GigaCloud Technology (GCT -0.89%) and Baozun (BZUN -2.62%) represent two very different ways to invest in China's sprawling e-commerce sector. GigaCloud's business-to-business platform connects product manufacturers -- most of them based in China -- with retailers across the world. Baozun's end-to-end e-commerce platform serves as a one-stop shop for large foreign companies that want to quickly establish an online presence in China.
In other words, GigaCloud helps Chinese sellers reach overseas buyers while Baozun helps overseas merchants reach Chinese buyers. But which strategy is likely to generate bigger gains for long-term investors?
GigaCloud generates explosive (but slowing) growth
GigaCloud operates a network of 21 warehouses in four countries across North America, Europe, and Asia. It primarily ships "large parcel merchandise" like furniture, home appliances, and fitness equipment.
The company generates most of its revenue by taking on its own inventories and then reselling them to overseas retailers like Amazon and Walmart. However, it has been gradually shifting away from that lower-margin, first-party approach by letting Chinese merchants directly ship their products to overseas sellers through a third-party marketplace.
In 2020, GigaCloud's revenue surged 125% to $275.5 million as its net income skyrocketed 1,211% to $37.5 million. Its gross merchandise volume soared by 437%, its number of active third-party sellers grew by 196% to 210, and its number of active buyers increased by 283% to 1,689. Its average spending per active buyer also climbed by 40% to $112,777.
But in 2021, GigaCloud's revenue only rose 50% to $414.2 million as its net income declined by 22% to $29.3 million. It attributed that slowdown in part to a difficult comparison to the first year of the pandemic, during which sales of home furnishings surged, and in part to supply chain constraints in 2021.
But despite those challenges, its gross merchandise volume still increased by 117%, its number of active third-party sellers rose 82% to 382, and its number of active sellers jumped 111% to 3,566. However, its average spending per active buyer only improved by 3% to $116,150. Higher freight costs also reduced its gross margin by 570 basis points to 21.6%.
Those headwinds persisted in the first quarter of 2022, when its revenue rose just 19% year over year and its gross margin contracted to 15%. Analysts haven't released any definitive forecasts for GigaCloud yet -- it only went public in a wild market debut less than a month ago -- but it still seems reasonably valued at less than 2 times its trailing sales.
Baozun is still stuck in the mud
Baozun's growth has decelerated significantly over the past several years as trade tensions, tariffs, and regulatory threats have caused many multinational companies to rethink their expansion strategies in China.
In 2020, Baozun's revenue rose by 22% to $1.36 billion, driven by 25% gross merchandise volume growth, and its adjusted net income increased by 50% to $82 million. Its profitability improved as it shifted its customers from its "distribution" model, under which it took on inventories at its own distribution centers, toward a "non-distribution" model that enabled its clients to directly ship their products to Chinese consumers instead. Its adjusted operating margin expanded by 130 basis points to 7.6%.
But in 2021, Baozun's revenue grew by just 6% to $1.47 billion. Its gross merchandise volume still increased by 28%, but most of that growth came from the non-distribution side, which generates lower revenue (but higher margins) from each order.
Nevertheless, its adjusted operating margin tumbled to 2.4% and its adjusted net income plunged 63% to $31 million. Management attributed that deceleration to China's economic slowdown, which curbed sales of appliances, personal care products, sportswear, and personal electronics.
Those problems dragged on into 2022 and were only exacerbated by the intermittent COVID-19 lockdowns the Chinese government instituted in several large metropolitan areas. As a result, Baozun's revenue fell 2% year over year in 2022's first quarter and slipped another 8% in the second quarter.
For the year, analysts expect Baozun's revenue to dip by 1% as its adjusted earnings rise 15%. Based on those expectations, its stock looks fairly cheap at just 0.4 times this year's expected sales and 16 times forward earnings.
The clear winner: GigaCloud
GigaCloud still has a lot to prove, but it's a better buy than Baozun because it's growing much faster, it generates most of its revenue outside of China, and it has carved out a defensible niche in the "large parcel" space.
Supply chain constraints will generate near-term headwinds for the company, but its growth will likely stabilize again over the long term. Its margins should also gradually improve as it gains more third-party sellers. GigaCloud is still a speculative play, but it could be a long-term winner if overseas retailers continue to import large products from Chinese manufacturers.