TMTPost -- Hong Kong-traded Shares of Miniso Group Holding Limited plunged as much as 39.2% in the morning session of Tuesday. The American depositary receipts (ADRs) of the company slumped up to 20% before settling around 16.7% Monday, underperforming the market as the U.S. stock benchmark S&P 500 rose 0.28% to refresh its closing record hit last Thursday.

Credit：Miniso

Shares of Miniso sold off after the Chinese retailer announced its plan to buy a majority of stake in Chinese supermarket operator Yonghui Superstores Co., Ltd. Miniso has entered into share purchase agreements with certain shareholders of Yonghui to acquire an aggregate of 29.4% of the issued and outstanding shares of Yonghui for a total cash consideration of approximately RMB6.3 billion, according to a statement Monday. Miniso said the deal is pending for antitrust clearance from the State Administration for Market Regulation of China, and it now anticipates the transaction to close in the first half of 2025. Upon the consummation of the transaction, Miniso will become the largest single shareholder of Yonghui.

The share purchase agreements were entered into between Guangdong Juncai International Trading Co., Ltd. (Guangdong Juncai), a wholly owned subsidiary of Miniso, and the respective sellers. The Dairy Farm Company, Limited, the seller under one of the share purchase agreements, is an indirectly wholly-owned subsidiary of DFI Retail Group Holdings Limited, which is a member of the Jardine Matheson Group. Beijing Jingdong Century Trade Co., Ltd. and Suqian Hanbang Investment Management Co., Ltd., the sellers under the other share purchase agreement, are both indirectly wholly-owned subsidiaries of JD.com, Inc.

Pursuant to the share purchase agreements, at the closing of the transaction, Guangdong Juncai will pay to each seller a cash consideration based on a per share price of RMB2.35, which represents a premium of 3.1% to the closing price of Yonghui's shares on the Shanghai Stock Exchange last Friday. Miniso expects to fund the transaction with a combination of internal financial resources and external financing.

Miniso Chairman and CEO Ye Guofu said he believes that the collaboration with Yonghui in retail channel upgrade and supply chain will enable Miniso to share resources to further enhance economies of scale, optimize the cost structure and create value for consumers. The transaction will also expand our access to the essential goods sector, allowing us to diversify our business and mitigate cyclical risks, said Ye.

"Meanwhile, we remain confident in and committed to the growth of our existing business, and will continue to strategically invest in its development and expansion. We are determined to achieve Miniso's five-year development strategy of growing our core business at a compound annual growth rate of no less than 20% over the next five years, excluding the potential impact of this transaction."  Ye concluded in the statement.

At a conference call following the statement, Ye suggested the stake acquisition resulted from his desire to invest in a good example to replicate Pang Dong Lai, a popular Chinese supermarket chain that is well-known for its exceptional customer service, employee care and trustworthy brand image. Ye said  the reason for investing in Yonghui is that China's offline supermarkets are facing a structural opportunity that only comes once every 20 years, namely the Pang Dong Lai model. Ye recalled he visited the first store that Pang Dong Lai helped Yonghui renovate late July as he went to Zhengzhou, the capital of Henan province in central China. During that visit, Ye found the "Pang Dong Lai version of Yonghui" had undergone tremendous changes, with customer flow and turnover doubling. "I was thinking how great it would be if this store was mine," said Ye.

The investment in Yonghui will provide meaningful help for improving Miniso’s return on capital (ROC), the Chief Financial Officer (CFO) Zhang Jingjing said at the call, noting that cash accounts for a high proportion of company's more than RMB15 billion of assets, which has been dragging down its ROC. Zhang also said  it is time to invest in Yonghui as its business has reached a turning point and will see significant improvements in the next one or two years.

However, the Wall Street didn’t feel as upbeat as Miniso management. BofA Global Research double downgraded Miniso to Underperform from Buy on elevated near-term risk, following the company’s announcement to acquire a 29.4% stake in Yonghui. “While we continue to believe MNSO’s core business enjoys a solid outlook, we now think the Yonghui transaction raises more questions than answers, increasing the company’s risk profile and adversely impacting investors’ perception of the company,” said BofA analyst Lucy Yu.

The reason for the downgrade is that Yonghui has suffered from weak fundamentals for years and that China’s hypermarket activity is facing disruption due to the weakening of the macroeconomy, according to Yu.