BZUN - Baozun: Turning Bullish On Positive Developments (Rating Upgrade)

2023-11-13 09:38:02 ET

Summary

• Baozun's key corporate developments include a new partnership with Authentic Brands Group, the setting up of new live-streaming studios, and the transition to a more diversified channel mix.
• BZUN is valued by the market at a 0.13 price-to-sales multiple, even though its expected revenue CAGR in the coming years is a respectable high single-digit percentage.
• I raise my rating for BZUN from a Hold to a Buy, after considering a number of positive developments for the company.

Elevator Pitch

My investment rating for Baozun Inc. ( BZUN ) [9991:HK] is a Buy now.

I previously analyzed the prospects for Baozun's three key business segments in my August 8, 2023 write-up . In this latest update, I outline positive developments for BZUN.

I view BZUN's new live streaming centers, new partnership with a leading brand management company, and the diversification of channel mix, as key positives for the company. Baozun's current valuation metrics suggest that favorable developments for the company haven't been priced in, which explains why I have upgraded my rating for BZUN to a Buy.

New Live Streaming Studios

Baozun has boosted the company's live streaming e-commerce capabilities with the establishment of new live streaming studios in the second half of this year. These studios are located in five major cities in China, including Shanghai which is the company's headquarters.

BZUN's New Live Streaming Centers

The total area occupied by BZUN's new live streaming centers has exceeded 10,000 square meters. Baozun also disclosed on its corporate website that the company has more than 300 employees working at its digital marketing department, including 100 of them who have relevant experience in either advertising or e-commerce, to support its live streaming business operations. In addition, BZUN has previously created a new brand known as "ZhangJin" (literally translated as "Taking Charge Of The Lens") that is focused on live streaming activities on China's leading short form video platform known as Douyin as per a news report published by Chinese finance news portal SINA .

The Top Rankings For Baozun's Live Streaming Shows

Baozun's investments in physical space and talent have already paid off to some extent, as some of its past live streams attained the "top spot" in specific categories like "outdoor sports" as indicated in the picture above.

New Partnership Adds Leading British Outdoor Brand

On its website , British brand Hunter highlights that it was first created "in Scotland in 1856" and best known for its "durable rubber products." According to a June 24, 2023 Financial Times article , brand management company Authentic Brands Group acquired Hunter this year with the aim of bringing "the upmarket wellington brand global" by leveraging on a "new love affair with Britain across the US and Asia." Baozun is now in a good position to benefit from the Hunter brand's expansion in the Asian region.

BZUN has established a joint venture with Authentic Brands Group that will have ownership of the Hunter brand's intellectual property rights for Southeast Asia and Greater China. Baozun was able to have the opportunity to buy and own a 51% interest in this joint venture, thanks to its partnership with Authentic Brands Group.

BZUN's Collaboration With Authentic Brands Group

The Alliance Between Baozun And Authentic Brands Group Adds Outdoor Brand Hunter To BZUN's Portfolio

BZUN's addition of Authentic Brands Group as a strategic partner isn't just significant with respect to the chance to own a stake in the Hunter brand's IP in Asia. In its disclosures , Authentic Brands Group revealed that it has a "portfolio of more than 50" brands that generate "$29 billion in global annual retail sales" in aggregate.

It would be an understatement to refer to Authentic Brands Group as a key partner for Baozun that will expand its future growth opportunities. For example, BZUN's Baozun Brand Management or BBM business only has a handful of brands (less than 10 versus over 50 for Authentic Brands Group) in its portfolio as noted in my earlier February 24, 2023 article . Going forward, BZUN can consider either buying or licensing brands from Authentic Brands Group to grow its BBM business' portfolio.

Diversifying Channel Mix

Baozun was too reliant on Alibaba's ( BABA ) Tmall as a key channel in the past, which is not surprising considering BABA's 14.9% equity stake in BZUN.

But BZUN's channel mix has been evolving in recent times. As indicated in BZUN's investor presentation , Baozun used to have Tmall contribute as much as three quarters of its e-commerce GMV (Gross Merchandise Value) in the past, but Tmall's e-commerce GMV contribution as a proportion of total e-commerce GMV has declined to roughly two-thirds now.

BZUN has been actively exploring other e-commerce channels apart from Tmall, including but not limited to the Douyin live streaming platform, the e-commerce platforms for JD.com ( JD ), Tencent's ( OTCPK:TCEHY ) ( OTCPK:TCTZF ) WeChat social messaging app and Vipshop ( VIPS ), Chinese lifestyle platform Xiaohongshu. It is realistic to expect Baozun's e-commerce channel mix to become more diversified over time, which will reduce its concentration risks associated with Tmall.

Valuations

I hold the view that the positive corporate developments outlined in the earlier sections of this article will have a favorable impact on Baozun's financial performance in the future, but this doesn't appear to have been priced into BZUN's valuations.

The market currently values Baozun at a depressed consensus forward next twelve months' price-to-revenue multiple of just 0.13 times (source: S&P Capital IQ ). As a comparison, BZUN's consensus FY 2024-2026 top line CAGR projection is a reasonably decent +6.9%.

Similarly, BZUN trades at 11.2 times consensus forward next twelve months' normalized P/E now as per S&P Capital IQ data. In contrast, the market's consensus normalized EPS CAGR forecast for Baozun during the period between FY 2024 and FY 2026 is an impressive +36.0%.

A comparison of Baozun's key valuation multiples with the company's key forward-looking financial metrics indicates that BZUN is undervalued.

Closing Thoughts

I am of the opinion that Baozun should be rated as a Buy rather than a Hold. This is because various positive developments for BZUN aren't reflected in the company's valuations.

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