Description

Secoo (SECO) is a luxury ecommerce platform in China (sells designer watches, handbags, shoes, etc. across various international and local brands). The company is still somewhat early stage, but is growing rapidly, is profitable, and occupies a leadership position (by market share) in the ecommerce platform segment of a high-potential category – China luxury.

Given the China angle, a smaller float, and the rapid growth trajectory, this idea may be most applicable to less traditional, smaller, and more growth-oriented investors on the site, but there is also a real case for more classic value investors as the company trades at ~11x 2019’s EPS on forward estimates which I hope to prove achievable / conservative.

I would encourage reading jls’s November 2017 write up on Yoox Net A Porter (YNAP) on this site for background. While it doesn’t touch on SECO, that write-up makes a broad bullish case for ecommerce luxury and introduces some nuances of the luxury business that are key to investing in the space. SECO itself also company recently commissioned / completed a “white paper” on China luxury, with Deloitte which is available online. Some of the covering research analysts also have detailed notes including covering some of the company’s presentation materials. IR may be able to provide more info, though I don’t see a presentation posted online currently. I’ll be somewhat brief focusing on the thesis points and risks, and can follow with more detail.

Luxury is a good business, with some unique aspects. Luxury will increasingly adopt ecommerce approaches over time. Brand image is very important and luxury companies are very careful about remaining exclusive. They’re therefore extremely slow to change or to have their products sold in an undisciplined way, as they’re rightfully protective of that earned brand image. Luxury companies have historically adopted a physical-store only approach, are increasingly beginning to open up to own-brand ecommerce websites, and will further push into more online platforms (including those with other brand inventory like SECO) over time. China is very important to the luxury business broadly and ecommerce is the preferred option of the Chinese consumer; therefore I think large scale luxury ecommerce in China is inevitable. Brands need these customers, but need to be smart about how they go about capturing them, in keeping with the characteristics of being a luxury brand. My determination is that Secoo understands these aspects quite well, and approaches their partners accordingly, which will allow them to win more direct brand collaborations over time. This is what has allowed the company to achieve its considerable success thus far.

Secoo is a genuine leader in China. It’s a good website and has solid name recognition in China. While Alibaba’s “Luxury Pavillion” and JD’s “Toplife” luxury platform have gained a lot of attention, Secoo has far more SKUs, is more of an actual purchase engine (as opposed to brand marketing) and my research indicates that it has the best placement in organic search results for China luxury. JD actually announced TopLife shortly after SECO’s IPO, which helps explain some of the poor initial post IPO share price action. JD also has invested in Farfetch – a YNAP competitor. Using JD as an example, it will be interesting to monitor their traction but I’d note they’ve tried their hand at luxury well before ‘TopLife’ and they haven’t gotten very far; I think this is indicative of the challenges of approaching luxury while connected to a massmarket platform.

Continued growth with some margin drivers should create strong financial results and share price upside. Growth is coming from increased partnerships with brands, better marketing / membership initiatives, and the overall macro tailwinds of China online luxury. Margin will come from a few places: (a) a big mix shift going on (SECO started out heavily skewed towards low margin luxury such as watches / jewelry, but is moving further into apparel, travel, and other higher margin sales) (b) growing the marketplace business whereby SECO doesn’t assume ownership and doesn’t book the COGS (i.e., they get ~100% gross margin) and (c) increasing direct brand collaborations as opposed to working through distributors. I think 1 – 2ppts of annual margin improvement is achievable. Together with ~30% top-line CAGR over the next two years, I think $1+ of EPS by 2019 is achievable. If the company delivers on these results, and continues to prove its credibility in this space, a $15 share price is well within reach.

SECO is currently one of the few ways to play the luxury ecommerce theme, and the only pureplay in China. After YNAP’s takeout (at a near 20x ebitda multiple, which I think reflected the strategic value of this asset class), SECO doesn’t have any close publicly listed peers. Farfetch and Meilishuo (China fashion oriented site) may seek IPOs later this year and, if so, I would expect both to attain valuations above SECO, and perhaps serve as potential catalysts by comparison.

Risks / Items to be aware of

Competition: no question China ecommerce is tough: VIPS and JD have had a lot of difficulty getting margin in apparel, as Alibaba is throws its muscle around. The market is very dynamic and positioning can change quickly. In addition to Alibaba and JD’s own platforms, there are players such as fashion oriented site Meilishuo (mentioned above), social-media driven fashion sites, etc. As alluded to earlier, I believe that the unique nature of luxury will (a) favor players that work in a collaborative manner with brands and (b) favor players that are most clearly focused on creating a smart, niche platform that fits with their brand's image / goals. Yet, I would never rule out the likes of Alibaba etc. taking share and so this is a key analytical determination that bears continued monitoring. As another example of the market's dynamism, Netease’s ecommerce business has grown from zero to multibillions RMB in short order, and also provides a way for Chinese consumers to purchase quality imported goods. While I don’t consider it a SECO peer (as SECO is more true “luxury” as opposed to just high quality imports), the broader point here is that (a) a lot of players are vying for China’s ecommerce consumer but also that (b) there are many success stories outside of Alibaba.

Brand partnership traction falls flat: if brands don’t adopt, or if they resist SECO’s platform, then SECO is just a glorified online reseller, which may not be fatal but this is not the vision that allows for sustainable growth and margin improvement.

Cash flow: it’s still negative. Despite being profitable in 2017, the company is spending a lot of money on inventory acquisition which can help jumpstart relationships with new brands. I’d prefer better cash flow but it’s a tradeoff I’m temporarily accepting for the topline growth currently.

Spreading thin: the company has announced forays into a variety of arenas including upscale bars and liquor concepts. I think these are mostly PR driven concepts; they come off a little odd to me, but I simultaneously understand management trying to do something unique that will resonate with their Chinese members / customer base. I’m not overly concerned management is losing focus on their core business.

Language / coverage: The last conference call had only one or two questions, and management are primarily Chinese speakers. I think this 'is what it is' for the time being; the company does make an effort with investors and I’d expect this to get better over time.  

Catalyst

potential fartech, meilishuo IPOs, perhaps a strategic investment, continued strong growth.