From the point of view of ChaoWai and the large-scale industry, it is very important to have top IPs and designers' resources. In this respect, Miniso was born to have this kind of resources. The second is the integration capability of Miniso's public chain. From the point of view of the single industry, It is one of the core competencies of this power supply company. For this, we can also give it very well. The third one is actually our more traditional know-how in terms of door stores, right? For some of the management of door stores, some of the sales know-how. The fourth one is actually the resources of our offline developers. We can quickly access some of the best stores for developers. We think that in this aspect, I really want to go to different places.

Thanks for the question. The concept of creating a pop toy store is nothing new. As you might remember during our IPO, we always say that toys are a very meaningful part of our product categories. There is a massive white space in China for the toy stores. And then creating TopToy is really our strategy to create a platform business where we consolidate building the infrastructure through our core competencies and with the different new product categories plugged in onto this infrastructure. And then the second question with respect to our competitive advantage versus our peers, I think it mainly comes from four areas. Number one, we do have a very rich IP resources. We think IP, intellectual property IP rights is very critical for the pop toy industry. And given that we have a large pool of globally renowned IPs as well as designer resources, we think we are well positioned to make foray in this business. Number two is really our supply chain capability, our ability to consolidate a supply chain and to really roll out new products very frequently and generate that excitement and refreshment to our consumers. Number three is also our Minnesota Retail Partner resources. Those Minnesota Retail Partners, they are able to locate optimal locations and really help us to find stores and use that to reach consumers. And last but not least is our operational know-how. Given that we've been in this industry for years, we know how to efficiently run a store, so that also helps us to manage our store network more efficiently. And also, another key differentiator for us is we are not only stores specifically for blind boxes. So as we mentioned earlier, there are seven key categories. And for typical top toy stores, probably one third of areas will be for blind boxes, but the remaining two thirds will be all kinds of toys. So really, we believe Our brand and our value proposition are more towards the consumers across all demographics versus our peers where they are only target a very specific demographic group. 非常感谢,我们有别的问题吗?

Our next question comes from Joan Song with Industrial Securities. Please go ahead.

Hello, Director Guan. Thank you for the opportunity. I have a question for you. This year, we have opened more than 100 stores in the next year, and we have also entered some low-end cities. I would like to ask you about the future layout of stores, or the layout of cities, or high-end cities and low-end cities. So I will translate myself. I saw that we have more than 100 stores in this quarter. So I want to know the proportion of the low-tier city and high-tier city for our store guidance in the next few years. and the business model difference between the low-density and high-care cities. Thank you.

Okay, let me answer. Yes, because Miniso, when we first started, we started from high-end cities. So now we have a relatively high number of stores in the first and second-tier cities. But it doesn't mean that we didn't go to the third-tier cities. We now have more than 900 stores in the third-tier and third-tier cities. Ah, so to speak, and the situation of these stores and the situation of income growth is still relatively very good. Ah, from the point of view of the three-way model, because the low-end city's客 flow is not as dense as the high-end city, so its income is certainly not as high as the high-end city. Ah, for example, if the average annual turnover of a high-end city is 5 million or 6 million, it is possible to go to a three- to four-line city, then its turnover may only be 3 million to 4 million, but it is because the cost of high-end cities is relatively high, especially The cost of electricity is relatively high, but in low-end cities, the cost of electricity is relatively low. It is still a lot between 7% and 10%, as we know. So low-end cities, although the revenue is not high, its single-point model E-commerce Unix has no problem at all. Even ROE often appears, it is the situation of exceeding high-end cities. As for the future, we believe that there is still a lot of space for low-end cities in China. There are actually more than 200 cities that we define as three-line or three-line cities. Now we have gone to 195 of them, but there are still more cities that we have not been to yet. And the cities we have been to have a low penetration rate. We believe that this space is actually very, very large. Oh, the meaningful, um,

story or our journey starts from higher tier cities where we have already established a leading market position but tier 3 or lower tier cities they are not new to us i mean if you uh take a look at breakdown of municipal stores in china there are more than 900 stores located across tier 3 or lower cities in terms of unique economics we don't think the unit economics for tier three cities, they're lower. I mean, in some cases, we see they're outperforming the Tier 1 or Tier 2 cities. I mean, in terms of footfall traffic, the Tier 3 and lower cities, they have a smaller traffic. So, and that's the smaller AUV. So, for example, in Tier 1 and Tier 2 cities, the average annual sales will be 5 to 6 million RMB, whereas in Tier 3 or below cities, that number is roughly 3 to 4 million RMB. But in Tier 3 or lower cities, we have a smaller AUV. operating expenses. For example, rental expenses, they account for a meaningfully lower in Tier 3 cities. So net-to-net, the operating margin or even ROE in Tier 3 cities, in some cases, they're even better than Tier 1 or Tier 2 cities. In terms of strategies or growth process for Tier 3 cities, assuming we will be adding 500 new mini-store stores annually, so our store count will be more than 5,000 in five years' time, and we believe by then the Tier 3 or below cities will account for roughly 50% of total store mix. meaningfully higher than the percentage by the Tier 3 stores currently.

Okay. Thank you, management.

This concludes our question and answer session, which also concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.