Baozun Initiated At Overweight By Morgan Stanley; Firm Digs Into 'Sweet Spot In China eCommerce'

In a report published Monday, Morgan Stanley analyst Robert Lin initiated coverage of Baozun Inc (ADR) BZUN with an Overweight rating and a price target of $13.70, saying that the company appears well positioned in "the fastest growing niche of China eCommerce."

Analyst Robert Lin says that the company's core business is healthy and its new initiatives are likely to support strong top-line and earnings growth. Moreover, Baozun has potential long-term revenue catalysts that are not reflected in its share price.

According to statistics released by iResearch, brand eCommerce accounted for 29 percent of China's US$445bn eCommerce market in 2014; and this is expected to triple by 2017 to US$380bn.

In the report Morgan Stanley noted, "China's eCommerce landscape is dominated by 3P marketplaces, and Alibaba's “search engine” approach to eCommerce monetization allows for robust profit growth for end-to-end solution providers such as Baozun. The convergence of 3P eCommerce platforms as both a sales and digital advertising channel for brands and retailers bodes well for brand eCommerce, in our view."

Last year, Baozun turned profitable on a non-GAAP basis. Lin expects the company's earnings to grow at a CAGR of 154 percent between 2014 and 2017). Gross merchandising value, or GMV, is estimates to grow to Rmb13.6bn by 2017, backed by:

• Strong industry growth with more international brands entering China via the online channel
• Healthy same-store sales growth of existing brands, coupled with net additions of 22 brands per year in 2015-17

"Baozun's focus on consignment business with an improving mix from higher-margin categories should support take-rate expansion," the report added.

Lin expects the company's stock to trade at "a discount to major eCommerce platforms, given its dependency on the platforms," but at a premium to Jumei International Holding Ltd (ADR) JMEI, given faster earnings growth.