IPOs: E-Commerce Services Provider Baozun In Intriguing IPO Play
Bottom line: Baozun’s IPO should achieve its $200 million fund-raising target and the stock could perform relatively well for the rest of the year if it can show that it will become profitable for all 2015.
The first serious Internet IPO of the year could finally be in the pipeline, with word that e-commerce services provider Baozun has filed for a New York listing that would be a first-of-its-kind for this type of company. Media are calling Baozun an e-commerce firm, but the reality is that the company helps others design and operate e-commerce sites, meaning it doesn’t have to compete itself in the fiercely competitive space.
The company’s largest shareholder is actually e-commerce leader Alibaba (NYSE: BABA), which holds 23 percent of Baozun. That relationship underscores Baozun’s unique market position as a service provider rather than actual website operator, and the company cited third-party data saying it currently controls about 20 percent of its market. The Alibaba relationship also provides important ties with many major retailers that already do business on Alibaba’s hugely popular Tmall.
China IPO watchers will probably notice I’m calling Baozun this year’s first “serious” Internet listing by a Chinese firm, rather than the first listing. That’s because the firmly second-tier group buying site 55Tuan (Nasdaq: WOWO) made its market debut in New York earlier this month, following repeated delays due to lack of investor interest. (previous post) Those shares are now down nearly 10 percent from their listing price 2 weeks ago, following a sharp drop in the latest trading session.
But let’s return our attention to Baozun, which boasts a strong stable of customers for its e-commerce website design and operation services, including the likes of Nike (NYSE: NKE) and Microsoft (Nasdaq: MSFT). According to its inaugural filing, the company hopes to raise up to $200 million from the offering, which is being handled by investment banks Morgan Stanley, BofA Merrill Lynch and Credit Suisse.
I was somewhat surprised to read that Baozun, which was founded 8 years ago, is still losing considerable money. (English article; Chinese article) The company’s prospectus says it lost $25 million last year, on sales of $255 million. That’s certainly not an encouraging sign, since Baozun’s business as a service provider isn’t extremely capital intensive and its relatively mature age means it has had plenty of time to become profitable.
55Tuan is also losing money, and it indeed looks like this year’s crop of Chinese Internet IPO candidates could include more such money-losing companies following a record year in 2014 that saw many of the best candidates list already. Most of the other details in the latest media reports are about Baozun’s background and credentials, which certainly look sold enough despite the company’s money-losing status.
We should expect to see more information come out about Baozun in the run-up to the listing, including potential news that the company expects to post its first-ever profit in the first quarter of this year. Such “good news” is quite common from Chinese companies preparing to go public, even if it’s often accomplished with short-term accounting tricks. In this case the large fund-raising target, combined with the strong pedigree of IPO underwriters, hints that this offering should attract fairly strong interest. Accordingly, I would expect to see Baozun ultimately raise the full $200 million, and perhaps even more if it attracts interest from sort-term buyers looking to make some quick money.
We’ll really have to see some more financials before we can comment much more on the longer-term potential of this company. Its business scale and market share certainly look attractive, and its status as China’s first web design and hosting services company to list also looks intriguing. If the company can move into the black for all of this year, which seems like a good possibility, I would give its IPO a good chance for success and could see the stock continue to perform well after its trading debut.
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