My rating for Baozun Inc.’s (NASDAQ:BZUN) [9991:HK] stock is a Hold.
I previously previewed Baozun’s Q4 2022 financial results with my February 24, 2023 article for the company. In this latest write-up, I discuss about the expectations relating to BZUN’s upcoming Q1 2023 earnings and its corporate restructuring plan.
There is a low likelihood of Baozun reporting above-expectations first quarter results towards the end of this month, as I deem the current consensus estimates for BZUN to be realistic. Separately, Baozun still needs a couple of years to reignite its top line growth with the company’s corporate restructuring plan, so it is too early to turn bullish on BZUN. I continue to assign a Hold rating to Baozun.
The Analysts’ Consensus Financial Forecasts For BZUN
Baozun is expected to reveal the company’s financial performance for the first quarter of 2023 in late May. The sell-side sees BZUN delivering a poor set of results for Q1 2023.
Revenue for BZUN is projected to decrease from RMB1,984 million for Q1 2022 to RMB1,893 million in Q1 2023 as per S&P Capital IQ’s consensus financial data. The expected -4.6% top line contraction for Q1 2023 will represent an improvement as compared to Baozun’s YoY sales decline of -8.3% and -19.5% for Q3 2022 and Q4 2022, respectively.
But Q1 2023 will be the sixth consecutive quarter of revenue contraction for BZUN assuming that the analysts are right. Furthermore, Baozun’s consensus Q1 2023 top line estimate means that the company’s revenue will drop by -25.9% in QoQ terms.
The market expects Baozun to reverse from a normalized net profit attributable to shareholders of RMB138 million in the final quarter of the prior year to generate a non-GAAP adjusted net loss of -RMB13 million for the first quarter of the current year.
My Bet Is On BZUN Reporting In-Line Q1 Results
In my opinion, the sell-side analysts’ consensus Q1 2023 financial projections for Baozun are realistic, which implies that I don’t expect any positive surprises.
Earlier, Baozun announced on January 31 that it had concluded the purchase of apparel retailer Gap’s businesses in China (referred to as Gap Greater China), which will be integrated into BZUN’s existing brand management business. The consolidation of Gap Greater China into BZUN’s financials has a significant impact on the company’s Q1 2023 financial numbers.
As mentioned in the preceding section, BZUN’s YoY top line decline is expected to narrow from -19.5% in Q4 2022 to -4.6% for Q1 2023, and this is largely due to revenue contribution from the recently consolidated Gap Greater China.
At Baozun’s November 9, 2022 investor briefing (audio recording and transcript not publicly available), BZUN disclosed that Gap Greater China’s FY 2022 revenue was $280 million (RMB1.9 billion), and guided for Gap Greater China contributing $350 million (RMB2.4 billion) of sales for FY 2023. As such, Baozun could potentially recognize an estimated RMB400 million or two months’ worth of revenue from Gap Greater China in Q1 2023.
Even though BZUN has benefited from Gap Greater China’s incremental top line contribution for the first quarter, Baozun still needs more time to recover from the negative impact of the COVID-19 pandemic following China’s reopening and pivot away from the COVID-zero policy in late-2022. As such, it is reasonable that BZUN’s Q1 2023 sales will still be lower on both a YoY and QoQ basis.
Baozun noted at the company’s Q4 2022 results call on March 22, 2023 that it has put in place a number of “cost optimization initiatives, including centralizing our operating capabilities, rationalizing incentives and consolidating office footprint.” But the positive effects of expense control measures are more than offset by the negatives associated with the consolidation of Gap Greater China.
At its most recent quarterly results briefing in late March, BZUN mentioned that its goal is to “narrow down the losses of the Gap Greater China” this year and target positive earnings by 2025. Therefore, the consolidation of the loss-making Gap Greater China since the start of February implies that Baozun will be in the red for 2023.
Corporate Restructuring Could Potentially Lead To Positive Valuation Re-Rating In The Long Term
In the company’s FY 2022 results press release, Baozun disclosed that the it will undergo a corporate restructuring exercise where BZUN is organized into “three major business lines — Baozun e-Commerce, Baozun Brand Management and Baozun International.”
BZUN currently trades at 0.19 times consensus forward next twelve months’ price-to-sales and 0.55 times consensus forward next twelve months’ price-to-tangible book value as per S&P Capital IQ’s valuation data. Baozun’s depressed valuations are attributable to the fact that the company is expected to suffer from significant revenue growth deceleration.
Baozun has consistently delivered revenue growth rates (in local currency terms) of above +20% for every year in the period between FY 2015 and FY 2020. But the current sell-side’s consensus financial estimates (source: S&P Capital IQ) point to an expected FY 2023-2026 top line CAGR of +11.5% for BZUN, as the company’s core e-Commerce business is now at the mature stage of its corporate lifecycle. Going forward, the other businesses, Baozun Brand Management and Baozun International, will play a big role in reigniting the company’s top line growth.
However, Baozun will have to bear with short-term pain before the company can enjoy the long-term gains associated with corporate restructuring. As indicated earlier, Gap Greater China, which is now part of Baozun Brand Management, is only expected to turn profitable in FY 2025. Separately, BZUN has referred to Baozun International (the company’s overseas operations) as “a longer term opportunity that we will patiently invest in and explore” at its most recent Q4 2022 earnings briefing.
Baozun’s shares are rated as a Hold. The short-term outlook for BZUN is unfavorable, considering the expectations for its Q1 2023 results and the drag on Baozun’s bottom line from the consolidation of the loss-making Gap Greater China business. In the long term, BZUN’s brand management business (Baozun Brand Management) and foreign operations (Baozun International) are expected to throw up new growth opportunities for the company. Taking into account both the bleak near-term prospects and the growth potential of new businesses in the long run, a Hold rating is appropriate.
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