It's been a wild ride, but with just a month left in 2020 shares of Baozun ( BZUN 5.23% ) are up nearly 16% since the start of the year. E-commerce is already a well-established field in mainland China, but in the wake of the COVID-19 crisis, it's more important than ever. Baozun's third-quarter 2020 results speak to this fact. If you think digital retail is the future for famous consumer brands, this stock is a worthwhile bet.
Q3 by the numbers
Baozun's third-quarter revenue increased by 22% year over year to 1.83 billion Chinese yuan ($269 million). Within the total, product sales were up 21% year over year to 803 million yuan, and service sales (primarily Baozun's consignment model, where it acts as a service partner for brands distributing products in China) were up 22% to 1.03 billion yuan.
Adjusted net income increased 55% in the period to 91.5 million yuan ($13.5 million) as Baozun continues to lap a difficult 2019. As a reminder, it lost a large Chinese electronics manufacturer as a customer, and also had a warehouse fire that led to the loss of merchandise. But Baozun is putting those headwinds in the rearview mirror and continues to expand its number of relationships. Brand partners were at 260 at the end of September 2020, up from 250 at the end of Q2 and 223 a year ago.
Also of note, Baozun finished its secondary stock offering on the Hong Kong Stock Exchange during the period as well. As a result, it finished September with $664 million in cash and equivalents, another $39.5 million in long-term deposits and equity investments, and $375 million in debt.
Investing in China has risks, but the future looks promising
Baozun is closely tied into the Alibaba ( BABA 1.78% ) e-commerce ecosystem, but its success hinges on international brand demand within China. The pandemic has been highly disruptive to growth in this department, but I think the handling of distribution for easily recognizable fashion names like Nike and Calvin Klein and digital products like Microsoft and Nintendo bodes well for Baozun over the long-term.
The continued development of China's massive middle class is also a positive, and the world's largest market for digital retail should only continue to grow in the years ahead. On this front, Alibaba's deal with online luxury goods marketplace Farfetch ( FTCH 4.82% ) is a promising sign. China is also the world's largest destination for high-end fashion, and Farfetch bringing its platform to the country could hasten that industry's migration to the internet. Not incidentally, Baozun will be helping with product distribution for Farfetch.
Besides a potentially large new marketplace in need of digital logistics, I like Baozun's chances at continual rebound into 2021 as effects of the pandemic wear off. E-commerce already comprises over 20% of total retail sales in China, but it's nevertheless still a growing industry. And at just 18 times trailing 12-month free cash flow (revenue less cash operating and capital expenses), the stock looks attractively priced to me.
Granted, China has been a volatile economy to invest in over the last few years, and I don't think anything will change going forward. Keep this in mind when deciding whether to buy (or buy more) Baozun. This isn't a stock to bet the farm on by any stretch. But for a small amount (perhaps 1% or less) of a long-term growth-oriented investor's portfolio, I still think this remains a good play on the future of e-commerce in China.