Baozun Inc. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. Although the request refers to 2017 Q4, this is an annual filing; it does not provide a clear standalone fourth-quarter income statement or cash-flow value. Financial statements are prepared under U.S. GAAP. Amounts below are RMB unless stated otherwise; U.S. dollar figures are convenience translations.
Business context
Baozun provides integrated e-commerce services to brands in China, including store operations, technology, marketing, customer service, warehousing and fulfillment. It served 152 brand partners at year-end. The company shifted its business mix away from product distribution toward service-fee and consignment models; Maikefeng was scaled down in 2017 due to unsatisfactory performance, and Baozun reported one operating segment for the year.
Financial and operating metrics
| Metric | FY2017 | FY2016 | Change/comment |
|---|---|---|---|
| GMV | RMB19,112.2 million | RMB11,264.8 million | Up about 69.7% |
| Net revenue | RMB4,148.8 million (US$637.7 million) | RMB3,390.3 million | Up 22.4% |
| Product sales revenue | RMB2,257.6 million | RMB2,176.4 million | Up 3.7%; 54.4% of revenue, versus 64.2% |
| Services revenue | RMB1,891.2 million | RMB1,213.8 million | Up 55.8%; 45.6% of revenue, versus 35.8% |
| Operating income | RMB256.3 million | RMB90.1 million | Operating margin 6.2%, versus 2.7% |
| Net income | RMB209.1 million | RMB85.4 million | Net margin 5.0%, versus 2.5% |
| Net income attributable to ordinary shareholders | RMB208.9 million | RMB86.6 million | Basic EPS RMB1.29; basic EPS per ADS US$0.59 |
| Non-GAAP net income | RMB267.9 million | RMB119.6 million | Excludes share-based compensation and acquisition-related intangible amortization |
| Operating cash flow | RMB(169.1) million | RMB13.4 million | Turned negative |
| Investing cash flow | RMB(637.2) million | RMB(119.4) million | Higher investment, including short-term investments and capital spending |
| Cash and cash equivalents at year-end | RMB244.8 million | RMB917.3 million | Short-term investments were RMB312.6 million |
| Short-term borrowings at year-end | RMB172.0 million | None reported | Weighted average effective rate 4.57% |
Fulfillment expense rose 51.3% to RMB818.2 million and sales and marketing expense rose 38.3% to RMB910.8 million. Each grew faster than revenue; as a share of revenue, fulfillment increased to 19.7% from 16.0%, and sales and marketing to 22.0% from 19.4%. Cost of products fell slightly to RMB1,917.5 million, while cost of products as a share of product-sales revenue improved to 84.9% from 88.3%.
Material changes and liquidity
- Distribution GMV was RMB2,620.2 million, or 13.7% of total GMV, down from 22.5% in 2016. Non-distribution GMV grew to RMB16,492.0 million. The service-heavy mix lifted services revenue but reduced net revenue as a percentage of GMV to 21.7% from 30.1%.
- Receivables rose to RMB1,082.7 million from RMB624.8 million; receivable days increased to 75 from 53. Management attributed the change principally to service growth and its associated payment terms. This working-capital build was a major factor in negative operating cash flow.
- Inventories were RMB384.7 million, versus RMB312.1 million; inventory days increased to 66 from 62. Accounts payable were RMB583.5 million, and payable days increased to 106 from 94.
- Current assets were RMB2,463.3 million and current liabilities RMB1,145.9 million. The company reported RMB446.4 million of undrawn capacity under one-year bank credit facilities at year-end; facilities were due to expire between January and October 2018.
- Capital expenditures increased to RMB349.9 million from RMB92.2 million, mainly for warehouse property and equipment, software, and land-use rights. The filing states management believed cash, operating cash flows and available facilities would cover anticipated needs for at least 12 months.
- Operating lease commitments totaled RMB398.2 million, and future minimum payments under a retail product license agreement totaled RMB518.8 million. The combined contractual-obligations table also included the RMB172.0 million short-term loans.
Management commentary, outlook and notable items
- Revenue growth reflected brand-partner expansion and stronger service activity. Product sales growth was partly offset when a leading electronics partner moved from distribution to consignment in September 2017.
- Management expected fulfillment, marketing, technology and administrative costs to rise with business growth and continued investment. No quantified revenue, earnings or cash-flow guidance is provided.
- Management cited the service/consignment mix as generally having higher operating margins than distribution, while producing lower reported revenue relative to GMV. Future revenue ratios and profitability may vary with business-model and product mix.
- Maikefeng was scaled down and its inventory was being sold. In 2017 Baozun acquired 51% of a cosmetics e-commerce business for cash consideration of RMB17.9 million, recognized RMB13.2 million of goodwill, and recorded noncontrolling interests. The acquisition was described as not material to the consolidated statements.
- Other 2017 items included RMB5.5 million gain on disposal of investments, RMB6.2 million investment impairment, RMB1.3 million share of loss from the Baozun-CJ equity-method investment, and RMB58.2 million of share-based compensation expense.
- Principal risks include brand-partner and customer concentration (top 10 brand partners represented 68.6% of revenue; the top three represented 22.1%, 12.8% and 12.5%), dependence on Tmall and other third-party channels, receivables and working-capital growth, competition, fulfillment and technology disruptions, and evolving PRC licensing, cybersecurity and data rules.
- The VIE structure relies on contractual arrangements with Shanghai Zunyi rather than direct ownership. Regulatory or enforceability challenges could impair control or consolidation. PRC restrictions also limit access to subsidiary cash: restricted net assets were RMB536.2 million at year-end.
- The company reported no material legal or administrative proceedings and no off-balance-sheet arrangements of the types described in the filing. The auditor issued an unqualified opinion on the financial statements; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2017. The filing also discusses limits on PCAOB inspection of China-based auditors as a broader investor risk.
Most important facts for investors to verify
- Whether 2018 cash generation improved as receivables rose sharply and operating cash flow turned negative in 2017.
- Collection quality and concentration within the receivables balance, including the customer disclosed as accounting for more than 10% of receivables.
- Whether growth in services and non-distribution GMV translated into sustained margin improvement after rising fulfillment and marketing costs.
- Renewals and economics of major brand-partner relationships, and the company’s dependence on Tmall and other marketplaces.
- Use and repayment of short-term borrowings, renewal or replacement of expiring credit facilities, and funding needs following elevated capital expenditures.
- Performance of the acquired cosmetics business, the remaining Maikefeng wind-down, and recoverability of investments and goodwill.
- Continuing compliance with PRC licensing, cybersecurity, data-protection, foreign-exchange and VIE-related requirements, and the practical availability of cash held in China.