China Youzan is Up 200% This Year. Is it Too Late to Buy?

Everyone loves a growth stock, the next big thing, but is China Youzan Limited (SEHK:8083) worth the hype?

Youzan’s share price is trading at an expensive price-to-sales (PS) ratio of 19.30x and price-to-book (PB) ratio of 7.0x. This is not exactly cheap but it shows investors think the stock has growth potential.

Here’s a brief background of China Youzan and whether it’s too late for investors to buy this growth stock.

What does Youzan do?

The company offers a variety of Software-as-a-Service (SaaS) functions, including marketing, and payment solutions to help online merchants grow their business and improve efficiency.

Often, its customers are traditional stores or retailers who wish to expand online.

Merchants can customise their online store with over 1,000 or so features and can operate on multiple platforms like WeChat Mini Programme, QQ, Alipay Life Account and Weibo.

Youzan also provides cloud services, marketing support, payment options, and payment guarantees to make it easier to transact with customers.

Furthermore, the company invests heavily to develop additional features. Some cool new features allow merchants to make short videos to showcase products and live-stream product demos with interactive Q&A. 

How big is the market?

China is the world’s biggest e-commerce market according to Statista and it’s forecasted to grow to an incredible US$1.4 trillion by 2024.

With a Gross Merchandise Value (GMV) of just RMB 46.2 billion (US$6.6 billion) Youzan’s current market share is tiny yet the potential is huge.

Besides that, there are two major trends. According to Youzan, it sees the future of e-commerce moving towards live-streaming as merchants broadcast to multiple consumers at the same time, improving efficiency.

Youzan, being one of the first to offer live-streaming, is well-positioned to benefit from this exciting new trend.

Second, Covid-19 has accelerated the push for traditional retailers to go online, especially smaller stores badly affected by the lockdowns across China. What might have taken years has now been accomplished in months.

Performance so far

Youzan grew total revenues by 62.7% in H1 2020 compared to a year earlier, with its core business of SaaS and Extended Services growing faster at 89.7%. In fact, Youzan has seen 20% revenue growth in the last quarter alone.

Youzan’s revenue growth relies on its ability to grow the number of Paying Merchants, and more importantly GMV, which is the total value of goods and services sold on its platforms.

Youzan’s success ultimately relies on the success of merchants using its services.

As of the last half-year report, it achieved an incredible 110% and 47.3%  year-on-year growth in GMV and Paying Merchants.

Are there any red flags?

Youzan has only been in the SaaS business for a short time, previously active in third-party payment services and general trading.

It only changed its strategic focus to SaaS merchant services since acquiring 51% of Qima Holdings Limited (Qima) in April 2018. Therefore, it doesn’t have a long track record.

China’s merchant service landscape is filled with competitors including Youshop, Lewaimai, and Weimob. Some investors may prefer Weimob Inc (SEHK: 2013), which is supported by the tech giant Tencent Holdings Ltd (SEHK:700)

One exciting development is that Baidu Inc (NASDAQ: BIDU) has bought a minority stake in Qima, the subsidiary of Youzan. This shows Baidu’s confidence in Youzan and will bring opportunities to cooperate with the tech giant.

Youzan, while growing fast, is still loss-making with a loss of HK$230 million (US$29.6 million) in 1H20 and HK$915 million for full-year 2019.

As a result, it’s had to issue new stock with a 27% increase in issued shares since March 2019, which is not ideal for shareholders who have been diluted.

On the positive side, while still loss-making, the losses are narrowing and surprisingly in H1 2020 showed a positive operating cash flow of HK$83 million.

Furthermore, it’s common for growth companies to issue stock or take on debt to grow while the market opportunity is hot.

Foolish takeaway

Youzan is a hot stock in a hot sector. But competition is fierce and at this stage, it’s difficult to say who will gain a strong foothold.

It is promising to see that Youzan continues to reduce losses and has reported positive operating cash flow.

For me, Youzan remains a high risk, high reward stock. The question for investors is: what is their own risk appetite?