Is Baozun a Buy?

There have been a whirlwind of concerns surrounding Baozun (BZUN 4.31%) lately, including about the U.S.-China trade war, slower growth due to the loss of a key customer, and a report of a warehouse fire from October causing $7.6 million in damage. Add all of that up and you get a stock that's down 45% from its 52-week high last summer.

BZUN data by YCharts

Looking behind the headlines, however, this Chinese e-commerce service company has a lot going for it. Let's dive into what Baozun does, how it's transitioning its business model, and whether this stock is a buy today. 

Baozun facilitates e-commerce in China

Self-described as the "leading brand e-commerce service partner in China," linking brands and consumers, Baozun provides end-to-end support for a brand's e-commerce operations. Services include online store operation, customer service, digital marketing, supply chain services, and warehousing and fulfillment. Its 500,000 square meters of warehouse space in six mainland cities enable it to reach 200 cities in China with next-day delivery and serve Hong Kong, Macau, and Taiwan. A sampling of its roughly 220 customers include well-known brands such as Nike, GoPro, and Godiva.

The company operates three different business models: distribution, consignment, and service fee. The distribution model offers more of a hands-off approach for brands, where Baozun makes the buying decisions on what products to stock, takes ownership of inventory, and sells items under the Baozun name. In the consignment model, the company takes more of a service-partner role and stores products on behalf of the brand, but doesn't take ownership of those products. In the service fee model, Baozun only performs services on behalf of the brand, such as online store operations or customer service, but doesn't handle inventory. Consignment and service fees make up its services segment, which is becoming the primary way it earns money.

Image source: Getty Images.

A business in transition

In 2015, 75% of Baozun's revenue originated from product sales (with the distribution model). Today, that segment accounts for less than half and has been growing at 9% annually versus the services business at 63%. But that only tells part of the story. 

The gross merchandise volume (the value of goods sold on its platform) for its nondistribution business has grown from 4.5 billion RMB in 2015 to an estimated 40.3 billion RMB for 2019 (around $5.6 billion), accounting for over 90% of the total. This shows Baozun's ability to scale and also highlights an opportunity.

Est.= estimated. Data source: Baozun investor overview presentation. Chart and 2019 estimate by author.

As it moves to primarily an asset-light model, Baozun is looking for ways to better serve and earn more services revenue from its customers. One of its key growth initiatives is enhancing its digital marketing tools with what it calls mini-apps, which are extensions to a brand's store that better engage potential customers and create more opportunities for targeted marketing. On Singles Day in 2019, the company saw a record 54% year-over-year gross merchandise value gain to 10 billion RMB (or $1.4 billion) due to its focus on marketing efforts. It is confident that this recent success will help convince brands of the power of these marketing apps to increase sales.

Baozun is positioning itself as a trusted partner for brands. This will be especially important as it looks to capitalize on two massive trends in China.

The rise of the middle class and e-commerce

Over the next decade, China's middle class is expected to grow 45% to 1.2 billion people, and its spending power "will be equivalent to the middle classes of North America and all of Western Europe combined," according to a post on the Organisation for Economic Co-operation and Development website. What's even more amazing is that much of this spending will be online.

E-commerce sales in China are already three times the size of U.S. online spending in gross dollar value and growing faster.

Data source: eMarketer. Table and calculations by author. 

By 2023, e-commerce sales in China are expected to reach an incredible $4.1 trillion, representing 64% of total retail sales, according to eMarketer. Baozun is well-positioned to capitalize on these trends.

Where Baozun is today

The company expects to notch fourth-quarter revenue growth of only 23% to 25%. This estimate of slowing growth disappointed investors, considering the company's top-line growth for the first nine months of 2019 was 41% over the previous year and full-year 2018 was a 30% increase over 2017. Management attributes much of the slowing growth to a huge electronics brand it lost. Many in the industry think it was China-based Huawei, which would be better than if it had lost a key brand from the U.S. or Europe, which would have brought into question its value proposition of linking brands unfamiliar with China to the country's consumers.

Management is optimistic about the coming year. Between its efforts to attract higher-value brands and adding a projected 45 new brands in 2019, it's setting up for a solid 2020. Ending the year, Baozun expects to have at least 230 brands, which would represent 24% growth over 2018. Higher-value-generating brands will be ramping up over the next year, creating opportunity for improved gross merchandise volume and revenue growth.

The bottom line for investors 

The stock is priced at a bargain 1.9 multiple of sales. The recent concerns surrounding the company (and even uncertainty with the coronavirus outbreak) are short-term in nature. Baozun is a quality company that has positioned itself to capitalize on the economic growth in the world's most populous country. For those who are looking for exposure to China's growing middle class or want to add an e-commerce specialist at a discount price, Baozun is a buy today.