Ladies and gentlemen, thank you for standing by, and welcome to MINISO Group Holdings Earnings Conference Call for the First Quarter of Fiscal Year 2023. At this time all participants are in a listen-only mode. After the managements prepared remarks, we will conduct a question and answer session. Please note the event is being recorded. Now I'd like to hand the conference over to your host speaker today, Mr. Eason Zhang, Vice President of Capital Markets. Please go ahead, Eason.

Thank you. Hello, everyone, and thank you all for joining us. We have announced our quarterly financial results earlier today and earnings release is now available on our Investor Relations website at ir.miniso.com. Joining us today are our Founder and CEO, Mr. Jack Ye; and our CFO, Mr. Steven Zhang. Before we continue, I'd 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 financial measures today, which we have explained and reconciled to the most comparable measures reported under International Financial Reporting Standards in the company's earnings release and filing with the U.S. SEC and Hong Kong Stock Exchange. In addition, we have prepared a PowerPoint presentation for today's call, which contains financial and operational information for this quarter. If you are using Zoom meeting, you should be seeing it right now. We can also revisit it on our website later. With that, I will now turn the call over to Mr. Ye. Please go ahead.

[Foreign Language]

Thank you. Hello, everyone, and welcome to MINISO Group's earnings call for the 2022 September quarter. We kicked off fiscal year 2023 with an encouraging set of results headlined by strong margin performance in spite of the short-term hearings brought by pandemic in China, we remain focused on our long-term strategic goals, delivering on our globalization strategy, bolstering the strength of our product offerings and optimizing our store network. These efforts are yielding positive results, and we continue to see our overseas operations move further along the path of recovery, while our margin profile continued to beat expectations.

[Foreign Language]

As we have repeatedly emphasized in our earnings call over the past several quarters, value retailers are well positioned to rather economic cycles. Our business model have demonstrated great resilience despite the pandemic on our near-term results. During the quarter, we made progress on upgrading minor brand in China and rolling out a portfolio of vogue products with gross margin increasing by about 4% year-on-year. We continue to focus on driving the strong recovery of our overseas business, which has recorded 50% year-on-year revenue growth for two consecutive quarters and now accounts for 33% of our total revenue. Benefiting from these two drivers, our overall gross margin reached 35.7%, a record high for MINISO Group.

[Foreign Language]

MINISO's globalization strategy gives us greater flexibility in dealing with pandemic-related uncertainty in China. Our directly operated overseas business turned profitable during the quarter as we continue to unleash operating leverage, combined with our continued progress in cost cutting, this helped us increase our adjusted net profit by 127% year-on-year to RMB 417 million in the September quarter. Our adjusted net margin reached its highest level at 15.1%.

[Foreign Language]

Next, I will talk in more detail about the developments in each business segment during this quarter.

[Foreign Language]

Let's start with MINISO China, which recorded a revenue of RMB 1.7 billion this quarter. Revenue from MINISO China's offline business was RMB 1.54 billion, which represents a 9% year-on-year decrease, but a 20% quarter-over-quarter increase. E-commerce revenue was RMB 163 million, decreasing by 12% year-on-year, yet increasing by 23% quarter-over-quarter to account for 6% of our total revenue.

[Foreign Language]

Over the last three years in China, the pandemic has posed unprecedented challenges to off-line retail business. With the ease of pandemic control policies, however, it is important to note that the most difficult time are behind us and most MINISO retail partners are financially stable and generating healthy rate return. Our inventory turnover has also recovered to the normalized pre-COVID level. Going forward, we'll continue to communicate closely with our partners and respond to the concerns in a timely manner. In order to provide our partners with additional support of product and operations team are conducting detailed research and analysis on different regional markets in China, aiming to help them improve the store performance from both product and operational perspective. During the quarter, we added 43 stores on a net basis, most of which were located in lower-tier cities. In the near future, we'll adjust our store opening pace based on pandemic dynamics in China to reduce MINISO Retail Partners' operational risk.

[Foreign Language]

Moving on to our progress on the international front. Revenue for the September quarter was about 920 million, representing an increase of almost 50% year-on-year. Revenue from our distributor model increased by 42% year-on-year. Revenue from our directly operated model increased by more than 60% year-on-year.

[Foreign Language]

We are delighted to see that overseas markets sustained good recovery momentum during the September quarter, with overall sales increasing by 41% year-on-year and nearly recovering to the 2019 recovery level for two consecutive quarters. GMV in our distributor markets increased by 36% year-on-year and we're above the level from the same period in 2019. GMV in our directly operated markets increased by 64% year-on-year, recurring to the north of 80% of the 2019 pre-COVID level.

[Foreign Language]

Breaking down by regions. North America, which accounts for 6% of our overseas stores and 7% of sales. Store sales growth of nearly 50% year-on-year, matching the level from the same period in 2019. Europe, which accounts for 9% of stores and 9% of end sales, store sales increased by 20% year-on-year, doubling the level from the same period in 2019. Latin America, which accounts for 22% of stores and 35% of sales increased by nearly 40% year-on-year and 20% from the same period in 2019. Middle East and North Africa which accounts for 7% of stores and 14% of sales increased by nearly 20% year-on-year and 50% from the same period in 2019. Asian countries, which accounts for about 50% of our overseas stores and 30% of sales increased by 70% year-on-year, representing 65% of the level from the same period in 2019. Oceania, which accounts for 2% of both of our overseas stores and sales, saw year-on-year growth of more than 3 times, recovering to nearly 80% of the level from the same period in 2019.

[Foreign Language]

Since 2022, with many countries have gradually lifted lockdown policies, MINISO overseas expansion has shifted from recovery model to growth model. MINISO added 54 overseas stores on a net basis during the quarter, compared to 26% in the same period last year. In addition to accelerating store expansion, more localized product strategies and sophisticated operations are imperative to our sustainable growth. In our last call, we talked about product strategies. Let me share some details about MINISO's localized operation this quarter.

[Foreign Language]

We celebrated MINISO's 5,000 store in Boston last December Recently, we celebrated the grand opening of our 2000 overseas store, which locates in Lyon, France. This is truly another milestone in the globalization of Chinese offline retail brands.

[Foreign Language]

We are proud to position MINISO as a globalized the Chinese brand together with more localized products and operations. And this is going to be a very standard strategy going forward. First of all, in order to promote traditional Chinese culture, the opening ceremony presented a fantastic Chinese line dancing and we plan to keep it for upcoming new stores. Secondly, the decoration, the product display and service of line stores have been tailored to local consumers habits. For example, the store layout is divided into several engaging areas with different IPs, allowing young people with more interesting, more personalized and more diversified correction in one visit. Meanwhile, the store is wheelchair accessible with shelf-based 1.4 meters apart for easy navigation. Finally, by leveraging our supply chain capabilities, we have brought quality, affordable designed products to French consumers which are affordable luxuries today. And it's not just our products but also the experience of shopping at MINISO and the comfort that it adds to life. That coincides with MINISO's mission of enabling everyone to enjoy life differs price.

[Foreign Language]

MINISO will continue to bring more play for more appealing and more useful IP products to global fans. Following the success we had in China last winter, we recently launched new lots of products in overseas markets such as Vietnam with initial success. We have been teasing the loss of collection and exciting the launch on social media. And on the launch day customers flocked to means of stores and quickly fill the retail pace. And the shares were soon cleared in the following three days, long queues continue to form as enthusiastic shoppers waited for restocking. At one of the stores in Ho Chi Minh, the daily sales broke Vietnamese stores history record on launch date. Overall, the Vietnamese market, the debut of the loss of service drove up sales by nearly 2 time.

[Foreign Language]

Next, I would like to provide everyone with an update on TOP TOY. We made significant progress on executing our established strategy for TOP TOY during the quarter. At quarter end, we had 109 TOP TOY offline stores representing an increase of 37% year-on-year and 12% quarter-over-quarter. Seven of these were DreamWorks stores and 102 were collection stores.

[Foreign Language]

Merchandise gross margin of TOP TOY was about 42% in the quarter, a slight increase from the previous quarter. Revenue contribution of proprietary products stabilized at 20% for all channels and over 30% for online channel. This gross margin relatively stable. TOP TOY net loss narrowed significantly on a sequential basis as we continue to optimize the business margin profile.

[Foreign Language]

We recently released our first ESG report in which we have disclosed relevant information from governance structure, internal control products, stakeholders, brand development and social responsibilities. As a company with global reach, strengthening the disclosure of ESG information provides stakeholders a useful perspective to better understand the value of the company. In the future, yes, you will not only be reflected in our strategy, but also be executing our daily operation.

[Foreign Language]

On November 11, China's National Health Commission released a new set of refined pandemic prevention control policies, which are more scientific and more precise. I believe that on the guidance of these new policies, the offline retail industry will see new opportunities for recovery and growth. We remain optimistic about our revenue and profit growth potential. Our profit outlook is based on our long-term confidence in China's economic development, our steadfast commitment to our vision for the off-line retail business and our determination to achieve a truly global reach.

[Foreign Language]

This concludes my prepared remarks. I'll now turn the call over to our CFO for financial review.

Hello, everyone. Thank you for joining us today. I will walk you through the financial results of the September quarter. Please be noted that all numbers are in RMB unless otherwise stated, and I will also refer to some non-IFRS measures, which have excluded share-based compensation expenses. Revenue in September quarter reached RMB 2.77 billion, increasing by 5% year-on-year, primarily due to a 48% growth of our revenue from overseas market and partly offset by a 9% decrease of revenue from China. Revenue from China was RMB 1.85 billion including a RMB 1.7 billion from MINISO Brand and RMB 152 million from other business, including TOP TOY. For MINISO brands, the year-on-year revenue decrease was also about 9% in this quarter, primarily due to the pandemic. During the peak summer sales season of July and August when the pandemic situation was also relatively stable, our risk GMV in China recovered to 95% of level from the same quarter of last year. With the pandemic resurgence in September, our GMV declined to 80% over last year's level. During the quarter, an average of 2%, 5% and 7% of our stores were unable to operate due to the pandemic in July, August and September, respectively. Excluding the impacted stores, we estimate that the average sales per sold from July to September were about 85% of 90% and 80% of the same period last year reactively. Revenue from overseas market was RMB 920 million, accounting for 33% of our total ad revenue. The 48% of revenue growth was primarily due to a year-on-year increase of 10% in average store count and the year-on-year growth of 35% in average revenue per MINISO store in overseas market. As we have presented in CEO speech, we are to see strong sales recovery from across the border…

[Operator Instructions] Your first question today comes from the line of Michelle Cheng from Goldman Sachs. Your line is open. Please go ahead.

[Foreign Language] I have two questions here. So the first one is regarding the domestic business, given the volatile sales performance in the past few quarters, can you share with us the retail partners cash flow and the confidence in opening the stores. So basically, what is the store expansion outlook in the short term versus midterm, and second question is regarding GP margin. So GP market expansion has been performing pretty well. So how should we think about the upside for the GP margin, given the brand upgrade strategy has been quite successful.

[Foreign Language]

Okay. Thank you. Thank you for your question, Michelle. This is Mr. Ye. Because of the uncertainty of the pandemic development in China, we have been quite cautious in terms of opening new stores on the current situation, but we also have managed to make sure the store catered remained at a relative healthy level for us. Before pandemic the normalized store closure rate was about 5% to 6% annually for MINISO. During the past two years in pandemic, there was some increase, however, around 8% to 9% in calendar year 2020 and 7.5% in 2021. And it decreased to 6.4% in the first 3 quarters of 2022 on an annualized basis. And last week, the government updated its prevention policies to minimize the impact to economic and social development. I think, which has played a positive role in the recovery and development of the offline retail industry. In the short term, the impact of pandemic will continue for shop. But on the guidance of the positive policy background, our store network will continue to grow at a relatively healthy level. In addition, the performance of our stores is expected to be restored. Thank you.

[Foreign Language]

Thank you, Michelle, for a question on the gross margin. First of all, our gross margin in this quarter increased about 8% compared to the same period last year. I think there are several reasons. The first reason is that the merchandise gross margin was 4% higher than last year. And the second reason is the revenue mix from overseas business in this year is 33% compared to 24% last year. And if you look at the overall gross margin of overseas operations, it is higher than last year. So if you quantify this, the impact to the gross margin was about 2%. And the remaining increase, I think it can be attributed to the cost cutting measures we have taken to reduce the cost of our certain products. Since this year, we have achieved remarkable results in our reduction cost efforts. Our product team has systematically checked nearly 10,000 SKUs internally at home and abroad, especially in certain categories such as beauty tools, skin care products, plus tours and socks and so on. Basically with lower costs of these products by different ways. First way is to simplify the excessive or redundant packing in our products if it does not affect the consumer experience. So this helped us to eliminate unnecessary waste. One example is our effort to simplify the packing material of our MINISO hand sanitizer. The cost was successfully reduced by adjusting the thickness of the plastic bottle and the weight of the pumping head. Customer barely noticed the change, but it saved some cost for us. In addition, we also reduced the use of outer packing boxes in the whole supply chain process to reduce costs. The second way is, I think, is to optimize the production process of material. For some products, it has designed for production process or even material with low consumer sensitivity, so we just replaced them with lower cost alternatives. For example, we used to have a comp with a no go edge in overseas markets. which needs to use an expensive technique called electroplating. In the new product development, we replaced the electroplating process with a new design element, so that helped us reduce the cost. And I think the most important, third way is to leverage MINISO scale advantage to negotiate price with our suppliers. So MINISO, I think, is the kind of customer that suppliers nowadays wanted because of our large volume of orders because of our high capability because of our timely payments, so whenever our suppliers want to continue this relationship with us, I think we are willing to cooperate with us to reduce cost and offer more competitive prices. For example, a supplier of one of our products has replaced more efficient new equipment for MINISO, so thus reducing the production cost of its own raw material and ensuring no prices. So generally speaking, that is the room for our cost reduction in this quarter.

The next question is from the line of Lucy Yu from Bank of America. Your line is open. Please go ahead.

[Foreign Language]. So I have two questions here. First of all, operating expense savings is also one of the key reasons that we achieved a record high quarterly net profit for this quarter. Could you please elaborate what we have done to achieve this cost saving, how much that is one-off, how much that is temporary savings? And how much of that will be sustainable into the future? Second question is on 11 shopping holiday. We noticed that you have done some more promotions and more activities during Double 11 this time. So how much GMV we have achieved? And what's our strategy on e-commerce.

[Foreign Language]

Okay. Thank you for the question, Lucy. This is Steven. In terms of question on the expense. So first of all, in terms of -- general expense decreased. The main reason here is the decline in labor cost. So we have also disclosed in our annual report, our current accounts, which is 3, to at the end of June this year. And the headcount was 3,648 at end of June 2021. So that is reflecting our stock turnover trends and it has some decrease. This, however, reflect MINISO's ability and control our cost under uncertain environment. And second, in terms of selling expense, we have been promoting our MINISO brands strategic upgrade since this year. And as you have seen that the result has been -- the initial result has been quite encouraging, and we plan to continue to execute this strategic brand upgrade. In this quarter, there were some savings in the advertising expense. But in December quarter, we currently estimate that there will be about RMB 15 million advertising expense on this project, and it's larger than the September quarter, and it has increased. But generally speaking, I think if you look at the expense on annual basis, I think it's on our control and the expense ratio can be quite stable in the long term.

[Foreign Language]

Okay. In terms of second question on Double 11. In short, the total GMV exceeded RMB 100 million this year and with sales on [indiscernible] growing by 6% year-on-year. Some of our key products such as Perfume increased by more than 20% and Top Toy’s by more than 400% and buying books by more than -- it's about 12 times.

The next question is from the line of Kin Shun Ling from Jeffries. Your line is open. Please go ahead.

[Foreign Language] So my question is -- the first one is that would renminbi depreciate a lot versus other currency, does it mean that given the -- since we are sourcing from Mainland basically, does it mean that we are able to [Indiscernible] from renminbi depreciation versus in other market where we get foreign currency. Second -- the second question is on the GP margins for Mainland China. With the brand upgrade strategy, do you think that GP margin these days is already above 60% overall, or in other words, is there any particular target for our GP margin in China moving forward?

[Foreign Language]

Okay. And this is Steven. So for your first question about the overseas gross margin, yes, this quarter, we have seen overseas gross margin as a whole was about 40%. It's quite high, of which the distributor model which accounts for 60% of our revenue. Its gross margin was about 33%. And the directly operated model its gross margin can be as high as 50% -- 55%. And the positive effect of direct countries breakeven to the company is more about this improvement of the company's overall profitability. During the past three years in the pandemic, the gross margin of the directly operated business has been stable. However, it's -- because of its sales were impacted coupled with the existence of fixed cost and expense. So that's why we incurred loss in direct operated business. And with the gradual normalization of overseas market and the expansion of this part of business in the future, we are quite optimistic about this improvement. As for the RMB deprecation gas to U.S. dollar, I think, is not relevant to the GP margin of overseas

[Foreign Language]

And in terms of second question on the GP margin potential. I think it can last for a while for the three reasons. The first is that as we mentioned, we have download in reducing the costing of our certain products. And this works -- these efforts, the results of them can be reflected in our financial statement in upcoming quarters. And second is that as we have open approaching the holiday season of overseas market, as I just mentioned, it's -- gross margin is relatively high, and we expect that its sales contribution in December quarter will still maintain above 30% or higher, and that will help increase the overall gross margin. And third is the are the repeat from our strategic suppliers, as we approach in the year-end. And as we have surpassed the threshold, we have agreed in the agreement, so we can record more rebates by year-end or in the second half of the year. But all in all, we are very cautious as I just said, we are very cautious about raising GP margins through simply increasing our price. In the past few quarters, we have communicated -- as we have communicated, we have achieved the GP margin improvement through cost reduction, cost saving through our product innovation or through the adjustment of our product structure. So at the same time, our price of MINISO's products has maintained at a very, very reasonable price brand, and we have kept our value proposition, which is very competitive compared to peers.

Thank you once again for joining us today. If you have any further questions, please contact MINISO Investor Relations team. Our contact information can be found on today's press release. We will see you next quarter. Have a nice day.