Baozun, The Chinese Shopify

Investment Analysis Clubs Saul’s Investing Discussions
#1

Forgive me if this company has already been brought to this board in the past, but I want to make sure everyone has a chance to evaluate it given so many of us are significantly invested in Shopify. While I completely understand and respect the apprehension of some on this Board in investing in Chinese companies(of course including Saul), this Company is so good and still so reasonably priced that I thought it was worth bringing it to this Board. [please note that Starrob did the same on another Board for those of you in RB http://discussion.fool.com/1069/baozun-up-31-the-new-strategy-im….

The company is Alibaba-backed Baozun (NASDAQ: BZUN), a Chinese e-commerce service company that is involved in the whole process of e-commerce: software, online store development, store operations, digital marketing, customer services, warehousing and fulfillment (distribution). It operates on JD.com (JD) and even more on Tmall (BABA), but also on mobile social media malls, the official brand stores and even offline smart stores.

Baozun is often called the “Shopify of China,” since it uses a similar business model to bring brick-and-mortar businesses online. It provides retailers with digital storefronts as well as marketing, customer, fulfillment, and IT services.

During the past quarter, Baozun’s gross merchandise volume (GMV) – the value of all products processed on its platform – rose 76% to 8.43 billion RMB ($1.3 billion).

Baozun has been pivoting away from a distribution model, in which it takes ownership of the goods that are sold, to a non-distribution model, in which the vendors sell goods directly to consumers. That change lowers Baozun’s operating costs and streamlines its business.

Shares of Baozun surged more than 30% on Tuesday, after the Chinese e-commerce services provider posted its fourth-quarter earnings. Its revenue rose 23% annually to $240.6 million, which missed estimates by nearly $5 million. However, its non-GAAP net income surged 128% to $24.7 million, or $0.42 per share, which beat expectations by $0.11. per share.

Baozun currently trades at only 26 times next year’s earnings, which is a surprising low multiple relative to its growth potential. It’s also the go-to brand for digitizing a business in China’s booming e-commerce market, so investors should keep a close eye on this stock – which has already rallied more than 240% in the past 12 months.

[Read more: Baozun Surges After a Mixed Fourth Quarter | Investopedia https://www.investopedia.com/investing/baozun-surges-after-m…

To put it simple, if a major Western brand wants to sell on the Chinese e-commerce market (and which brand wouldn’t want that these days?), Baozun is the one-stop shop to do it. It can translate both language and concepts to the Chinese market, implement the clients’ strategy, integrate all activities and make innovations if desirable.

The net of it is that Baozun has recently converted to a Shopify-like subscription and transaction based revenue model, and the growth is now taking shape in a BIG way with increasing margins and 50% YOY growth. After yesterday’s earnings release and 30% rise in the stock price, the market is clearly valuing the company’s progress, scalability and potential. And yes, the prospects for Baozun are great with expanding blue chip clients signing up and expanding quickly. Clients like Microsoft, Nike, Starbucks, Calvin Klein, Zara, Huawei, Samsung, Shell, Honda, Burger King, NBA etc…

Baozun is still relatively small. Even after this huge surge yesterday and up from $17 a year ago (where I bought a sizeable first position), the company still has a market cap of only $2.5B. That indicates that there it a LOT of room left for growth, especially when considering Shopify’s $14B+ market cap, the massive expanding Chinese economy, and America’s need to reliably set up commerce there. PwC calls China a ‘must-play, must-win market for retailers and brands globally.’ And Baozun is the biggest player in its market: bringing Western brands to the Chinese market.

This company is owned 8% by insiders, which is very Foolish. I can definitely see this name becoming a RB recommendation at some point in the future.

I’ll try to post more about this stock if I can free up the time but would love to get this board’s thoughts on it as well.

https://seekingalpha.com/article/4154159-baozun-31-percent-n…
https://finance.yahoo.com/news/why-baozun-inc-stock-skyrocke…

Vic

22 Likes
#2

Cramer likes it. Not sure what that means.

#3

2 questions from a point of reference…

  1. Are they really Shopify equivalents, ok they make website templates (like Wix) but do they have all the other innovations Shopify is churning out…
  2. Yes they are in China but why are they growing half the growth rate of Ali Baba and a third of Shopify? When Shopify can outgrow Amazon by 3x in its home market.
    Ant
    ps - aren’t all of Baozun’s customers drop-shippers? :wink:
7 Likes
#4

What follows does not purport to be legal advice. Readers should check the veracity of the following statements themselves before taking action. I have no special knowledge about Chinese law, and the following is nothing more than opinion.

For an understanding of some of the drivers of Baozun’s business model, see

https://www.chinalawblog.com/2017/08/china-e-commerce-the-re…

and

https://www.chinalawblog.com/2017/11/china-e-commerce-resist…

In summary, and in general, foreign merchants wishing to sell to Chinese customers through e-commerce will be forced to do so through a Chinese intermediary.

Sure, foreign brands can set up an online store that looks as though it is an official foreign company store, but in reality the store will be set up and run by a Chinese intermediary acting on behalf of the foreign brand.

Baozun, among others, has set itself up as that intermediary.

Unlike Shopify, Baozun’s clients are largely the world’s biggest non-Chinese consumer brands, and not small merchants.

Bombora

2 Likes
#5

Very helpful thoughts on BZUN - thanks - I’m going to watch this company and probably build up a 3% starter position.

…Marc

#6

Bombora
How is boazun different from JD?

#7

If the value of goods processed on their site increased 76%, why did revenue only increase 23%?

#8

Mekong: you said “ If the value of goods processed on their site increased 76%, why did revenue only increase 23%?”

Answer: Baozun has been pivoting away from a distribution model, in which it takes ownership of the goods that are sold, to a non-distribution model, in which the vendors sell goods directly to consumers. That change lowers Baozun’s operating costs and streamlines its business. It also means it will recognize revenue on a net basis rather than on a gross basis moving forward. The good news is that customers are flocking to them on a higher margin basis, and they have the same type of scalability and profit potential that Shopify exhibits.

Hope that helps.

Vic

3 Likes
#9

Rizz,

(1) JD.com uses a distribution model, whereby they buy items from suppliers, and keep them in stock until sold. As others have pointed out here, the capital-heavy distribution model is exactly the model from which Baozun is moving away, towards a capital-light purely intermediary model.

(2) When shopping on JD.com it’s very clear that the merchant you’re dealing with is JD.com. When shopping on a Baozun-run e-commerce site of a global brand, to you it looks as though you’re shopping on the brand’s company website.

The intermediary business model seems simple enough that one might think that Baozun has many competitors. So, what is Baozun’s competitive advantage? I think the answer lies in one word - credibility. Credibility with global brands and Chinese consumers - that goes without saying. But, more importantly and more elusively, credibility with the Chinese government. The Chinese government trusts Baozun to run e-commerce operations for foreign brands, the foreign brands know that this trust exists, and the foreign brands are desperate not to do anything that antagonises the Chinese government. And, this credibility with the Chinese government is rare, hard to achieve and difficult to maintain, hence the competitive advantage.

The above should not be construed as a recommendation. Readers should do their own research.

Bombora

4 Likes
#10

Some additional data to reference today:

Baozun Inc. (ADR) is a brand e-commerce solutions company based in China. This company is partially owned by Alibaba Group Holding Ltd. (NYSE:BABA) - 9.5% of the votes and 16.5% of the common stock.

From our original Top Pick dossier, I stated rather bluntly with respect to the Alibaba stake:

That’s critical, because if we are going to talk about any kind of bullish narrative on e-commerce in China, if it does not include Alibaba, skip it - it’s not going to happen. The way China works is different than the United States - there is a faux competition, which is to say, the state itself has a vested interest in its giants, and if it the state is behind something, it will have legs.

The relationship with Alibaba gives Baozun a natural moat - and a growing one at that, protected from competition. It also, perhaps most importantly, reduces (or eliminates) the risk that Alibaba will all of a sudden launch its own competitor.

Softbank owns another 13% of Baozun, which is one of the cash richest and most powerful investors in all of the world, not to speak of China.

So, broadly speaking, we’re looking at about 30% of the stock owned by the most powerful holders in Asia…

Company’s Shifting Focus

If we look at revenue growth, we will see that Shopify towers above Baozun, at over 70% y-o-y growth, while Baozun sits in the rather modest 17% area. But, Baozun is shifting its focus away from some of the lower margin areas of e-commerce (like distribution) and toward the crown jewel - the platform. In fact, the company saw services revenue growth of 56%.

Baozun is shifting from a distribution to a service fee business model, which means it’s prioritizing profits over top-line growth. It recently reported a 75% increase in gross merchandise volume and a 15% increase in customer count.

A high percentage of big brands - like Starbucks and Nike - used Baozun’s services. But the new SaaS platform, called Nebula, is aimed at providing medium-sized brands with more omnichannel options. That expansion could widen Baozun’s customer base and provide it with more data for analytics purposes…

https://seekingalpha.com/article/4154455-baozun-beats-explod…

Vic

5 Likes
#11

Of course you could just invest in Ali Baba which is growing twice the rate and is profitable and also OWNS 10% stake in Baozun.

Ant

2 Likes
#12

Of course you could just invest in Ali Baba which is growing twice the rate and is profitable and also OWNS 10% stake in Baozun.

Ant,

Respectfully, not a chance. BABA’s market cap is nearly $500B while BZUN’s market cap is <$3B. Which stock do you think is capable of massive returns given successful execution? I would take BZUN 10 times out of 10 even with additional risk!

Vic

1 Like
#13

Respectfully, not a chance. BABA’s market cap is nearly $500B while BZUN’s market cap is <$3B. Which stock do you think is capable of massive returns given successful execution? I would take BZUN 10 times out of 10 even with additional risk!

Hi Vic

Well I think that way some of the time too, however Ali Baba’s growth potential is enormous - far greater than Amazon I believe and from a lower base. FWIW - when I bought into Ali Baba and started banging the table on it, the market cap wasn’t anywhere near $500bn, (more like 200bn). There aren’t many/any $500bn companies growing over 50%. It is unique.

As per several other situations - I might well hold the gorilla as well as the fast growing chimp, it doesn’t have to be either/or, but I haven’t been totally convinced of Baozun to date and in the meantime, Ali Baba is killing it.

Ant

3 Likes
#14

just saw this write-up…nice job!
I like BZUN a lot, and it had a recent runup and then got pummeled with everyone else the last few days, so oppty to buy in a bit lower.

Key points you made, imo, are:
Backed by BABA, runs on TMall and JD.com
They are moving away from slower growth things like disty center and focusing on that services/Shopify model, which is growing at 50% clip.
They are gateway for American brands to advertise in China.

-Dreamer

2 Likes
#15

nice post-ER pop so far today (China stocks often give ER press release before market open, due to time zones)

Here is what I posted on NPI:

ER results
Baozun Announces First Quarter 2018 Unaudited Financial Results https://seekingalpha.com/pr/17166504?source=ansh $BZUN

Services revenue was RMB461.3 million (US$73.5 million), an increase of 50.3% year-over-year.

(50% growth in key rev category)

First Quarter 2018 Operational Highlights

Total Gross Merchandise Volume (“GMV”)6 was RMB4,943.2 million, an increase of 66.2% year-over-year.
Distribution GMV7 was RMB535.9 million, a decrease of 7.6% year-over-year.
Non-distribution GMV8 was RMB4,407.3 million, an increase of 84.1% year-over-year.
Number of brand partners increased to 156 as of March 31, 2018, from 136 as of March 31, 2017.
Number of GMV brand partners increased to 150 as of March 31, 2018, from 125 as of March 31, 2017.

(“Distribution” is the biz they are getting out of)

Vincent Qiu, Chairman and Chief Executive Officer of Baozun (BZUN). “On May 11, 2018, we held our third annual Global Brand E-commerce Summit in Shanghai. This year’s theme was ‘Eyes on The Data’ and featured talks on big data, artificial intelligence, and cloud computing. We are firmly focused on becoming the leading brand e-commerce business partner and technology development and solution services provider. We plan to continue investing in innovation to further strengthen our industry leading position and create greater value for our shareholders.”

Guidance

Business Outlook

The Company expects total net revenues to be between RMB1,060 million and RMB1,100 million for the second quarter of 2018. ($172m)

While the Company is transitioning more of its business from the distribution model towards the non-distribution model, Baozun is providing quarterly guidance on services revenues. The Company expects services revenue to increase by over 50% on a year-over-year basis for the second quarter of 2018.

(Guiding to 50% growth in key rev metric for next Q)

Dreamer

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