China is the largest digital commerce economy in the world and, according to researcher eMarketer, is on pace to pass the U.S. as the largest retail market outright in 2020. Though dominated by names like Alibaba (BABA -0.52%), e-commerce is still very much a growth industry on the other side of the Pacific. Alibaba-backed e-commerce infrastructure outfit Boazun (BZUN -2.46%) -- with a market cap of just shy of $2.6 billion -- is thus worth some attention.
Doubling down on the importance of digital selling
While the Chinese consumer is certainly reeling this year amid the COVID-19 pandemic, e-commerce is helping many manage their purchasing amid social distancing orders. Some method of digital purchase will account for about 40% of total retail sales in China in 2020, an increase of 16% from 2019 (again according to eMarketer). Not a bad figure considering the type of year this is shaping up to be.
That is showing up in Baozun's results. Building on its 35% year-over-year revenue advance in 2019, Q1 2020 revenue increased 18%, and Q2 accelerated to 26% (to 2.15 billion Chinese renminbi, or $305 million). As of the end of June, brands utilizing Baozun's online store management, marketing, and/or order fulfillment services increased to 250, compared with 239 at the end of March and 212 at the end of June 2019.
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Clearly Baozun is getting some benefit from the continual shift to online consumer activity, even though effects from the pandemic have slowed its trajectory a bit. And is it expands, net income has been rebounding since a warehouse fire in autumn 2019 and a switch to non-distribution sales, in which its partner brands ship merchandise directly to customers. Adjusted net income grew 73% in Q2 to 146 million renminbi ($20.7 million).
But therein is a reason many investors may shy away from Baozun: With the company slowing down for now (its Q3 2020 forecast called for 16% to 20% year-over-year growth), shares currently trade for 57 times trailing 12-month earnings. It's a steep price tag that assumes the bottom-line will keep expanding at a high rate like it has been so far this year, and it's unclear if the company can sustain its recent pace.
A developing middle class that wants world-class brand access
Add to that the fact that Baozun is far from having e-commerce management services cornered in the Middle Kingdom. It's going up against plenty of other services in China's massive and well-developed digital ecosystem -- although counting Alibaba as a key shareholder and integrating with Alibaba's Tmall online marketplace are working in its benefit. There's also political risk, as Baozun and other Chinese stocks face a possible delisting from American stock exchanges.
Substantive risks considered, though, this is a small stock worth keeping on your radar. Baozun focuses its partnership on large companies outside of China looking to tap the developing Chinese middle class -- names that include Nike, Nintendo, Burger King (owned by Restaurant Brands International), and Michelin, to name just a few. And even in the midst of a global economic downturn, Baozun continues to steadily add new brands to its stable. The pairing of new customers and rising Chinese consumerism can be a powerful combo over time.
That said, my standard rule for investing in small-cap stocks applies here. I usually make an initial investment of less than 1% of my portfolio value and add to the winners over time. As it's a small player in China's retail universe with ample and deep-pocketed competitors, my position in this company is small, and is part of a larger collection of other small-cap stocks. Nevertheless, Baozun has the makings of a long-term winner, even though COVID-19 is hurting the near-term outlook.
