Baozun Inc. — 2018 Annual Report Summary
Period: Fiscal year ended December 31, 2018. The requested “2018 Q4” period is not presented as a standalone quarter in this Form 20-F; the figures below are annual unless stated otherwise. Financial statements are prepared under U.S. GAAP. Amounts are in RMB unless otherwise noted.
Business context
Baozun provides brand e-commerce services in China, including store operations, technology, marketing, customer service, warehousing and fulfillment, and also sells products under a distribution model. At year-end it served 185 brand partners. Total GMV was RMB29.426 billion (US$4.280 billion).
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total net revenue | RMB5.393bn (US$784.4m) | RMB4.149bn | +30.0% |
| Product sales revenue | RMB2.517bn | RMB2.258bn | +11.5% |
| Services revenue | RMB2.876bn | RMB1.891bn | +52.1% |
| Operating income / margin | RMB355.8m / 6.6% | RMB256.3m / 6.2% | Income +38.8% |
| Net income attributable to Baozun shareholders | RMB269.7m (US$39.2m); 5.0% margin | RMB208.9m; 5.0% margin | +29.1% |
| Non-GAAP net income | RMB346.8m (US$50.4m) | RMB267.9m | +29.4% |
| Cash flow from operations | (RMB98.5m) | (RMB169.1m) | Outflow narrowed |
GMV grew 54.0% year over year. Non-distribution GMV rose to RMB26.524bn, while distribution GMV was RMB2.902bn; distribution represented 9.9% of GMV, down from 13.7%. Services accounted for 53.3% of revenue, up from 45.6%. Revenue as a percentage of GMV declined to 18.3% from 21.7%, which management attributed to the higher services mix.
Operating expenses increased 29.4% to RMB5.037bn. Fulfillment and sales and marketing costs rose 54.3% and 47.0%, respectively; technology and content costs rose 91.2% as investment in the innovation center and technology staff increased. Cost of products rose 6.1%, and declined as a share of product sales revenue to 80.8% from 84.9%.
At December 31, 2018, Baozun had cash and cash equivalents of RMB457.3m, restricted cash of RMB125.5m, and short-term investments of RMB56.5m. Current assets were RMB3.252bn versus current liabilities of RMB1.749bn. Short-term borrowings were RMB436.2m and long-term borrowings RMB68.8m; the short-term loans carried a weighted average effective rate of 4.75%. The company reported RMB579.8m of remaining availability under bank facilities. It said cash, operating cash flows and facilities should cover anticipated needs for at least 12 months.
Working-capital balances expanded: accounts receivable rose to RMB1.548bn, with receivable days increasing to 89 from 75; inventories rose to RMB650.3m, with inventory days at 93 versus 66. Accounts payable increased to RMB886.3m, and payable days rose to 132 from 106.
Material changes, outlook and risks
- Services growth and the shift of a major electronics brand partner from distribution to consignment drove the changing revenue mix and improved product-cost ratio.
- Operating cash flow remained negative despite higher earnings. Management attributed the 2018 outflow mainly to higher receivables, inventory, supplier advances and prepayments, partly offset by higher payables.
- Unusual or notable items included RMB9.0m of investment impairment, RMB6.0m of foreign-exchange loss, RMB13.1m of interest expense, and RMB22.7m of other operating income, primarily government subsidies. The RMB weakened about 5.7% against the U.S. dollar during 2018.
- The company adopted ASC 606 retrospectively from January 1, 2018; management said the cumulative effect on opening equity was not significant, though return-allowance balance-sheet presentation changed. No specific 2019 financial guidance is provided in the filing.
- Revenue is concentrated: the top two brand partners represented approximately 23.6% and 12.8% of 2018 revenue, and the top ten together represented 61.1%. The company also relies substantially on Tmall and has related-party payments to Alibaba Group for platform, marketing and logistics services.
- Key risks include brand-partner renewal and concentration, e-commerce channel dependence, rising fulfillment and marketing costs, working-capital demands, competition, cybersecurity and data regulation, foreign-exchange and PRC cash-transfer restrictions, and the enforceability and regulatory status of the VIE arrangements. The filing notes that Baozun’s PRC auditor was not then subject to PCAOB inspection.
- Contractual commitments included RMB643.5m of operating lease payments and RMB495.3m under a retail product license agreement. The company reported no material legal or arbitration proceedings and no material off-balance-sheet arrangements of the types described in the filing.
Most important facts for investors to verify
- Whether receivable collection and inventory turnover improve, and whether operating cash flow turns positive as revenue and earnings grow.
- How brand-partner concentration, renewals and the continuing migration toward service-fee and consignment models affect GMV, revenue yield and profitability.
- Debt maturity, interest costs, borrowing availability and compliance with financial covenants, alongside the sizable lease and product-license commitments.
- Exposure to Alibaba/Tmall and the commercial terms and balances of related-party transactions.
- Developments in PRC e-commerce, data-security and foreign-investment rules, including the VIE structure and restrictions on moving cash offshore.
- The effect of the ASC 606 presentation changes and the company’s non-GAAP adjustments, particularly share-based compensation and acquired-intangible amortization.