William_Potter
Elevator Pitch
I have a Hold investment rating assigned to Baozun Inc.’s (NASDAQ:BZUN) [9991:HK] shares. In its press releases, BZUN describes itself as “the leader and a pioneer in the brand e-commerce service industry in China” which offers “integrated one-stop solutions” that “address all core aspects of the e-commerce operations.”
My view of Baozun as a potential investment candidate is mixed, which supports my Hold rating for the stock. On the positive side of things, ADR delisting is now less of a concern for BZUN. The company is expected to be a dual-primary listed company by November assuming its primary listing conversion application is successful; and there has been some progress made in tackling the issue of audit paper access for Chinese companies listed in the US. On the negative side of things, Baozun’s Q2 2022 net income was only 1% of what the company’s quarterly earnings were a year ago, and this was way below what the market hoped for.
Second-Quarter Earnings Fell Short Of Expectations
Baozun’s financial performance in the most recent quarter was poor and below what the market had anticipated. It wasn’t a surprise that BZUN’s share price dropped by -8% from $8.43 as of August 22, 2022 to $7.79 as of August 23, 2022 after it released its Q2 2022 results on August 23 before the market opened.
BZUN’s non-GAAP adjusted net profit attributable to shareholders fell by -99% YoY from RMB150.8 million in Q2 2021 to RMB1.3 million in the most recent quarter. According to the sell-side’s consensus financial estimates sourced from S&P Capital IQ, analysts were expecting Baozun to generate a much higher bottom line of RMB33 million for Q2 2022. Instead, Baozun was only marginally profitable in the recent quarter.
The company’s top line contracted by -8% YoY from RMB2,304 million in the second quarter of the previous year to RMB2,122 million in Q2 2022. As a comparison, Baozun’s revenue grew by +7% YoY in Q2 2021, and it suffered from relatively milder sales declines of -5% YoY and -2% YoY for Q4 2021 and Q1 2022, respectively.
On a segmental basis, Baozun’s product sales revenue decreased by -29% YoY to RMB694 million in Q2 2022, while its services revenue increased by +7% YoY to RMB1,428 million in the recent quarter.
BZUN mentioned at its Q2 2022 earnings call on August 23, 2022 that the drop in second-quarter product sales revenue was mainly the result of “the outbreak of COVID and subsequent strict lockdown in April and May” 2022 in mainland China and weak “consumer sentiment.”
For BZUN’s services revenue segment, a +20% YoY growth in warehousing & fulfillment revenue to RMB611 million in Q2 2022 was the key driver, but this was largely contributed by incremental revenue from new acquisitions. Baozun previously revealed at its Q3 2021 investor briefing on November 30, 2021 that it had “two new acquired warehouse and supply chain businesses”, namely “BolTone and Baobida.”
As highlighted earlier, Baozun’s bottom line took an even greater hit (as compared to its top line) in the second quarter of 2022. The -99% YoY drop in BZUN’s non-GAAP net income for Q2 2022 was mainly driven by the increase in fulfillment costs and sales & marketing expenses.
Fulfillment expenses for BZUN jumped by +29% YoY from RMB560 million in Q2 2021 to RMB725 million in Q2 2022, as a result of the increase in costs associated with the BolTone and Baobida acquisitions referred to earlier. The company’s sales & marketing costs also increased by +3% YoY to RMB668 million in the recent quarter, and Baozun attributed this to “increased strategic business development staff to drive business growth” in its Q2 2022 earnings presentation.
In summary, Baozun’s Q2 2022 financial results were disappointing. Both its top line and bottom line were lower on a YoY basis, and there is a huge gap between investors’ expectations as per consensus numbers and the company’s actual performance.
Delisting Risk Continues To Draw Attention
Moving beyond the recent quarterly results, the delisting risk for Chinese ADRs (American Depositary Receipts) is a key issue that Baozun’s investors are watching closely.
In the past week, there has been positive news flow for both Chinese ADRs as a group and Baozun specifically in relation to the risk of delisting. This explains why BZUN’s shares rose by +10% from $7.79 as of August 23, 2022 to close at $8.53 at the end of the August 26, 2022 trading day, even though its Q2 financial performance wasn’t good.
On August 26, 2022, the Public Company Accounting Oversight Board or PCAOB issued a media release highlighting that the China Securities Regulatory Commission or CSRC has agreed to allow “inspectors and investigators (from PCAOB) to view complete audit work papers” of US-listed Chinese companies. This will increase the chances of Chinese ADRs staying listed in the US.
Separately, BZUN announced recently on August 23, 2022 that it “made an application for a voluntary conversion of its secondary listing status to a primary listing status on the Main Board of The Stock Exchange of Hong Kong.” Baozun has guided at the company’s Q2 2022 investor briefing that the conversion should take place by the beginning of November this year. Baozun’s shares were first listed on NASDAQ in May 2015, and the company subsequently did a secondary listing on the Hong Kong Stock Exchange in September 2020.
Assuming that Chinese companies are still being required to delist from the US in the future with the audit access issue remaining unresolved, shareholders of the US-listed shares of Baozun have the option to convert their ADRs into the company’s shares traded in Hong Kong. The primary listing conversion for Baozun is also significant, as it makes the company’s stock eligible for inclusion in the “China-Hong Kong Stock Connect“, as highlighted in an August 10, 2022 Reuters news article. If and when Baozun’s Hong Kong-listed shares are included in the “China-Hong Kong Stock Connect” (pool of Hong Kong-listed names that investors from Mainland Chinese investors can trade in), the company will be able to gain access to the Mainland Chinese investor base, which will help to make up for the potential loss of its US-listed status and US investor base in the future to some extent.
Concluding Thoughts
Baozun’s stock is rated as a Hold. The company’s actual earnings for the second quarter of the current year turned out to be significantly lower than what the sell-side analysts were forecasting. On the flip side, the delisting risk for BZUN has been reduced in view of recent positive developments.
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