SHU Portfolio: Baozun Can Afford To Invest In Its Future

May 18, 2018 3:16 AM ETBaozun Inc. (BZUN)21 Comments

Summary

  • Investors seem to worry that management's intention to invest more will come at the expense of margins and profits.
  • The growth of the company and the higher margins, which are the result of the change in business model, allow the company to invest and still expand margins.
  • Q1 results demonstrated that once again and the shares exploded higher.
  • The company, selling at just 4x sales, is still ridiculously cheap, given it is already profitable, has no debt, no cash flow problem and is expanding margins.

Well, we argued not all that long ago that if we were forced to holding just one stock, it would be the leading Chinese brand e-commerce service provider Baozun (NASDAQ:BZUN).

One reason for that is simply this:

But that guarantees exactly nothing of course, so there are quite a few other reasons:

  • Tailwinds from the growth of Chinese middle classes, retail sales and the rising online part of that.
  • A change in business model from the distribution to the non-distribution model which, while optically slowing revenue growth, commands higher margins.
  • The platform business model which has ample opportunities for producing economies of scale, scope and network economies, as well as increasing the value of the platform and its stickiness in the process.
  • The company has ample runway to keep on growing, it can add new brands, profit from the growth of the brands it already has as clients, add additional services, expand to other markets, etc.
  • Given the company's growth far in excess of market growth, execution is very good.
  • Perhaps most of all, we really think the shares are not trading on the multiples they deserve. We'll get back to that below.
  • A possible boost from a possible Chinese listing. That's two 'possibles' but the odds are fairly good on both as the Chinese authorities have woken up to the fact that mainland Chinese investors cannot invest in some of their biggest growth stocks.
  • The company is already profitable and doesn't seem to have a cash problem.

Risks

In previous articles we have concentrated on the upside, investors should also consider what can go wrong. Here are what we see as the main risks:

  • The shares tend to be very volatile, especially around earnings. Swings of 20% in a matter of days are no exception. One disappointing quarter can knock the shares
ChartBZUN Shares Outstanding data by YCharts

ChartBZUN EV to Revenues (TTM) data by YCharts

This article was written by

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Finding the next Roku while navigating the high-risk, high reward landscape

I'm a retired academic with three decades of experience in the financial markets.

Providing a marketplace service Shareholdersunite Portfolio

Finding the next Roku while navigating the high-risk, high reward landscape.

Looking to find small companies with multi-bagger potential whilst mitigating the risks through a portfolio approach.

Disclosure: I am/we are long BZUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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