Final Trade Detail
- The escalating China-U.S. trade war has weighed on China ADRs in recent months.
- China has a history of prohibiting international competition on its home turf. With Baozun firmly positioned as a leader in its space, fewer competitive threats are likely to emerge.
- Baozun's Gross Merchandise Volume (GMV) increased 68.8% Y/Y. This impressive growth is expected to continue for several quarters.
The escalating U.S-China trade war has detracted from the fundamentals of China’s high growth technology companies. Take China Internet behemoth, Tencent Holdings, Ltd. The company has lost nearly $150 billion in market value since January. While we’re quick to recommend Tencent and several other Chinese Internet companies, today we’re focused on what many call the Shopify of China – Baozun (BZUN).
Baozun is China’s leading eCommerce solutions provider. They support all aspects of the E-commerce value chain, including IT solutions, store operations, digital marketing, customer services, warehousing and fulfillment. The company supports several industries and works with leading brands like Nike, Huawei, Microsoft, Samsung, Goodyear, Phillips and many more.
Why We Like Baozun
One key metric we’ve followed closely in recent quarters is Baozun’s Gross Merchandise Volume (GMV). GMV is the total volume of sales across Baozun’s platform. In its most recent quarter the company announced GMV growth of 68.8% Y/Y while adding 22 new retailers to its platform. As a comparison, Amazon grew sales volume by roughly 30% over the same period.
We should note that slower revenue growth is expected in coming quarters. Baozun’s shift from an inventory-based model to a service-based business model will impact revenue growth, but ultimately improve gross margins and EBITDA.
Baozun is in a strong position to benefit from China’s rapid shift to eCommerce. China already has over 500 million online shoppers, with total sales topping $1 trillion in 2017. China is the biggest eCommerce market in the world and, according to Goldman Sachs, sales should reach $1.7 trillion by 2020. Here’s a diagram outlining the change in China’s middle class.
Baozun is also backed by the top e-commerce company in China, Alibaba (BABA), and Japan’s leading investment bank, SoftBank.
Not only is Baozun integrated into Alibaba’s TMall marketplaces, but it has also partnered with Alibaba’s rival JD.com (JD) as well as stores on Tencent’s (TCEHY) WeChat, the leading messaging app in China.
Baozun is a fantastic additional to any long-term portfolio. The company has a strong position in a high-growth industry in the largest economy in the world. Let’s take advantage of the depressed share price while it’s still possible.
We recommend accumulating shares of Baozun between $40 and $48 per share. Please note that Baozun has a history of volatility when it reports quarterly earnings. We do not recommend this trade if you cannot withstand a 40-50% drawdown or have a short-term investment horizon.