Baozun Stays Hooked on Alibaba With New Logistics Investment From Cainiao

Key takeaways:

• Alibaba-backed Cainiao is paying $217.9 million for 30% of Baozun’s Baotong warehouse and fulfillment subsidiary
• Deal shows how Baozun remains dependent on Alibaba, despite ongoing attempts to diversify its customer base

By Mia Shanley

With China tech under intense regulatory scrutiny, a new deal by Alibaba’s BABA Cainiao logistics arm to buy 30% of Baozun Inc’s BZUN warehouse and fulfillment subsidiary Baotong for $217.9 million did little to excite investors.

A year ago, such a move by the e-commerce giant to bolster its logistics arsenal might have grabbed more headlines and lifted the shares of any lucky firm involved. That’s certainly not the case today, though we should also note Baozun first disclosed the deal in its latest earnings announcement in August without giving any terms.

Shares in e-commerce software and services provider Baozun – which is listed in both the U.S. and Hong Kong – slipped after last Friday’s announcement before largely recovering to trade just below $17 a share. The shares remain down more than 70% from a February high of $57, mirroring a similar pattern for many U.S. and Hong Kong-listed China tech companies.

The lackluster response shows just how difficult it will be to change sentiment toward Chinese shares in the wake of a broad regulatory clampdown on tech companies in China over data security concerns and monopolistic behavior.

Put differently, the $217.9 million price tag represents about 16% of New York and Hong Kong-listed Baozun’s latest market cap, meaning Cainiao most likely took control of about that amount of the overall company in the deal. That would bring Alibaba’s overall stake to about 27% of Baozun, after factoring in an existing holding the former already owns in the latter.

By drawing Baozun closer to Alibaba, the deal also shows how Shanghai-based Baozun remains highly dependent on the e-commerce giant. Baozun already generates about 70% of its gross merchandise volume (GMV) on Alibaba’s wildly popular Tmall, where it helps international and domestic brands sell clothing, electronics and consumer goods.

Alibaba owns 63% of Cainiao, which launched in 2013 and is Alibaba’s official global parcel tracking platform and broader logistics arm. Alibaba also had an 11.3% stake in Baozun, according to Baozun’s latest annual report.

Baozun, whose wide-ranging offerings include products and services related to IT, store operations, digital marketing and warehousing, has been keen to wean itself off Alibaba and show it can stand on its own, even as the latest deal draws the pair even closer together. It seems old habits die hard in China’s siloed internet economy where smaller satellite companies like Baozun are often closely tied to giants like Alibaba, Tencent and JD.com.

Baozun said the latest tie-up will allow it to leverage Cainiao’s national logistics and standardization expertise for Baotong, which is just five years old and now boasts almost 700,000 square meters of distribution centers across greater China.

“Quality and comprehensive end-to-end logistics services are critical to empower our brand partners to provide the ultimate customer experience to highly demanding Chinese customers,” Baozun vice president and Baotong General Manager Peter Liang said.

Baozun CFO Arthur Yu has said that partnering with a giant like Cainiao – which has similar tie-ups with other major logistics providers – would produce better economies of scale and reduce costs. The two complement one another, he has said, with Baozun bringing a specific focus on the luxury market – especially in sportswear – while Cainiao is more focused on standard goods.

“We think the combination of two will help us win more market share,” he said.

Undervalued?

The new investment values Baozun’s logistics subsidiary at $726.3 million, or about half of the latest market capitalization for a company that claims to be China’s largest e-commerce player in its class based on gross merchandise volume (GMV) that passes through its channels. Baozun didn’t break out the contribution of Baotong to its overall revenue in its latest results.

Baozun’s shares have tumbled lately in line with the broader China tech sector, but have also suffered from their own issues. Most notably, the company has taken a hit from a Chinese consumer boycott of many of the major brands it is closely tied to, such as Swedish retailer H&M, following western criticism of alleged human rights violations in China’s Xinjiang region.

Following the collapse in its share price, Baozun looks quite cheap when compared with its peers. It now trades at a price-to-sales (P/S) ratio of below 1 – far cheaper than the 48 for Canada’s Shopify (SHOP.US). Hong Kong-listed Weimob (2013.HK), which itself is closely tied to Tencent’s WeChat, also trades at a far higher P/S ratio of more than 11.

Perhaps sensing a bargain, some hedge funds have been building up positions in Baozun despite hesitations about China. In addition to its cheap valuation, the company also still offers exposure to the world’s biggest online retail sector, and may face fewer regulations than bigger tech firms due to its status as a more behind-the-scenes player.

Blackrock, Morgan Stanley and Vanguard all raised their holdings in the company in the months through June, according to Nasdaq data.

Baozun, which counts global brands like Nike, Zara, Panasonic and Bosch among its customers, has set its annual GMV target at 150 billion yuan ($23 billion) in three to five years, representing a near tripling of the company’s 55.7 billion yuan in GMV last year, which was up 25% from 2019. It is also aiming to reach an annual operating profit of 2 billion yuan over that period, which would be more than six times its 300 million yuan operating profit last year.

Baozun has a solid balance sheet, with $702.3 million in cash and cash equivalents at the end of the second quarter. It posted a 106.6 million yuan operating profit in the second quarter, down from 160.6 million yuan in the same quarter a year ago as some of its apparel partners were hurt by the Xinjiang-related boycotts.

It has also made some progress in diversifying its customer base from Alibaba’s Tmall, with a stable of partners that also includes Alibaba rival JD.com and social commerce sites like WeChat’s mini programs, Xiaohongshu and Douyin, the Chinese version of TikTok.

Non-Tmall marketplaces and channels made up 31.7% of Baozun’s total gross merchandising volume in the second quarter, up from 24.7% in the same period last year, the company pointed out in its latest quarterly earnings report.

That’s certainly a positive development for Baozun as it continues to work on lessening its Alibaba addiction, even as it deepens its ties to the e-commerce giant with the latest deal.

(Disclosure: The reporter holds shares in Alibaba Group)