Last May, I claimed Baozun (BZUN +0.85%) was a promising growth play for investors who could ride out the near-term volatility. Since I made that call, share prices for the Chinese e-commerce services provider have risen about 80%.
Let's take a fresh look at Baozun's business to see if its stock is still worth buying ahead of the upcoming release of its fourth-quarter earnings report on March 4.
Don't call it the "Shopify of China"
When Baozun went public back in 2015, many analysts casually dubbed it the "Shopify (SHOP 3.40%) of China". However, the two companies run completely different business models.
Shopify mainly helps smaller merchants set up online shops with self-serve services for building websites and apps, processing payments, fulfilling orders, and maintaining marketing campaigns.
Image source: Getty Images.
Baozun provides managed, end-to-end e-commerce services for big companies, including Starbucks and Nike, which want to enter the Chinese market without hiring local sales and tech teams. Baozun's staff sets up clients' e-commerce platforms in China, manages their marketing campaigns, and fulfills their orders.
Baozun initially stored and handled its clients' inventories in a "distribution-based" platform. But over the past few years, it replaced that capital-intensive model with an asset-light "non-distribution-based" model, in which it let its clients directly ship their products to customers.
More than 90% of Baozun's gross merchandise volume (GMV) -- the value of all products sold across its platform -- now comes from its non-distribution-based customers.
How fast is Baozun growing?
Baozun's revenue and GMV rose 35% and 51%, respectively, in fiscal 2019. Both figures continued rising throughout the first three quarters of 2020.
|
Growth (YOY) |
Q1 2020 |
Q2 2020 |
Q3 2020 |
|---|---|---|---|
|
GMV |
18% |
31% |
19% |
|
Revenue |
18% |
26% |
22% |
Data source: Baozun. YOY = Year over year.
Baozun's growth rates remained stable, even as the U.S.-China trade war caused some big American companies to reevaluate their dependence on China. Its growth accelerated significantly in the second quarter, which included JD's (JD +6.13%) 618 shopping festival in the second half of June.
Like Alibaba's (BABA +0.48%) Singles Day in November, the 618 festival encourages other retailers to launch their own aggressive promotions. Baozun already integrates its services into JD, Alibaba, and other top e-commerce marketplaces, which makes it a diversified way to profit from the growth of China's e-commerce sector without betting on a single player.
Analysts expect Baozun's revenue to rise about 32% for both the fourth quarter and full-year as its growth accelerates throughout the Singles Day period. They also expect its revenue to rise another 32% in fiscal 2021.
How profitable is Baozun?
Baozun's top-line growth is impressive, but its operating margins and net income growth have been more volatile over the past three quarters.
|
Non-GAAP |
Q1 2020 |
Q2 2020 |
Q3 2020 |
|---|---|---|---|
|
Operating Margin |
2.4% |
8.7% |
6.1% |
|
Net Income Growth (YOY) |
(51%) |
73% |
55% |
Data source: Baozun. YOY = Year over year.
Baozun's margins and earnings tumbled in the first quarter as its expenses surged throughout the pandemic. However, China largely contained the crisis in the first quarter, and Baozun's focus on tighter cost controls and selling higher-margin products lifted its profits in the second and third quarters.
Wall Street expects that streak to continue, with 32% earnings growth for the current quarter and 46% earnings growth for the full year. Next year they expect its earnings to increase another 30%.
An expanding customer base and a rising take rate
Baozun ended the third quarter with 253 GMV brand partners, up from 231 at the end of 2019 and 185 at the end of 2018. That consistent growth indicates the trade war didn't significantly deter big foreign companies from ramping up their e-commerce investments in China.
Baozun's take rate, or the cut of each sale the company retains as revenue, has also steadily risen over the past few years as it shifted toward a non-distribution-based model and sold higher-margin products.
Surprisingly low valuations
Baozun only trades at about 33 times forward earnings and just over two times next year's sales. Those are surprisingly low valuations relative to its projected growth rates and make it much cheaper than other high-growth tech stocks in this frothy market. Therefore, I'm reiterating my bullish stance on Baozun -- and I believe this oft-overlooked stock could still head much higher in 2021.
