BZUN - Baozun: Mixed Prospects

2023-08-08 05:56:43 ET

Summary

• The near-term revenue outlook for Baozun E-Commerce is challenging, but Baozun Brand Management has recently achieved better-than-expected gross profit margins.
• BZUN has the ambitions to expand overseas, but only time will tell if its new Baozun International business unit will be successful.
• I view BZUN's prospects as mixed, and this translates into a Hold rating for the stock.

Elevator Pitch

I have a Hold rating for Baozun Inc. ( BZUN ) [9991:HK] shares. In my earlier update for BZUN written on May 12, 2023, I touched on the company's recent "corporate restructuring exercise which organizes the company into three business segments."

With the current article, I assess the outlook for BZUN's three businesses, Baozun E-Commerce, Baozun Brand Management, and Baozun International. My analysis suggests that the prospects for BZUN are mixed, which points to a Hold or Neutral rating for the stock. Baozun E-Commerce's sales are expected to be weak in the near term, while Baozun Brand Management has recorded above-expectations profitability. Also, Baozun International needs more time to prove to investors that it can become a new growth driver for the company.

Core Baozun E-Commerce Business Faces Short-Term Headwinds

In its Q1 2023 earnings release , BZUN refers to Baozun E-Commerce or BEC as the company's "China e-commerce businesses" which include "brands' store operations, customer services and value-added services in logistics and supply chain management, IT and digital marketing."

BZUN's BEC segment is the core business for the company. As indicated in the company's May 2023 investor presentation slides , the BEC business accounted for roughly 71% of BZUN's Q1 2023 product sales. The company derived the remaining 29% of its first quarter product sales from Baozun Brand Management. Baozun International has yet to contribute any revenue for the company.

The BEC business saw its product sales drop by -29.9% YoY from RMB680.8 million in the first quarter of 2022 to RMB477.1 million for Q1 2023. In my opinion, BZUN's core BEC business is likely to continue underperforming in the near term because of two key factors.

The first key factor is weak consumer demand in China. At the company's Q1 2023 results call , BZUN acknowledged that "weaker consumption in the appliance category" was a major reason for the substantial drop in overall product sales for the BEC business unit. In specific terms, the BEC segment's sales of appliances fell by -36% YoY in Q1 2023. Also, appliances' sales as a proportion of BEC's total product sales declined from 17% in Q1 2022 to 11% for Q1 2023. The BEC business' largest category in terms of product sales is appliances, and a poor economic environment has led Chinese consumers to cut back on the purchase of discretionary items like appliances.

The second key factor is the prioritization of profitability over sales growth for the BEC business unit. BZUN noted at its first quarter results briefing that it has a "commitment to reduce sales of low profit categories" for BEC. One of BEC's low-margin product categories is electronics, whose product sales contribution as a percentage of overall sales decreased from 7% for Q1 2022 to 2% in Q1 2023. In absolute terms, BEC's product sales derived from electronics plunged by -67% YoY in the first quarter of this year.

Baozun Brand Management Business Could Possibly Achieve Breakeven Earlier

BZUN describes Baozun Brand Management or BBM as a business focused on "holistic brand management" that "mainly comprises of product sales revenue of Gap Shanghai, a business we acquired on February 1, 2023" in its first quarter results release.

The company had previously guided for the BBM business line to be "breakeven from both profits and also cash flow perspective by 2025" at its FY 2022 earnings call in March this year.

There are indicators suggesting that Baozun's BBM business unit could be able to become profitable and cash flow positive in a shorter than expected period of time than what the company is currently targeting (i.e. 2025).

In the company's May 2023 investor presentation, Baozun highlighted that the company registered a "significantly narrowed operating loss for BBM on comparable basis" in the first quarter of the current year. The company didn't disclose expenses for the BBM segment separately in Q1 2023, but it plans to offer more detailed disclosures relating to BBM in subsequent quarters.

At its Q1 2023 results call, BZUN also revealed that it was able to "improve our gross margin (for BBM) faster than we had anticipated", because "consumers have accepted a higher price points and less discounts much faster." In other words, BBM's actual gross profit margin for Q1 2023 has exceeded the company's expectations, which puts this business unit in a good position to deliver positive earnings and cash flow before 2025.

Looking ahead, BZUN still has levers to drive a further improvement in the profitability of BBM. The company mentioned at its first quarter results briefing that "new products", "new marketing", and "the new store concept" have yet to be implemented for the brick & mortar retail stores it bought as part of the Gap Shanghai deal mentioned above.

It's Too Early To Judge The New Baozun International Business

BZUN noted in its May 2023 investor presentation that the new Baozun International or BZI business is set up with the aim to "replicate China e-commerce insights to explore overseas markets" like "Southeast Asia" and "Europe." In a nutshell, BZI is BZUN's international business arm.

On July 5, 2023, BZUN announced that it has entered into "a strategic partnership with Branded Lifestyle Asia (BLA), a leading premium fashion retailer", and the collaboration has already begun with the "launch of online stores for (BLA's brands) Little Ground Singapore and Roots Taiwan." This represents the first step that BZUN has taken to grow BZI's business operations.

Branded Lifestyle Asia is already an established retailer in Taiwan and South Korea with hundreds of outlets , and BLA has the ambitions to venture into the Southeast Asian retail market by leveraging on the partnership with BZUN's BZI business. According to a June 19, 2023 research report published by Chinese broker CMB International detailing takeaways from BZUN management meetings, BZI will open new offices in key Southeast Asian countries, "Indonesia, Vietnam, and Thailand" in the second half of this year.

Expanding into overseas markets has almost always been an uphill task for most companies, given that there are usually competitive advantages enjoyed by domestic businesses that can't be replicated in foreign countries. As such, it is premature to determine if BZUN will be successful outside of China with BZI.

Concluding Thoughts

BZUN is still in transition mode with a mixed outlook, which warrants a Hold investment rating. On one hand, the company is trying its best to improve the profitability of BEC by reducing sales contribution from low-margin product categories. On the other hand, BZUN is attempting to turn around the fortunes of the newly acquired Gap Shanghai business, which is under its BBM segment. Separately, the company has the intention to venture into overseas markets with the establishment of the new BZI unit.

For further details see: