BAOZUN(BZUN) - 2021 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION Outlines Baozun's corporate structure, VIE reliance, regulatory risks including potential delisting, cash transfers, and dividend restrictions - Baozun Inc. is a Cayman Islands holding company, operating primarily through PRC subsidiaries and a Variable Interest Entity (VIE), Shanghai Zunyi, which contributed 8.6% of total net revenues in 2021[24] - The company faces significant delisting risk under the HFCA Act due to the PCAOB's inability to inspect its China-based auditor, potentially leading to a U.S. trading prohibition by 2024 or as early as 2023[27][29] Cash Transfers Between Parent and Subsidiaries (2019-2021) | Flow | 2019 (RMB in thousands) | 2020 (RMB in thousands) | 2021 (RMB in thousands) | | :--- | :--- | :--- | :--- | | Capital contributions from Parent to Hong Kong subsidiaries | 1,369,590 | — | — | | Capital contributions from Hong Kong subsidiaries to PRC subsidiaries | 548,905 | 608,841 | 383,585 | | Loans from Hong Kong subsidiaries to PRC subsidiaries | 15,000 | 371,925 | 867,646 | | Repayment from Hong Kong subsidiaries to Parent | — | — | 2,256,302 | | Amounts paid by VIE to PRC subsidiaries | 652,675 | 735,580 | 757,749 | - Dividend distribution from PRC subsidiaries is restricted, requiring a 10% statutory reserve fund until it reaches 50% of registered capital; the total restricted amount was RMB 2,345 million (US$368.0 million) as of December 31, 2021[39] Condensed Consolidating Statement of Operations Highlights (VIE vs. Consolidated) | Metric (RMB in thousands) | Year | VIE and VIE's Subsidiaries | Consolidated Totals | | :--- | :--- | :--- | :--- | | Net Revenues | 2021 | 809,547 | 9,396,256 | | | 2020 | 869,580 | 8,851,563 | | | 2019 | 626,912 | 7,278,192 | | Net (Loss) Income | 2021 | 47,090 | (205,963) | | | 2020 | 87,897 | 426,534 | | | 2019 | 65,279 | 281,891 | Risk Factors - Business risks include dependency on China's e-commerce market growth, reliance on key brand partners (top 10 accounted for 48.2% of total net revenues in 2021), and significant reliance on the Tmall platform (69.3% of total GMV in 2021)[57][63][68] - The company reported a net loss of RMB 206.0 million in 2021, a reversal from RMB 426.5 million net income in 2020, primarily due to a RMB 210.0 million unrealized investment loss and weaker operational profitability[65] - Corporate structure risks arise from reliance on VIE contractual arrangements, which if deemed non-compliant by the PRC government, could lead to severe penalties[53][183][189] - Risks in China include uncertainties in PRC law enforcement, such as the E-Commerce Law, and potential CSRC approval requirements for offshore offerings, impacting future financing[54][200][213] - Securities risks include high trading price volatility and significant delisting threat from U.S. exchanges under the HFCA Act due to PCAOB inspection limitations[55][243][276] ITEM 4. INFORMATION ON THE COMPANY Provides Baozun's history, dual listing, business models, e-commerce capabilities, and its organizational structure with a PRC VIE History and Development of the Company Founded in 2007, Baozun has grown into a leading e-commerce service provider, with key milestones including its Nasdaq IPO in May 2015 and a global offering on the Hong Kong Stock Exchange in September 2020, accelerating growth through strategic acquisitions and a significant investment from Cainiao into its logistics arm, Baotong - The company was founded in 2007, listed its ADSs on Nasdaq in May 2015, and completed a global offering on the Hong Kong Stock Exchange in September 2020, raising net proceeds of approximately HK$3,511.4 million (US$450.2 million)[305][309][316] - In 2021, Baozun acquired several complementary businesses to enhance its service offerings, including Full Jet, eFashion, MoreFun, BolTone, and BaoBest[319] - In September 2021, Cainiao, an Alibaba subsidiary, made a 30% equity investment in Baotong, Baozun's logistics holding company, for US$217.9 million to develop fulfillment and e-commerce opportunities[320] Business Overview Baozun is a leading brand e-commerce service provider in China, offering end-to-end solutions across IT, store operations, digital marketing, customer service, and fulfillment, serving 333 brand partners as of year-end 2021 - Baozun is a leader in China's brand e-commerce service industry, holding a 7.9% market share by GMV in 2019, and served 333 brand partners for store operations as of December 31, 2021[322][323] Key Operating Metrics (2019-2021) | Metric | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total GMV (RMB in millions) | 44,410.3 | 55,687.4 | 71,053.9 | | Distribution GMV (RMB in millions) | 3,849.5 | 4,334.6 | 4,335.7 | | Non-distribution GMV (RMB in millions) | 40,560.8 | 51,352.8 | 66,718.2 | | Total Net Revenues (RMB in millions) | 7,278.2 | 8,851.6 | 9,396.3 | | Product Sales Revenue (%) | 47.0% | 44.1% | 41.2% | | Services Revenue (%) | 53.0% | 55.9% | 58.8% | - The company's top five customers accounted for 19.2% of total net revenues in 2021, while its top five suppliers accounted for 59.7% of purchases, indicating some concentration risk[393][394] - As of December 31, 2021, Baozun directly operated 57 warehouses with an aggregate gross floor area of approximately 1,135,000 square meters, fulfilling 50.4 million outbound orders in 2021[359] Organizational Structure Baozun Inc. is a Cayman Islands holding company controlling PRC operations through wholly-owned subsidiaries and a VIE, Shanghai Zunyi, to comply with PRC foreign ownership restrictions, maintaining control through contractual agreements for financial consolidation - The company utilizes a VIE structure to comply with PRC regulations; the VIE, Shanghai Zunyi, is 80% owned by CEO Vincent Wenbin Qiu and 20% by co-founder Michael Qingyu Zhang[493] - Control over the VIE is established through four key contractual arrangements: an Exclusive Call Option Agreement, a Proxy Agreement, Equity Interest Pledge Agreements, and an Exclusive Technology Service Agreement[496][497][498][500] - The VIE contributed 8.6% of the company's total net revenues for the year ended December 31, 2021[502] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS Analyzes Baozun's financial performance, highlighting 2021 revenue growth, a net loss, strong liquidity, and capital resources Consolidated Financial Highlights (2019-2021) | Metric (RMB in thousands) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total Net Revenues | 7,278,192 | 8,851,563 | 9,396,256 | | Product Sales | 3,422,151 | 3,906,611 | 3,873,589 | | Services | 3,856,041 | 4,944,952 | 5,522,667 | | Income from Operations | 383,653 | 558,677 | 7,021 | | Net Income (Loss) | 281,891 | 426,534 | (205,963) | | Net Income (Loss) per ADS (Basic) | 4.85 | 6.82 | (3.05) | - The net loss in 2021 was primarily driven by a RMB 210.0 million unrealized investment loss, mainly from a decrease in iClick Interactive's trading price, and a 134.7% increase in general and administrative expenses due to accounts receivable write-downs and new headquarters costs[562][568] Non-GAAP Financial Measures Reconciliation (2021) | Metric (RMB in thousands) | 2021 | | :--- | :--- | | Net loss attributable to ordinary shareholders | (219,830) | | Add: Share-based compensation expenses | 196,547 | | Add: Amortization of intangible assets from acquisition | 15,574 | | Add: Unrealized investment loss | 209,956 | | Less: Tax effect of amortization | (2,645) | | Non-GAAP net income attributable to ordinary shareholders | 199,602 | - As of December 31, 2021, the company had a strong liquidity position with RMB 4,606.5 million in cash and cash equivalents, and available credit facilities of RMB 991.7 million[598] Summary of Cash Flows (2019-2021) | Cash Flow (RMB in thousands) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 301,396 | 310,014 | (96,107) | | Net cash (used in) provided by investing activities | (1,133,451) | (616,367) | 375,820 | | Net cash provided by financing activities | 1,776,891 | 2,666,837 | 749,953 | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES Details Baozun's governance, board, senior management, compensation, employee count, and dual-class share ownership structure - The board of directors consists of eight members, including four independent directors, with key executive officers including co-founder Vincent Wenbin Qiu (Chairman & CEO) and co-founder Junhua Wu (Director & Chief Growth Officer)[631][666] - In 2021, aggregate fees, salaries, and benefits for directors and executive officers amounted to approximately RMB 19.8 million, excluding equity-based compensation, with 1,615,416 restricted share units also granted to this group[645] - The company utilizes two primary share incentive plans, the 2014 Plan and the 2015 Plan, to grant options and restricted share units to employees, directors, and consultants[648][649][650] - As of December 31, 2021, the company had 8,821 full-time employees, a significant increase from 6,076 in 2020, partly due to acquisitions, with the largest group (6,075) in front-end functions like store operations and customer service[683] Beneficial Ownership and Voting Power of Key Individuals (as of March 31, 2022) | Name | Percentage of total ordinary shares | Percentage of aggregate voting power | | :--- | :--- | :--- | | Vincent Wenbin Qiu (CEO) | 5.3% | 29.5% | | Junhua Wu (CGO) | 3.0% | 12.7% | | Alibaba Investment Limited | 13.1% | 8.2% | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Outlines major shareholders and significant related party transactions, including those with Alibaba and Softbank affiliates - The company's relationship with its VIE, Shanghai Zunyi, is governed by a series of contractual arrangements that provide effective control and economic benefits[698] - Significant transactions with Alibaba Group include service fees paid to Tmall, which amounted to RMB 752.8 million (US$118.1 million) in 2021[699] - In 2021, Cainiao, a subsidiary of Alibaba, made a 30% equity investment in Baotong (Baozun's logistics arm) for US$217.9 million, with an agreement including a call option for Cainiao to increase its stake to 60% starting from July 2023 and a redemption right under certain triggering events[700] - In 2021, the company repurchased 19,042,105 Class A ordinary shares from Tsubasa Corporation (a Softbank subsidiary) for approximately US$105.0 million in a privately negotiated transaction[730] ITEM 8. FINANCIAL INFORMATION Refers to consolidated financial statements, highlights key legal proceedings, and states the company's dividend policy - A securities class action lawsuit filed in 2019, alleging false and misleading statements, was voluntarily dismissed without prejudice in November 2020[734] - In September 2021, a subsidiary initiated an arbitration proceeding against a distributor for a US$22.2 million payment default, leading the company to record an allowance of RMB 93.3 million (US$14.6 million) for accounts receivable in 2021[735] - The company has no present plan to pay cash dividends and intends to retain available funds and future earnings to operate and expand its business[738] ITEM 9. THE OFFER AND LISTING Details the company's dual listing on Nasdaq for ADSs and the Hong Kong Stock Exchange for Class A ordinary shares - The company's ADSs are listed on The Nasdaq Global Select Market under the symbol "BZUN" since May 21, 2015[740] - The company's Class A ordinary shares are listed on the Hong Kong Stock Exchange under the stock code "9991" since September 29, 2020[742] ITEM 10. ADDITIONAL INFORMATION Covers corporate information, dual-class share structure, PRC exchange control and dividend regulations, and tax implications - The company has a dual-class share structure: Class A ordinary shares are entitled to one vote per share, while Class B ordinary shares are entitled to ten votes per share, with Class B shares convertible into Class A shares on a one-for-one basis[756][760] - PRC regulations permit dividend payments from PRC subsidiaries only out of accumulated after-tax profits and require setting aside at least 10% of after-tax profit into a statutory reserve fund until it reaches 50% of registered capital[808] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2021 tax year but notes that the significant decline in its ADS market price increases the risk of becoming a PFIC in the future[837] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Outlines the company's exposure to market risks, including foreign exchange, interest rate, and credit risks - The company's primary market risk is foreign exchange risk, as revenues and expenses are mostly in RMB, while some financial assets are in U.S. dollars, meaning a significant revaluation of the RMB could materially affect financial results[854] - As of December 31, 2021, the company held RMB 2,990.8 million in RMB-denominated cash and investments, and US$247.5 million in USD-denominated cash and investments[857] - Credit risk is present in accounts receivable; the company recorded an allowance for doubtful accounts of RMB 118.7 million (US$18.6 million) as of December 31, 2021[862] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Focuses on American Depositary Shares (ADSs), detailing depositary fees and conversion procedures for Class A ordinary shares - The depositary, JPMorgan Chase Bank, N.A., charges fees for ADS services, including up to US$5.00 per 100 ADSs for issuance or cancellation, and up to US$0.05 per ADS for cash distributions[866][867] - The report outlines the procedures for investors to convert Class A ordinary shares trading in Hong Kong into ADSs for trading on Nasdaq, and for converting ADSs back into Class A ordinary shares for trading in Hong Kong[883][886] PART II ITEM 15. CONTROLS AND PROCEDURES Management and auditors concluded disclosure and internal financial reporting controls were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[906] - Management assessed the company's internal control over financial reporting as effective as of December 31, 2021, excluding newly acquired businesses from 2021 which constituted 4.0% of net assets and 5.8% of revenues[910] - The independent registered public accounting firm, Deloitte Touche Tohmatsu Certified Public Accountants LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[911][913] Corporate Governance and Other Matters Covers corporate governance, audit committee, code of conduct, accountant fees, share repurchases, and foreign private issuer exemptions Principal Accountant Fees (2020-2021) | Fee Type (in thousands) | 2020 (US$) | 2021 (US$) | | :--- | :--- | :--- | | Audit Fees | 1,713.4 | 1,123.8 | | All Other Fees | 183.9 | 188.3 | | Total | 1,897.3 | 1,312.1 | - In 2021, the board authorized two share repurchase programs totaling US$175 million; by year-end, the company had repurchased 9,063,910 ADSs (or equivalent shares) under these programs[927][928][931] - As a foreign private issuer, the company follows home country (Cayman Islands) practices in lieu of certain Nasdaq rules, including not being required to have a majority of independent directors on its board[934][936] PART III ITEM 18. FINANCIAL STATEMENTS Presents audited consolidated financial statements for 2019-2021, including auditor's report and key financial statements Consolidated Balance Sheet Highlights | (RMB in thousands) | As of Dec 31, 2020 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | 10,474,691 | 12,318,980 | | Cash and cash equivalents | 3,579,665 | 4,606,545 | | Accounts receivable, net | 2,188,977 | 2,260,918 | | Inventories | 1,026,038 | 1,073,567 | | Goodwill | 13,574 | 397,904 | | Total Liabilities | 4,332,088 | 5,837,631 | | Short-term loan | — | 2,288,465 | | Long-term loan | 1,762,847 | — | | Total Equity | 6,133,603 | 5,059,669 | - The company completed several business acquisitions in 2021 for a total purchase consideration of RMB 569.6 million, resulting in the recognition of RMB 247.9 million in intangible assets and RMB 383.5 million in goodwill[962] - In 2021, the company repurchased 27,191,731 shares for US$164.9 million; of these, 19,042,105 shares were subsequently retired[1142] - As of December 31, 2021, the amount of restricted net assets in PRC entities not available for distribution was RMB 2,345.1 million[1161]