Alibaba (BABA +4.68%) and Baozun (BZUN +2.83%) are two of China's most important e-commerce companies, but the former is more widely recognized than the latter. That's because Alibaba's online marketplaces serve mainstream consumers, while Baozun operates behind the scenes.
Alibaba is China's largest e-commerce company and the top cloud-infrastructure services provider. It also operates brick-and-mortar stores, streaming media platforms, and a budding video game business.
Baozun mainly helps foreign companies establish an online presence in China by setting up their e-commerce websites, managing their marketing campaigns, and fulfilling online orders with its own logistics network. It's generally easier for big companies like Nike and General Mills to outsource those services to Baozun instead of hiring their own tech and sales teams in China.
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Shares of Alibaba and Baozun slumped over the past 12 months amid concerns about tighter regulations and escalating trade tensions. Alibaba's stock price tumbled nearly 20% as it was hit by an antitrust probe, a record fine, and tighter restrictions on its e-commerce business. Baozun's stock price declined nearly 30% as investors fretted over China becoming a hostile market for foreign brands. It might seem too risky to touch either stock right now, but is one of these stocks a more promising comeback play?
Which company is growing faster?
Alibaba's revenue increased 41% to 717.3 billion yuan ($109.5 billion) in fiscal 2021, which ended this March. Excluding its consolidation of the superstore chain Sun Art, its revenue would have risen 32%.
Alibaba's operating income fell 2%, mainly due to the $2.75 billion antitrust fine in China, but its adjusted earnings -- which exclude that impact and stock-based compensation expenses -- still rose 23%.
Analysts expect Alibaba's revenue to rise 30% this year, but for its adjusted earnings to dip 4% as it continues to expand its lower-margin brick-and-mortar, direct sales, and logistics businesses to boost its core commerce revenues. It will also likely pour more money into its unprofitable cloud business, nascent mobile gaming business, and other non-core divisions to expand its ecosystem.
Baozun's revenue rose 22% to 8.85 billion yuan ($1.36 billion) in fiscal 2020, which aligns with the calendar year. Its total gross merchandise volume (GMV) increased 25% to 55.69 billion yuan ($8.59 billion), and 92% of that total came from its higher-margin "non-distribution" channel -- which lets companies directly ship their products to customers in China. The remaining 8% came from its lower-margin "distribution-based" GMV channel, which provides end-to-end logistics services for its clients.
Baozun's adjusted operating income increased 42% during the year -- thanks to the expansion of its non-distribution channel, rising take rate, and tighter cost controls -- while its adjusted earnings rose 50%. Analysts expect Baozun's revenue to rise by 33% and adjusted earnings to increase by 2%, respectively, this year as it faces a tougher year-over-year comparison and ramps up its spending again.
Which company faces fewer regulatory headwinds?
Alibaba and Baozun both look fundamentally cheap at 17 and 14 times forward earnings, respectively. But both stocks are trading at steep discounts because Chinese and American regulators are squeezing U.S.-listed Chinese stocks. Chinese regulators are imposing new restrictions on the country's top tech companies, clamping down on their foreign listings, and urging those companies to return to Chinese exchanges. Meanwhile, American regulators are threatening to delist all foreign companies that don't comply with new auditing standards within the next three years.
Those threats have convinced many investors to sell all of their Chinese stocks and move on to brighter international markets. However, Baozun clearly faces fewer direct regulatory threats -- at least in China -- than Alibaba. Baozun's ecosystem is much smaller than Alibaba's, and it hasn't been accused of any anti-competitive strategies or investments.
Escalating trade tensions between the U.S. and China could generate headwinds for Baozun, but it also seems unlikely that major multinational brands will ever exit China. Instead, tighter restrictions on foreign companies in China could make Baozun even more appealing as a "one-stop shop" for avoiding regulatory headaches.
The winner: Baozun
I can't recommend buying any Chinese tech stocks right now, because the regulatory headwinds are too fierce and unpredictable. But if China cools off its tech crackdown and reaches some kind of agreement with the U.S. regarding foreign investments, these stocks might be worth buying again.
If that day comes, Baozun could attract more bulls than Alibaba -- which could struggle with the new restrictions on its e-commerce ecosystem and future investments. Baozun will also remain a more balanced long-term play on China's online shoppers and their attractiveness to overseas companies.
