Jumei International, The Beauty Products Retailer In China

May.16.14 | About: Jumei International (JMEI)

Summary

Jumei is the top online retailer of beauty products in China, with a market share of 20%.

Jumei's business model consists of three major segments: curated sales, flash sales, and online shopping mall.

Should fraud or health issues arise from the products that Jumei sells, then the brand name would be negatively impacted.

Over the past year, in 2013, Jumei's net revenues totaled $483 million USD, net income totaled $25 million, and net cash from operating activities totaled $27 million.

Jumei International, The Beauty Products Retailer In China

Jumei International (NYSE:JMEI) will be listing on May 16, 2014 at the New York Stock Exchange. The company is planning to issue 9.5 million Class A ordinary shares at a price range of $19.5-21.5 USD per ADS. The net proceeds from this offering, totaling more than $300 million USD, will be used by the company to grow its logistics network, enhance its marketing efforts in order to increase consumer brand awareness, and to expand its existing product offering. Jumei is the top online retailer of beauty products in China, with a market share of 20%. The company adapted to the rapidly-growing trend in e-commerce by establishing its e-commerce website (www.jumei.com) in March 2010, and has been expanding at an impressive pace ever since. Currently, Jumei is one of the largest retailers in China for beauty products (in terms of gross merchandising volume), along with Sephora and Watsons.

The Chinese beauty products market. Since 2010, the Chinese retail market for beauty products has been growing at an attractive annual rate of 17.5%, and is expected to grow at a 14.3% CAGR over the next five years. The online space, on the other hand, presents an even greater growth opportunity, as China has become the largest internet community in the world, with an internet population that is 2.5 times that of the U.S.. Since 2010, the Chinese online retail sales market has been growing at a CAGR of 54.4%, and is expected to grow at a CAGR of 24% over the next five years. In addition, China's per-capita annual disposable income is expected to grow at a CAGR of 13.5% over the next five years. The above, combined with an ever-more appearance conscious Chinese consumers, gives Jumei great potential for future growth.

Jumei's business model. Jumei's business model consists of three major segments: curated sales, flash sales, and online shopping mall. Under curated sales, the company selects a variety of branded products that it thinks will be of high interest to the consumer, and sells these products at discounted prices for a limited time. Jumei's home page is an example of a curated sales model; the company can also use this channel to recommend or to introduce new product brands to the consumer. The flash sales model, on the other hand, applies mostly to apparel and lifestyle products, and yet also provides customers with a variety of discounted items for a limited time (on a page that is separate from that of curated sales). Finally, Jumei's shopping mall, similar to many other e-commerce websites, allows customers to browse a selection of cosmetic products and to purchase them at competitive prices.

Mobile experience. The growing trend of transitioning from desktop to mobile cannot be ignored, especially for businesses with an e-commerce focus, such as Jumei. The company responds to this rising trend by investing substantial resources in building a mobile platform designed to provide users with an enhanced shopping experience. Customers can use Jumei's mobile platform to browse recommended products and, in particular the curated sales products, which can be viewed as soon as the user opens the mobile application. The company also uses the platform to push promotions and sales events to the end consumer while simultaneously obtaining information regarding the purchasing and browsing behavior of users. The application is available on both Android and iOS platforms.

Ongoing concerns. Cosmetics are applied directly onto human skin, which may raise a series of health and safety issues. In the United States, when a security incident occurs, both the provider and the insurance companies are responsible for providing compensation. Jumei conducts proper due diligence on its suppliers and ensures that the products supplied are authentic. Should fraud or health issues arise from the products that Jumei sells, then the brand name would be negatively impacted.

Valuation. Over the past year, in 2013, Jumei's net revenues totaled $483 million USD, net income totaled $25 million, and net cash from operating activities totaled $27 million. Going forward, Goldman Sachs estimates that 2014 Non-GAAP net income will reach 530 million RMB (translating to roughly $85 million USD), with a market cap of $3.25 billion USD. This implies a forward 2014 price-to-earnings ratio of 38 times. If you compare this metric for Jumei to other online retailers (below), you can see that this IPO is coming at attractive valuations and given the structural tailwinds of the business that they are in, should provide for good returns.

Ticker

2014 P/E

VIPS US

69x

AMZN US

257x

ASC LN

64x

JMEI US

38x

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JMEI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Business relationship disclosure: The article has been written by a senior analyst at Central Asset Investments. Central Asset Investments is not receiving compensation for it (other than from Seeking Alpha). Central Asset Investments has no business relationship with any company whose stock is mentioned in this article. This article provides general information only. It does not constitute an offer to sell or the solicitation of an offer to buy any interests in any securities, investment product or fund. Investor should consult their own financial advisors prior to making any investment decisions and should not rely solely on these statements or any information presented in order to make such investment decision. Investors should verify the accuracy of any information mentioned in this article. CAI may or may not have an interest in the companies mentioned in this article.