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Down Nearly 50% From Record Highs, Is Baozun a Buy?

By Aditya Raghunath - Jan 22, 2020 at 7:50AM

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Baozun has trailed Chinese tech stocks and major indices in 2019. However, this gives investors an opportunity to buy the stock at an attractive price.

In 2019, several tech stocks gained momentum to finish the year at record highs. Investors were buoyant about the low unemployment rates, a strong domestic economy, and de-escalation of the U.S.-China trade war.

Chinese tech giants such as Alibaba, Baidu, and made strong comebacks in the second half of 2019. However, there was one Chinese company that underperformed peers and the broader market last year.

Baozun (BZUN -0.81%) stock gained less than 10% in 2019 and is currently trading almost 50% below its record high. The stock went public back in May 2015 at a price of $10 per share.

It then sky-rocketed to $64.23 by June 2018 on the back of its stellar growth, before a slowing economy in China and the trade war wiped out significant value in the last 18 months.

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Image source: Getty Images.

What is driving Baozun sales?

Baozun is a brand e-commerce solutions company and generates all its revenue from China. It provides various e-commerce products and services including IT solutions, digital marketing, warehousing, fulfillment, customer services, and store operations.

The e-commerce market in China continues to grow at a rapid pace. Several brands are scaling their online presence, which provides an opportunity for Baozun to leverage its expertise in this space.

According to a report from eMarketer, retail online sales will grow by 27.3% to $1.9 trillion in 2019 and account for 36.6% of total retail sales in the country. Online sales are expected to touch $4.1 trillion by 2023 and account for 64% of the total retail sales.

Baozun's end-to-end e-commerce capabilities are integrated with the back-end systems of brand partners. This allows clients to enable data tracking and analytics across the value chain. The company also helps clients to establish an online market presence and launch products on major platforms, including and Alibaba's Tmall.

Baozun has managed to partner with 223 brands at the end of the September quarter, up from 132 brands in the prior-year period. The company added 11 brand partners in the third quarter and continues to focus on generating sustainable gross merchandise volume (GMV) growth. Baozun managed to increase its GMV by a stellar 43% year over year with net revenue growth of 35% in Q3.

The company is optimistic about long-term growth, as the country's e-commerce shift toward marketing campaigns or event-driven sales will drive top-line growth. Its sales have risen from 3.39 billion yuan ($490 million) in 2016 to 5.39 billion yuan ($790 million) in 2018.

Wall Street expects sales to touch $1.02 billion in 2019 and $1.33 billion in 2020, indicating robust growth opportunities.

Major concerns for Baozun investors

Despite Baozun's stellar growth, the stock has underperformed markets. In the September quarter, Baozun reported sales of $210.3 million with adjusted earnings per share of $0.14. Comparatively, analysts forecast sales of $214.1 million and earnings per share of $0.14 in Q3.

The stock fell 18% on Nov. 21 last year after the company provided revenue forecast between $384 million and $391 million for the December quarter. Analysts estimated the company to post sales of $401.2 million in the holiday quarter. 

Baozun shares also slumped over regulatory issues that rightly have investors worried. Last month, it released a press statement announcing that a fire caused damages amounting to $7.6 million.

Baozun claimed that the damages were worse than estimated, but investors were concerned that the management took close to two months to inform them about the same. Baozun has also been hit by class-action suits in the U.S. that have accused the company of misleading statements about its relationship with telecom giant Huawei.

There have always been transparency issues in the case of Chinese companies. The stock is bound to take a hit when such matters become public news. But if investors can look beyond the management blips, Baozun stock is well-positioned to move higher on the back of growing traction among brand partners.

What should an investor think of Baozun?

Baozun is valued at $2.22 billion in terms of market cap or 2.2 times forward sales, which is an absolute bargain compared to its growth rate. The stock is trading at a forward price-to-earnings multiple of 25, which is not too high considering its expected earnings growth of 10% in 2019 and a solid 56.7% growth in 2020. 

The sluggish macro-economic conditions in China will have an effect on Baozun sales in the short term. However, the increase in purchasing power among the country's middle class and the shift to online sales make the stock an irresistible bet for growth investors.

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