Baozun Seems On Track to Deliver Substantial Growth in the Long Run

Summary

  • BZUN’s Q2 2016 revenue came out at $105.4 million, a 35.3% increase compared to the same quarter last year
  • BZUN’s brand partners increased to 120 and gross merchandise volume increased 81.4% year-over-year
  • The recent launch of Baotong will help them diversify their revenue stream
  • Stock price of BZUN has already reached near BoA’s $14 per share price target from June 2015
  • We believe long term investors should consider increasing their exposure in BZUN

Company Overview

Founded in 2007, Baozun (NASDAQ:BZUN) has evolved as an e-commerce service company in China that helps various brands and retailers reach consumers through their end-to-end solutions. Baozun has developed a range of products and services, such as website design and development of content, web hosting and other fringe IT infrastructure, warehousing and logistics service, and digital marketing for companies interested in building an e-commerce business.

By offering all the services required to directly sell to consumers, Baozun connects brands and their potential consumers. By offering an a ready and robust e-commerce supply chain technology, Baozun strives to engage consumers and drive sales of its clients.

As of August 30, 2016, Baozun had a market capitalization of $646.41 million and employed around 2,496 people to run its operations.

Review of Q2 2016 Financial Results

On August 3, 2016, Baozun released its Q2 financial results, which showed that the revenue came out at US$ 105.4 million, representing a year-over-year increase of 35.3%. Baozun also managed to reach breakeven in Q2 with US$ 0.2 million net profit.

The good news was the RMB 2,204.4 million Gross Merchandise Volume ((GMV)), which increased 81.4% year-over-year.

Investors were interested in the performance of the Maikefeng, their online retail platform, which generated around RMB39.5 million. While contribution from Maikefeng was relatively small to the total GMV, it showed potential with a 3.8% year-over-year growth.

Furthermore, the number of brand partners of Baozun has increased this year to a total 120, which is significantly higher than last year’s 99 brand partners.

Baozun Started New Warehousing and Logistics Subsidiary Baotong

On August 23, Baozun announced the launch of Baotong, of a wholly-owned new warehousing and logistics solutions subsidiary. “Baotong will further strengthen and expand the scale of the Company’s diversified range of warehousing and fulfilment services and improve its ability to serve a larger number of brand partners,” said Baozun in the press release. Baotong’s first premium warehouse, the Baotong Cube, is expected to become operational in September.

Baotong will serve as a separate logistics entity. It will mainly provide warehousing and fulfilment services to Baozun’s brand partners and likely to create a new revenue stream.

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Figure 1: Baozun’s Stock Price Has Almost Doubled Since Releasing Q2 2016 Earnings

Since releasing Q2 2016 financial results, the stock price of Baozun was already displaying bullish pressure. However, after they announcing the launch Baotong, their stock price went through the roof.

Prior to releasing the Q2 2016 earnings, Baozun’s stock was trading at near $8.5 per share, which climbed to $13.6 per share on August 30, representing a 60% increase within a month.

Takeaway from Q2 Earnings Call

During the Q2 earnings call, the Chief Executive Officer of Baozun, Vincent Qiu, sounded pleased to say that they had “another strong quarter of solid growth,” where they have managed to “beat” their quarterly guidance. It is worth noting that since the IPO in May 2015, Baozun has managed to beat the guidance on every quarter, making it a norm!

As the Chinese economy continued to mature and its middle class consumers are slowly becoming fond of foreign branded products, we believe companies like Baozun are in a good position to leverage that changing market condition to become more vital. Vincent Qiu mentioned also sounded optimistic when he mentioned that “more and more high-quality foreign brands are looking to enter this [Chinese] market.”

Baozun has already increased its portfolio of brands and currently representing 120 brand partners. “We are constantly in talks with a number of brands seeking to benefit from the enormous growth opportunities in China’s e-commerce market,” said Mr. Qiu.

He specifically mentioned the onboarding of Korean CJ O Shopping, a division of CJ Group. CJ O Shopping will create a joint venture with Baozun and together they will leverage Baozun’s resources in e-commerce operations, online marketing and logistics in order to introduce these brands in the Chinese market.

During the earnings call, we learned that Baozun’s cash and equivalents dropped compared to the same quarter last year, because the management used some of the cash for “share repurchase program,” which have contributed to the recent bullish move of the stock.

Conclusion

In Q2, sales and marketing expense of Baozun went up. With the growing operation, it was expected. However, we are happy to see that compared to last year, this quarter, the gross margin also increased by 8%, which can cover the added expenses and generate a higher operating margin in the balance sheet.

Overall, we believe secondary investors should focus on the growth potential of Baozun, which appears very optimistic with the continuous better than expected revenue and GMV guidance.

In June 2015, Bank of America initiated coverage of Baozun and set the price target at $14 per share, which was very optimistic at the time. However, with this month’s bullish move, Baozun’s stock is trading very near to this price target, still offering a 3% upside potential.

We believe that Baozun management is on the right track and the company is poised to experience a substantial secular growth in the coming quarters. We strongly recommend that secondary investors with a long-term focus consider increasing their exposure to Baozun.