How to Profit from Massive Chinese Consumer Spending with BZUN Stock

Baozun
iStock.com/danielvfung

Baozun Stock Looking to Run Higher as Chinese Economy Grows

The 19th Congress of the Chinese Communist Party recently witnessed a staggeringly long speech by President Xi Jinping. The 203-minute talk focused on the economic and political role of China over the next five years, which of course could be hampered by President Donald Trump in his “America First” ambitions.

I have rarely written about Chinese stocks, with the exception of Alibaba Group Holding Ltd (NYSE:BABA) and other large-cap technology stocks, but—in my view—there continue to be vast opportunities in the world’s second-largest economy.

While the added risk premium with Chinese stocks may scare some investors off, it’s not a region that you should ignore.

One play on the rapid growth of consumer spending in China is small-cap Baozun Inc. (ADR) (NASDAQ:BZUN), which you may not recognize. Its share price is up an astounding 178% year-to-date and is easily outperforming the majority of the technology sector.

Also ReadTop Ecommerce Stocks to Buy and Hold for 2017

Yet, in spite of the price acceleration, my view is that BZUN stock has another leg up, albeit we could first see a price adjustment.

A foreign company that wants to sell goods in the massive China market, where there are about 400 million middle-class consumers who appreciate global brands, may seek Baozun’s services. The company designs digital and e-commerce solutions for companies to build and sell their brands in China.

Baozun represents over international brands in a broad range of goods and services, including apparel, appliances, automobiles, beauty and food, home and construction, insurance, and technology.

With China still growing at the mid-to-high six percent level and, given that domestic consumption has risen to about 65% of gross domestic product (GDP), the outlook for spending in the country is optimistic. When Xi Jinping took reign in 2012, consumer spending accounted for a mere 12%.

Strong Growth for BZUN Stock

Baozun has nearly doubled its revenue over the past two years, from almost $255.4 million in 2014 to more than $487.8 million in 2016.

During this time, Baozun has managed to increase gross profits as well as expand its key gross margin from 33% in 2015 to 43% in 2016.

As we move forward, Baozun could see its revenue grow by another 20.2% this year and 22.2% in 2018, to almost $752.2 million (average analyst estimate). (Source: “Baozun Inc. (BZUN),” Yahoo! Finance, last accessed October 20, 2017)

The gross margin expansion has also led to profits for Baozun stock. The company could see profits rise to as high as $0.86 per diluted share in the full 2017 and $1.46 per diluted share in 2018.

Analyst Take:

At the high earnings per share (EPS) estimate for 2018, BZUN stock could be trading at 23 times, which is not cheap, but the potential for the next five years under Xi Jinping is intriguing, as the country’s push to get consumers to spend continues.

On the below stock chart, Baozun stock is displaying a bullish golden cross, with the stock holding the 50-day moving average.

Baozun stock chart

Chart courtesy of StockCharts.com

Baozun stock is pausing at the $35.00 level since retrenching from the $40.00 level. It is trading sideways after two attempts to break $37.00.

A sustained breakout at $40.00 could see the next leg up toward $50.00 for BZUN.

BZUN stock chart

Chart courtesy of StockCharts.com

If the stock fails to hold support at $33.00, it could falter to around $27.00, where I would expect to see ample buying.