China is the most populous country in the world with a growing middle class. Chinese companies benefit from huge growth within a single domestic market, before needing to internationalise. And like all other economies, it is becoming increasingly technology-focused and forward-thinking.
Thesis - JD.com is a pure play on e-commerce in China. E-commerce penetration in China is the highest worldwide and still growing, as its middle class grows and consumes more products. Alongside Alibaba’s Tmall, JD.com is a leader in online consumer retail. Since 2007, it has invested heavily in building out its nationwide logistics and delivery network in order to enable faster deliveries around the country (mirroring Amazon’s strategy in the US). In 2014, Tencent invested in JD.com and remains a large shareholder whilst Google invested $550m in 2018. They also have a partnership with Walmart to deliver groceries from several of Walmarts China locations and sell directly through Tencent’s WeChat app. With a large market, a powerful tailwind (e-commerce in China) and a number of strong partnerships, JD.com could be set for long-term success.
Financials & Performance - From 2015-2019 JD grew revenues 34% a year. Gross margins are at a slender 8%, although the margin profile of the business is improving with scale (up from 5.4% in 2015). This reflects the heavy investments they have made in their delivery network. The company recently became marginally profitable.
Risks - Competition for the Chinese e-commerce consumer is fierce. As mentioned, Alibaba’s Tmall is a strong competitor with a large footprint and newer companies like Pinduoduo (mentioned in edition #4) are also claiming market share. A further consideration is ongoing trade tensions with the US, which certainly effects the perception of Chinese stocks which are US-listed.
Thesis - NIO is a leader in the Chinese electric vehicle market. Since its IPO in 2019, NIO has tripled in value. Its name in Chinese translates to “Blu Sky Coming” - a nod to an environmentally friendly Chinese future. Often touted as the “Tesla of China” it designs and jointly manufacturers premium electric vehicles. It does have some significant differences to Tesla. First, it is significantly smaller in scale, delivering only 10,331 cars in Q2 (Tesla did almost 10 times that). Second, NIO is not vertically integrated. It does not wholly manufacture the car and does not create the battery. Instead, it focuses on the software, service and community around the car. In fact, it is known for excellent customer service and is very well rated in the Chinese car market. An investment in NIO is definitely a more high-risk public market investment, betting on the Chinese EV market in general.
Leadership - William Li is the founder and CEO of NIO. At 46 years old, this is the third (!) company that he has founded and taken public. Brought up in a humble farming town, he excelled in school and went on to study at the top-rated Peking University. As a computer science major, he participated in the early Chinese internet wave, his second company Bitauto was valued at $1b. With NIO, he seeks to make EV mainstream in China by improving the quality of electric cars as well as the experience of car ownership. He emphasises the lifestyle of owning an EV and pushes the community aspect of NIO ownership. He is known for being heavily in the details of how the cars are perceived and presented, for example, it is said he’ll personally check how clean the showroom floors are where his cars are on display.
Financials & Performance - In Q2 2020, revenues where $493.4 million, up 146% annually. Vehicle margins are 9.7%, up from negative numbers the previous year. Given the current scale, the numbers are likely to change significantly in the coming quarters. The company remains very unprofitable and relied on an external raise from Chinese government earlier this year.
Risks - Whilst NIO has a great reputation amongst customers it is still a long way from mass adoption. EV ownership is by no means mainstream in China and the current vehicle prices are considered expensive in China, however the government is supportive of the market (as well as its local companies). As mentioned above, the financial situation of the company is still very immature and will need to improve in the coming quarters. An investment in NIO requires a very long-term outlook.
Thesis - Baozun is a technology partner that helps Western brands succeed in China. It benefits form the fact the Chinese market is so different to the west and Western brands often struggle to adapt. Its customers include giant names such as Nike, Starbucks and Nestle. Their technology helps brands operate on Chinese shopping channels, market on Chinese social media as well as operational activities such as fulfilment and warehousing. Alibaba owns about 15% if the company, signalling its strong market position. At its current valuation, Baozun has room to grow and benefits from the continued shift towards online shopping.
Financials & Performance - As of Q2 2020, Baozun has 250 brand partners, up from 231 in 2019. Revenue growth has been between 25% and 40% over the last 8 quarters, with gross margins near 40%. In has been listed as a “six-star” service partner by Tmall, highlighting its success with customers and marketplaces.
Risks - Baozun relies on large brands choosing them to enter the market. Should its positioning deteriorate, or brand choose to enter independently, Baozun’s business would suffer. Similarly, the large Chinese marketplaces that it partners with could also begin to offer services similar to Baozun.