BZUN Baozun Inc

Sector financial performance:

This china-based company, who primarily sells, by itself and through the third party marketplace stores and its own website, general merchandise products and as well provides marketplace for third sellers and internet related services, has been grouped into online retail& service sector in merchandise industry.

Almost all companies in this sector in our analysis have experienced fast growth in terms of direct products sales between 2015 and first half of 2017 (double digits growth rate) as reflected from the increased sales volumes. This can be attributed to the lower purchasing costs (price/shipping) in North America or strong natural demands in China. Correspondingly, the service revenue of some of companies where apply increased as well as the sales of third-party seller who use their marketplace increased quickly.

Products sales of most companies in this sector grew slowly or decreased in 2017 in US market and some rebounded back on the track of 2015/16 in 2018. The slowing growth of 2017 in direct products sales of many companies in China market seems to be continuing after entering 2018 and presents a more clearly downward growth trend since 2015for those China-based companies probably due to increasing pressure on price resulted from competition.

Direct sales gross margins (merchandise margin) of companies that focus on US market decreased significantly probably due to the lower price and shipping costs. Benefiting from economy scales and getting better of retail market and from leverage of other expenses such as fulfillment as a result of fast increase in revenue from service, some of US companies have been seeing the improved operating margin and cash flow. However, in China market, due to increasingly intensive competition, most of companies experienced shrinking margins and decrease in cash flow as compared with 2016.

The current average gross margin (direct sales gross margin) is about 15% with a range in 5-28% down from about 17% three years ago. The current average gross margin (products and service) is about 23% with a range in 7-36% up from about 17% three years ago(fulfillment expenses included). At the same time, as companies continued to increase investments in selling& marketing and technology innovation when facing intensive competition since 2017, the average SG&A as percentage of sales (currently average 18.5% with a range 6-32%) and average technology& content as percentage of sales (currently average 5% with a range of 2-13%) got worse in 2018. Therefore, under the help from improved gross margin, the average operating margin firstly went up above 0% from -3% in 2017 (12 months trailing data) and down back to -1% in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios vary from 100 to 200 and enterprise price/sales ratios vary between 0.4 and 4.5.

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Company performance:

The net sales of products have kept going up but at a slowing down pace in the past several years (64%, 12%, 4%, and 3.5% for 2015, 2016, 2017, and 2018 respectively) primarily as a result of brands shifting from distribution model to consignment model. Revenue from service increased quickly (with an annual growth rate of more than 50%).

The first six months of fiscal 2018 compared with the same period of 2017

Net sales increased about 23% primarily due to increase of about 3.5% in products sales and increase of 51% in service.

The fiscal 2017 compared with the 2016

Net sales increased about 22% primarily due to increase of about 4% in products sales and increase of 56% in service.

The first nine months of fiscal 2017 compared with the same period of 2016

Net sales increased about 14%.

Fiscal 2016 compared with 2015

Net sales increased about 31% primarily due to increase of about 12% in products sales and increase of 85% in service.

Fiscal 2015 compared with 2014

Net sales increased about 64% primarily due to increase of about 64% in products sales and increase of 65% in service.

Its gross margin of products sold by itself (excluding fulfilment costs) has increased significantly by about 650 basis points since 2014 to about 15% of fiscal 2017(trailing 12 months) as a result of favourable products mix. Therefore, while all other expenses as percentage of sales increased (the fulfilment increased 700 basis points to 18%, SG&A increased 450 basis points to 25%),this company’s operating margin still gained increase to about 3.5% in 2017 from -3.5% of 2014 because of the improved product gross margin and the leverage from faster increase in service revenue. Merchandise margin continued to increase to about 18% in 2018. However, due to faster increase in service revenue and its leverage, we see operating margin was improved to above 6% in 2018. Cash slow has been increasing quickly in the past two years presenting a compounding annual growth rate of 40%.

Stock price

This stock currently has a stock price/cash flow ratio of 97 ($310). We think that its stock is being relatively slightly overvalued considering that increased competition may make the improvement of its gross margin of direct sales unsustainable when revenue of its own sales increased slowly.