Description

Executive Summary

We believe Jumei International (NYSE:JMEI) is currently trading at a wide discount to its NAV, with cash covering over 60% of its market cap. We think some near-term catalyst could attract investor interests into this “relatively certain” stock in today’s uncertain / overvalued market. We admit that Jumei is not the best growth story out there (and the name is probably hated by many), but we do believe it offers one of the best risk/reward and margin of safety for conservative investors at current price.

As $2.90, Jumei has a market cap of $436m, est. 2017 end cash balance of $260m, implying an est. EV of $176m. The Company has a core e-commerce business and investments in Jiedian (will consolidate financials in 2H 2017) and BabyTree.

E-Commerce Business

Jumei went IPO in 2014 as the no.1 beauty products e-commerce player / only profitable vertical ecommerce player in China. The IPO was priced at $22 per share, valuing the company at over $3bn. Frankly speaking, Jumei was just lucky as no one else was seriously competing in the online beauty products category back then. Shortly after the IPO, Jumei’s business model started to face challenges and intensified competition: First, in order to fight counterfeits issue, Jumei chose to wind down its third-party platform and only retain its direct e-commerce (i.e. take inventory). This greatly hurt growth and profits. Secondly, Jumei realized its limitation and tried to reaccelerate growth by investing heavily in cross-border e-commerce since 2015, but due to regulatory change and competition, cross-border didn’t become a growth engine. Lastly and most importantly, larger e-commerce players such as Alibaba, JD.com, Vipshop started to catch up in the beauty products category, utilizing their much larger user base.

Currently, the e-commerce business is on a secular decline mode (-10% y-o-y), yet it is still profit making (although on a thin margin: 1H17 LTM 1.7% NI margin). We have checked traffic data and believe the business has not experienced significant decline in 2H17, so we estimate for 2017A, the business is likely to be slightly breakeven. E-commerce should be able to generate $900m in revenue in 2017A, but we will not assign much value to this piece in our SOTP.

Jiedian

In August 2017, Jumei completed a transformational acquisition by injecting RMB 300m into Jiedian for a 60% stake (post money), valuing Jiedian at RMB 500m. In September 2017, Jumei acquired an additional 15% stake from a selling shareholder for RMB 48m (valuing Jiedian at RMB 300m) and used that 15% stake as ESOP to incentivize Jiedian employees. Furthermore, Jumei stated that they would invest up to $100m new money into Jiedian to fund its growth, if needed. Post the transaction, Jiedian’s founding team all left and a veteran from Alibaba was hired to become the CEO of Jiedian.

Jiedian is one of the leading players in the portable power bank sharing business in China. It facilitates master power charging boxes in highly frequented points of interest, such as restaurants, bars, gyms, airports, train stations, shopping malls, hair/beauty salons and hospitals. Each power box contains multiple portable power banks, and users can charge their mobile phones on-site or take away a power bank and return it at any other Jiedian site. Users can use Jiedian’s app /Alipay/Wechat to locate nearby power boxes where they can rent a portable power bank by scanning a QR code and making mobile payments.

Portable power bank sharing industry only started to scale in early 2017. Right now, there are only four major players left in the game. Jiedian and Xiaodian are ranked top 2. Xiaodian has just completed its B+ round at $300m valuation, with cumulative funding exceeding $100m. Xiaodian is backed by many VCs as well as Tencent, while Jiedian appears to be very close to Alibaba/Ant Financial (you can rent a Jiedian device without deposit, if your Ant Financial credit score exceeds 600). We would not be surprised if later Alibaba/Ant Financial invest in Jiedian.

We carefully studied the unit economics of Jiedian, and believe Jiedian and Xiaodian’s public claim that they are already profitable in some cities might be real. Let’s take Jiedian’s standard power box (containing 6 portable power banks) as an example (through expert interviews). On the costs side: capex RMB 2000, labor costs RMB 400 per year for maintenance/coverage. On the revenue side, 2 orders per day per power box, RMB 2 per order, which translates into a payback period of 2 years. Note that this is a very conservative calculation as public sources estimated a much faster payback period. Comparing to the bicycle sharing industry in China, portable power bank enjoys a much better unit economics. In addition, we have not yet accounted for any strategic value / potential advertising revenue / value of the data / overseas expansion potential.

We think for valuation purposes, it would be fair to value Jiedian at book value, as it is not money losing. For the upside case, we think Jiedian should be valued at 3x book, per Xiaodian’s B+ round valuation.

BabyTree

BabyTree is the largest and most popular parenting website in China. Pro-forma for subsequent changes, Jumei invested $53.6m in BabyTree (in 2015) and currently owns a c.7.8% stake. Fosun (24%) and TAL (10.5%) also invested in Babytree in different rounds. BabyTree is planning for HK IPO in 2H 2018 with a valuation of at least $2bn, implying a 3x return for Jumei’s stake, which is currently booked as long-term investment under cost method on the balance sheet.

Cash Balance

As of 1H 2017, Jumei had US$ 430m in cash and cash equivalents. Adjust for 1) subsequent investments in Jiedian (RMB 300m injection for 60% stake, RMB 48m purchase of 15% stake, $100m new commitment), and 2) 2H 17 investment in a TV drama for RMB 100m, we think Jumei’s cash and cash equivalents should stand at $260m at 2017 year end. Furthermore, Jumei has no debt and its non-cash current assets covers its entire liability.

SOTP Valuation

Why Undervalued?

• Lack of confidence on Jumei as well as the integrity of its Founder/CEO, Leo Chen
  • Negative publicity for the $7 per share take private offer in Feb 2016 (which was canceled in Dec 2017)
  • No investor communication ever since 3Q 2015 (post going private offer)
  • Change of auditor in Nov 2017 (although just from PwC to E&Y, still reputable)
  • Jumei’s core team at the time of IPO all left the company subsequently due to lots of disagreements with Leo Chen
• No institutional investors

Risks

• Deterioration of core e-commerce business
• Jiedian did not reach profitability as it claimed to be
• Value trap continues / Leo Chen stays unfriendly to shareholders

Catalyst

• Filings of 2017AR (by May 1, 2018)
• BabyTree IPO (by 3Q-4Q 2018)
• New funding for Jiedian to reflect its mark to market valuation