China|Asia ●Initiation Consumer● E-commerce
See the last page of the report for important disclosures
Blue Lotus Capital Advisors Limited2
Baozun Inc. (NASDAQ: BZUN)
Why are we concerned about BZUN’s story
● BZUN’s story is essentially a pricing power story, which can be manifested
in three aspects: (1) take rate, (2) gross margin after fulfilment cost and (3)
working capital change, all of which are turning for the worse recently;
● BZUN has benefit from sector consolidation and Alibaba’s (BABA)
partnership. However, brand store hosting is a niche segment with ceilings;
● We initiate the stock with a SELL, with a US$30 TP. Our FY19 top line and
EBIT are (14) % and (30) % below consensus.
Worrisome signs of BZUN’s pricing power
BZUN’s total take rate has been declining for ten consecutive quarters. Its service
take rate has also been declining for six consecutive quarters. Removing
fulfilment cost, we estimate BZUN’s service fee take rate has also been declining
for the same length. BZUN’s three key working capital items: account
receivable, inventory and account payable, have also been worsening since IPO.
Earnings leverage doesn’t exist, in our view
We believe adjusted gross profit over GMV is the true gross margin measuring
BZUN’s pricing power against its customers. It has been flat. BZUN’s profit
growth, so far, has been mostly from GMV growth. Further, BZUN’s gross
margin less fulfilment cost ratio rose the slowest pace since C2Q16. If BZUN’s
customers increasingly request bundled fulfilment in their service contracts, the
scalability of BZUN’s business model will be reduced.
Brand store hosting is a niche market with growth ceilings
We are positive on BZUN’s share gain in the brand store hosting segment, which
is a niche market occupying only 5% of the total e-commerce service market.
But we believe BZUN will (1) increasingly face the competition from specialist
competitors in digital marketing and logistics, (2) compete against BABA.
Pricing power decline hurts free cash flow
Our survey of 27 multinational brands showed no conclusive evidence for
multinationals outperforming their sector peers, and for BZUN’s customers
outperforming non-customers. Trading at 32 2019 PE, we expect BZUN to grow
non-GAAP EBIT at 3 Yr. CAGR of 33% from FY18-20.
Summary financial data
Highlights 2016A 2017A 2018E 2019E 2020E
Revenues (RMB mn) 3,390 4,149 5,219 6,275 7,563
Non-GAAP op. profit (RMB mn)124 315 516 629 901
Non-GAAP EPADS (RMB mn)2.174.697.008.4011.2
GAAP EPADS (RMB mn)1.553.705.857.3710.0
EBITDA margin 4.7%8.8%12.0%12.0%14.2%
P/E (non-GAAP)125 58 39 32 24
Free cash flow yield (%) 0.3%(15.0%) 3.0%(0.3%) 2.7%
Source: CapitalIQ, Blue Lotus (as of Oct 25, 2018)
BUYHOLDSELL
Target Price: US$ 30.00 Current Price: US$39.26
RIC: (NASDAQ: BZUN) BBG: BZUN US
Market cap (US$ mn) 2,236
Average daily volume (US$ mn) 113
Shares out/float (mn) 57/N.A.
Source: CapitalIQ, Blue Lotus (as of Oct 25, 2018)
Key Changes
New Old Diff
BLRI Recommendation SELLNA NA
BLRI Target Price30 NA NA
2017A EPADS (US$)1.02NA NA
2018E EPADS (US$)1.22NA NA
2020E EPADS (US$)1.64NA NA
Source: Blue Lotus (as of Oct 25, 2018)
BLRI vs. The Street
No. of CapitalIQ Recommendations 8
Target price vs. CapitalIQ mean (50%)
1-year-fwd EPS vs. CapitalIQ mean (27.4%)
CapitalIQ recommendation 1.50
Source: CapitalIQ Recommendation, Blue Lotus (1=BUY,5=SELL) (as of
Oct 25, 2018)
Price performance and volume data
Source: CapitalIQ, Blue Lotus (as of Oct 25, 2018)
Research team
Tianli Wen
Head of Research
research@blue-lotus
Chris Z. Zhou
75
90
105
120
135
150
2018/4/242018/6/242018/8/242018/10/24
NASDAQ: BZUN-Share Pricing
NYSE Composite
NASDAQ Composite
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors.
Data is sourced from Bloomberg, Blue Lotus Capital Advisors Limited and subject companies. Consensus forward estimates are used in analysis. Past performance is not indicative of
future results. Investors should consider this report as only a single factor in making their investment decision.
Consumer| Baozun Inc.| (NASDAQ: BZUN) |SELL Initiation
See the last page of the report for important disclosures
Blue Lotus Capital Advisors Limited3
Baozun Inc.: Financial Summary
Fiscal year ends-31-Dec
Income statement
(RMB mn) 2017A 2018E 2019E Company Description
Baozun is the largest brand E-commerce business partner, and a leading
digital technology and solution company in China. Baozun helps brand
execute their E-commerce strategies in China by selling their goods
directly to customers online or by providing services to assist with their
E-commerce operations. The business scope includes IT solutions, store
operations, digital marketing, customer services, warehousing and
fulfillment.
Industry View
We estimate China’s e-commerce service industry handled RMB620bn
worth of goods, or 28% of Tmall GMV in CY2017. Brand store hosting
is a subsegment of e-commerce service industry with CY2017 GMV of
RMB110bn. Baozun had a market share of 17.3%. We estimate brand
store hosting GMV to reach RMB342bn in CY2021.
Total GMV19,112 31,087 45,112
Revenues4,149 5,219 6,275
Cost of products(1,917)(1,916)(1,802)
Gross profit2,231 3,303 4,473
Fulfilment(818)(1,267)(1,846)
Sales marketing(911)(1,200)(1,483)
Technology and content(141)(265)(432)
General and administrative(117)(162)(214)
Other operating income (loss)11 37 67
Operating profit, GAAP256 447 566
Share-based compensation(58)(69)(63)
Operating profit, non-GAAP315 516 629
Other income/(cost)15 (7)1
Pretax (Loss)/income, GAAP271 440 567
Income taxes expenses(54)(90)(119)
Net (loss)/income to shlds., GAAP217 350 448
Number of ADS, diluted59 60 61
EPADS (RMB), GAAP, diluted3.70 5.85 7.37
Gross margin 53.8% 63.3% 71.3%
EBIT margin, GAAP 6.2% 8.6% 9.0%
Net margin, GAAP 5.2% 6.7% 7.1%
Source: Baozun Inc., Blue Lotus (as of Oct 25, 2018)
Balance sheet
Cash flow statement
(RMB mn) 2017A 2018E 2019E(RMB mn) 2017A 2018E 2019E
Cash 245 404 386Net income 217350447
ST investment 313 344 378Adjusted for
Accounts receivable 1,083 1,097 1,347Depreciation & amortization 50108125
Inventories 385 404 451Share based compensation 586963
Advances to suppliers 89 80 87Allowance of doubtful accounts 122
Prepayments and others 301 359 408Inventory write down 425561
Total current asset 2,463 2,395 2,732Change in
Investment in equity investees 24 24 24Accounts receivable (458) (14) (250)
PPE 331 523 616Inventories (73) (20) (47)
Intangible assets 66 91 116Advance to suppliers 44(20) (40)
Land use right, net 45 57 69Prepayments and other current assets (103) (13) 7
Goodwill 13 13 13Amounts due from related parties (50) (46) (55)
Other non-current assets 18 20 22Other non-current assets 9(2) (2)
Deferred tax assets 16 16 16Accounts payable 57(29) (33)
Total asset 2,976 3,140 3,608Notes payable (67) 34(5)
short-term loans 172 172 172Income tax payable 1500
Accounts payable 584 555 522Accrued expenses and other current liabilities 173(87) (13)
Notes payable 48 82 77Cash from operations (90) 394260
Income tax payable 30 30 30Purchase of property and equipment (350) (157) (188)
Accrued expenses and others 312 225 212Addition of intangibles (36) (46) (55)
Current liabilities 1,146 1,064 1,012Purchase of ST investment (273) (31) (34)
Total liabilities 1,150 1,067 1,016Cash from investing (720) (235) (278)
Additional paid-in capital 1,824 1,824 1,824Cash from financing 16800
Retained earnings (25) 227 676Change in cash (673) 159(18)
Accu. other comp. gain/(loss) 10 10 10Cash at beginning 917245404
Total equity 1,826 2,072 2,592Cash at end 245404386
Total liabilities and equity 2,976 3,140 3,608
Source: Baozun Inc., Blue Lotus (as of Oct 25, 2018) Source: Baozun Inc., Blue Lotus (as of Oct 25, 2018)
Consumer| Baozun Inc.| (NASDAQ: BZUN) |SELL Initiation
See the last page of the report for important disclosures
Blue Lotus Capital Advisors Limited4
Recent Reports
Investment Cases at a Glance
Why is it a SELL
● Margin improvement might shrink: Fulfilment cost as percentage of revenues
has been gaining since C4Q15, suggesting consignment has been gaining share
over service fee in BZUN’s service revenue mix. While BZUN’s adjusted gross
margin (gross profit less fulfilment cost) is still gaining, its pace of 2.5ppt YoY
hit the lowest since C1Q16;
● Key working capital account turned from cash generating to depleting:
Working capital turnover days for account receivable, inventory and account
payable turned positive (cash depleting) for the first time since C4Q17 and
remained. We believe this, coupled with narrowing adjusted gross margin,
showed BZUN’s pricing power over its customers is approaching its limit;
● Industry commoditization will be next:Directions of gross margin, fulfilment
cost and working capital are just reflections of BZUN’s pricing power over its
brand customers.They must be viewed collectively. Besides a “translation
value” to bridge the organizational and cultural gaps among global brands,
Alibaba platform and China, BZUN also must create business value above
market average. We believe specialization in digital marketing and logistics are
two trends BABA will encourage, leaving generalists like BZUN with less room
to grow;
● BZUN must compete against BABA for value generation: Yes, it is possible
that BZUN and BABA together generate value and divide it. But we think it
doesn’t escape the fact that (1) the ingredients of such value creation reside with
the brand customer (data) and BABA (data and technology), not a middleman
like BZUN, (2) there are strong incentives for brand customers and BABA to
internalize the created values, (3) value creation must manifests in incremental
sales and profitability for BZUN’s customers, which we found lacking;
● So far there has been no conclusive evidence on better profitability from
BZUN’s customers: Based on our research, 14 out of 27 global consumer
brands were suffering from single-digit, or even negative revenue growth in
China/Asia area in recent two years. As for BZUN’s customers, 7/12
multinationals in our sample pool were stagnated in a low growth trend in
China/Asia, including BZUN important client Philips;
● Margin leverage doesn’t exist: Gross margin, fulfilment cost and working
capital must be viewed collectively to interpret BZUN’s margin story. BZUN’s
margin increase must be viewed together with its take rate decrease, fulfilment
cost increase and working capital days increase. When measured with adjusted
gross profit (less fulfilment cost) over GMV, BZUN virtually never had margin
expansion since its IPO;
● BZUN’s performance in data- and algorithm-based marketing has been
lacklustre:Our research has shown BZUN performed 2nd to last in Alibaba’s
Oct 16th, 2018: [WUBA US, BUY, TP
US$90) Earnings Preview]: C3Q18
Preview: No news is good news
Oct 10th, 2018: [JD (JD US, BUY, TP
US$35) Target Price Change]: C3Q18
Preview: Tough transition ahead
Sep 20th, 2018: [Alibaba (BABA US,
BUY, TP US$201) Target Price Change]:
Taobao take rate may stay flat next year
Aug 24th, 2018: [YY (YY US, BUY, TP
US$107) Rating Change]: Global
expansion brings new catalyst, upgrade
to BUY with TP at US$107
Aug 23th, 2018: [Yirendai (YRD US, BUY,
TP US$40) Target Price Change]: Dark
time soon passes, survivor shall benefit
Aug 21th, 2018: [JD (JD US, BUY, TP
US$40) Target Price Change]: C2Q18
Review: Transition period begets caution
Aug17th, 2018: [58 (WUBA US,
BUY, TP US$90) C2Q18 Review]: Traffic
rebound carries a long way
Aug 15th, 2018: [Vipshop (VIPS US,
HOLD, TP US$9) Rating Change]: C2Q18
Review: More hardship ahead … DG to
HOLD
Aug 14th, 2018: [58 (WUBA US,
BUY, TP US$90) Earning Preview]:
C2Q18: Healthy growth in core business
Aug 10th, 2018: [Baidu (BIDU US, BUY,
TP US$283) Target Price Change]: Baidu’s
internal issues will be exposed because of
Google, cut TP to USD $283。