Baozun Inc. — FY2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone 2016 fourth-quarter earnings filing. Financial statements are prepared under U.S. GAAP and audited by Deloitte, which issued unqualified opinions on the financial statements and internal controls. RMB amounts below are reported in millions unless stated otherwise; U.S. dollar translations are for convenience.
Business context and key financial metrics
Baozun provides e-commerce services to brands in China, including store operations, IT, marketing, customer service, warehousing and fulfillment. It earns product-sales revenue under its distribution model and service revenue under consignment and service-fee models. Management has been shifting toward the latter models, which generally have higher operating margins but lower revenue as a percentage of GMV.
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Total net revenue | RMB3,390.3 million (US$488.3 million) | RMB2,598.4 million | Up 30.5% |
| Product-sales revenue | RMB2,176.4 million | RMB1,940.6 million | Up 12.2%; 64.2% of revenue, versus 74.7% |
| Services revenue | RMB1,213.8 million | RMB657.8 million | Up 84.5%; 35.8% of revenue, versus 25.3% |
| GMV | RMB11,264.8 million | RMB6,735.3 million | Up 67.2%; non-distribution GMV rose to RMB8,730.7 million |
| Operating income | RMB90.1 million | RMB8.5 million | Operating margin 2.7%, versus 0.3% |
| Net income | RMB85.4 million (US$12.3 million) | RMB22.6 million | Up 277.6%; net margin about 2.5% |
| Net income attributable to ordinary shareholders | RMB86.6 million; RMB0.58 basic EPS | Net loss RMB2.7 million; loss per share RMB0.03 | Basic diluted EPS was RMB0.53; each ADS represents three Class A shares |
| Non-GAAP net income | RMB119.6 million | RMB47.8 million | Excludes share-based compensation; not a GAAP substitute |
| Operating cash flow | RMB13.4 million | RMB2.2 million | Positive but modest relative to net income |
| Cash and cash equivalents | RMB917.3 million (US$132.1 million) | RMB787.3 million | Restricted cash was RMB50.8 million |
| Total liabilities | RMB796.3 million | RMB654.7 million | No short-term borrowings outstanding at year-end |
Operating expenses were RMB3,300.2 million, up 27.4%. Fulfillment expense rose 66.3% to RMB540.9 million and sales and marketing expense rose 63.3% to RMB658.8 million. Cost of products was RMB1,921.9 million; it represented 88.3% of product-sales revenue, compared with 89.4% in 2015. The filing does not provide a consolidated gross-profit measure that includes all direct fulfillment costs.
At year-end, accounts receivable was RMB624.8 million, up from RMB364.8 million, and receivable days increased to 53 from 42. Inventories were RMB312.1 million, down from RMB334.3 million; inventory days were 62 versus 61. Accounts payable was RMB526.5 million and payable days increased to 94 from 80. The company reported RMB228.4 million available under one-year credit facilities of RMB353.4 million. FY2016 investing cash outflow was RMB119.4 million and financing cash inflow was RMB210.7 million. Capital expenditures were RMB92.2 million.
Material changes versus the prior comparable period
- Services became a larger and faster-growing revenue source, while product sales grew more slowly. Revenue as a percentage of GMV declined to 30.1% from 38.6%, which management attributed to the increased share of services revenue.
- Brand e-commerce segment revenue rose 33.1% to RMB3,365.6 million and operating income increased to RMB143.8 million from RMB63.7 million. Maikefeng revenue fell 64.4% to RMB24.7 million as the platform transitioned from proprietary retail to an open marketplace; its operating loss narrowed slightly to RMB53.7 million.
- Higher fulfillment and marketing spending reflected greater GMV, order volumes, courier use, warehouse capacity and advertising on Tmall. Operating margin improved despite those expense increases.
- Accounts receivable growth and weaker cash conversion merit attention: a RMB260.5 million increase in receivables was a major offset to FY2016 operating cash generation.
- FY2016 income tax expense was RMB16.8 million, compared with a RMB6.0 million tax benefit in 2015. The prior-year result included a reversal of deferred-tax valuation allowance. The RMB9.7 million gain on partial disposal of Automoney in 2015 did not recur; the 2015 equity-method investment loss also did not recur in 2016.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management said existing cash, operating cash flow and credit facilities should cover anticipated needs for at least 12 months, while noting that changed conditions or investment opportunities could require additional funding.
- Management identified brand-partner retention, GMV growth, marketplace cooperation, technology and fulfillment investment, business-model mix, cost control and working-capital management as key factors affecting results. It expects fulfillment, sales and marketing, technology and general and administrative costs to rise as the business expands.
- Revenue is seasonal: activity is generally weaker during Chinese New Year and stronger in the fourth quarter, particularly around Singles Day. Peak-period demand creates risks of system disruption, inventory shortages or excess inventory.
- Customer and channel concentration are significant. The top three brand partners represented approximately 19.8%, 18.9% and 12.4% of FY2016 revenue, respectively; the top ten together accounted for approximately 73.8%. A substantial majority of GMV was generated through Tmall.
- Maikefeng recorded an operating loss of RMB53.7 million in 2016. Its marketplace model brings additional seller-quality, delivery, consumer-protection and potential liability risks.
- Regulatory and structural risks include uncertainty around the PRC VIE arrangements that support Maikefeng and its ICP license, evolving licensing requirements, and the Cybersecurity Law taking effect June 1, 2017. The VIE contributed 3.0% of consolidated revenue in 2016, but is strategically relevant to the platform business.
- Other material risks include dependence on brand partners and third-party platforms, competition, data security, labor-dispatch compliance, foreign-exchange controls and RMB volatility. Baozun reported it did not maintain business-interruption or product-liability insurance. It also disclosed no material litigation proceedings as of the report date.
- Unusual and capital items: the December 2016 follow-on offering generated approximately US$33.1 million net proceeds, not yet used by the report date. The company repurchased shares for RMB45.3 million in 2016. It also reported RMB34.2 million of share-based compensation, which is excluded from its non-GAAP measures, and an April 2017 warehouse-property acquisition commitment of RMB254.0 million.
Most important facts for investors to verify
- Whether services-led GMV and revenue growth can continue while preserving or improving operating margins.
- Whether rising receivables and 53-day collection periods convert into cash, and how customer concentration affects collection risk.
- How Maikefeng’s transition affects future revenue, operating losses and obligations to third-party sellers and consumers.
- Exposure to Tmall and a small group of large brand partners, including renewal terms and the availability of replacement partners.
- Compliance with evolving PRC licensing, cybersecurity and labor rules, and enforceability of the VIE contractual arrangements.
- Use of follow-on offering proceeds, fulfillment and warehouse investment needs, and the impact of share-based compensation and dilution.