China offers incredible investing opportunities and is often overlooked by investment professionals in developed markets. Many investors avoid the country, because of a lack of transparency, protectionism of domestic companies, previous accounting scandals and general distrust. But the fact is, that China is the second largest economy in the world and will surpass United States to become no.1 sooner or later. Despite general misconceptions about China in the West, there are many honest and hard-working entrepreneurs there who have built successful and lasting companies, and I believe JNBY is one of them.
JNBY Design sells apparel, footwear and accessories to women, men and children primarily in China. The name "JNBY" is derived from Jiang Nan Bu Yi (or Just naturally be yourself"). It was started by a group of design students in 1994 as a single clothing shop in Hangzhou China. In 1997, as the number of stores expanded the founders Li Lin and Wu Jian (who are married) established Hangzhou JNBY with a focus on women's clothing. More than 20 years later, the group is still going strong and expanding across China and into developed markets.
Mrs. Li Lin (Chief creative office) started designing clothes at the early age of 12 and her passion continues even today. Mr. Wu Jian (Chairman and Chief executive officer) is mostly responsible for the operations of the company and further development. Together, they both own 61% of the company according to the latest annual report. JNBY is not a brand that is riding the wave of recent popularity, rather the company has churned out successful designs and products for more than 20 years and launched several well-known brands for women, men and children. The company is repeatedly ranked among top 10 women designer brands in China according to Fung Business Intelligence report. Between years 2005-2011 the company launched the brands CROQUIS, jnby by JNBY and less. In 2016, they have expanded their portfolio by introducing Pomme de terre, an apparel brand targeted at younger generations. In the same year, JNBYHOME was born, a designer brand for furniture and household products. The company primarily targets middle to high-income customers, which means their products cost somewhere between $15 to $1000. The company gives significant leeway to its team of experienced designers, who are lead to come up with their own original designs, instead of responding to latest fashion trends.
The main driver of revenue is their loyal fan base, which as of December 2017 had 1.9 million subscribers on WeChat (up 27% since July 2017), 800,000 followers on Weibo (up from 200,000) and 2.3 million followers on their Tmall store (up 28% in the same period). Active membership accounts (those that made at least two purchases in last 12 months) reached 290,000, up 26% since December 2016. You might say, that every fashion brand has its followers and members, but those at JNBY contributed 67% of revenue in the 6 months ending December 2017. That's a significant number and the company collects a lot of data points about their purchases, spending patterns, online visitation and shopping frequency.
In addition, the company has been very smart with their expansion, focusing mostly on lower-tier cities, where competition is limited and foreign brands are less dominant. Only 12.4% of their stores are located in Tier 1 cities (Beijing, Shanghai, Chengdu, Hangzhou, Shenzhen etc.) and 87% are in Tier 2 or smaller ones. As a result, they have been able to build a very large reach and position in smaller cities, and now can expand from a position of strength to the larger ones. The company sells their products in 3 ways: self-operated stores (557), distributor operated stores (1211) and online. Revenue from the online channel grew 31% in fiscal 2017, and 45% over the 6 months ending December 2017 but still represents only 8.5% of total sales. There is significant room to expand their online presence thanks to a large and growing fan base on WeChat and Tmall. Self operated stores are usually stand alone shops, but can also be smaller shops located within department stores in shopping malls.
JNBY Design sells apparel, footwear and accessories to women, men and children primarily in China. The name "JNBY" is derived from Jiang Nan Bu Yi (or Just naturally be yourself"). It was started by a group of design students in 1994 as a single clothing shop in Hangzhou China. In 1997, as the number of stores expanded the founders Li Lin and Wu Jian (who are married) established Hangzhou JNBY with a focus on women's clothing. More than 20 years later, the group is still going strong and expanding across China and into developed markets.
Mrs. Li Lin (Chief creative office) started designing clothes at the early age of 12 and her passion continues even today. Mr. Wu Jian (Chairman and Chief executive officer) is mostly responsible for the operations of the company and further development. Together, they both own 61% of the company according to the latest annual report. JNBY is not a brand that is riding the wave of recent popularity, rather the company has churned out successful designs and products for more than 20 years and launched several well-known brands for women, men and children. The company is repeatedly ranked among top 10 women designer brands in China according to Fung Business Intelligence report. Between years 2005-2011 the company launched the brands CROQUIS, jnby by JNBY and less. In 2016, they have expanded their portfolio by introducing Pomme de terre, an apparel brand targeted at younger generations. In the same year, JNBYHOME was born, a designer brand for furniture and household products. The company primarily targets middle to high-income customers, which means their products cost somewhere between $15 to $1000. The company gives significant leeway to its team of experienced designers, who are lead to come up with their own original designs, instead of responding to latest fashion trends.
The main driver of revenue is their loyal fan base, which as of December 2017 had 1.9 million subscribers on WeChat (up 27% since July 2017), 800,000 followers on Weibo (up from 200,000) and 2.3 million followers on their Tmall store (up 28% in the same period). Active membership accounts (those that made at least two purchases in last 12 months) reached 290,000, up 26% since December 2016. You might say, that every fashion brand has its followers and members, but those at JNBY contributed 67% of revenue in the 6 months ending December 2017. That's a significant number and the company collects a lot of data points about their purchases, spending patterns, online visitation and shopping frequency.
In addition, the company has been very smart with their expansion, focusing mostly on lower-tier cities, where competition is limited and foreign brands are less dominant. Only 12.4% of their stores are located in Tier 1 cities (Beijing, Shanghai, Chengdu, Hangzhou, Shenzhen etc.) and 87% are in Tier 2 or smaller ones. As a result, they have been able to build a very large reach and position in smaller cities, and now can expand from a position of strength to the larger ones. The company sells their products in 3 ways: self-operated stores (557), distributor operated stores (1211) and online. Revenue from the online channel grew 31% in fiscal 2017, and 45% over the 6 months ending December 2017 but still represents only 8.5% of total sales. There is significant room to expand their online presence thanks to a large and growing fan base on WeChat and Tmall. Self operated stores are usually stand alone shops, but can also be smaller shops located within department stores in shopping malls.
JNBY financial data
The company's fiscal year ends in June instead of December, and here are their financial results since 2014:
As we can see, revenue has almost doubled over this period, reaching 2.67 billion RMB ($420 million) and net income has almost tripled to 416 million RMB ($65 million). Net income margin has improved by 4.7%, thanks to better cost management, an omnichannel inventory system and higher gross margins. I expect this trend to continue, especially with regard to gross margins, as the company gets bigger and gains more leverage over suppliers. The company previously had a separate inventory management system for online channels and retail stores and now they have unified it, which resulted in faster delivery times and lower operating costs. Revenue grew 22.6% in fiscal 2017, and accelerated to 26% over the last 6 months ending December 2017.
Now I'm no fashion expert but JNBY's numbers just make me salivate. Their 4-year average ROA is 19%, while 4-year average ROE is 50%. You won't find such returns in many companies, let alone in the retail industry. This one is truly exceptional. Their return on equity actually went down in 2017 to 26%, because the company raised a lot of cash in the IPO, which hasn't been used yet. If we look at return on invested capital, the number is even more staggering. In fiscal 2017, their equity reached 1.26 billion RMB, while they had 828 million in cash and short-term investments with no debt, which means their invested capital was only 429 million RMB. Dividing net income by this figure, we get a 77% return on capital, that is just outstanding.
Growth has been driven primarily by opening new stores around China and abroad, but also by rising same-store sales as evidenced in this chart. An expanding fan base is the main reason for the increase in traffic in stores, while their customers generally spent more per visit in 2017 than 2016. Rising discretionary income is helping fuel a boom in China's apparel industry, which grew approximately 5% in 2017.
Now I'm no fashion expert but JNBY's numbers just make me salivate. Their 4-year average ROA is 19%, while 4-year average ROE is 50%. You won't find such returns in many companies, let alone in the retail industry. This one is truly exceptional. Their return on equity actually went down in 2017 to 26%, because the company raised a lot of cash in the IPO, which hasn't been used yet. If we look at return on invested capital, the number is even more staggering. In fiscal 2017, their equity reached 1.26 billion RMB, while they had 828 million in cash and short-term investments with no debt, which means their invested capital was only 429 million RMB. Dividing net income by this figure, we get a 77% return on capital, that is just outstanding.
Growth has been driven primarily by opening new stores around China and abroad, but also by rising same-store sales as evidenced in this chart. An expanding fan base is the main reason for the increase in traffic in stores, while their customers generally spent more per visit in 2017 than 2016. Rising discretionary income is helping fuel a boom in China's apparel industry, which grew approximately 5% in 2017.
JNBY started primarily as a brand for women, but later expanded to children and menswear. While the brands for women (JNBY and less) represented 80% of sales in 2014, this number was down to 68%, thanks to high growth at CROQUIS (men), Pomme de terre and jnby by JNBY (children). All their product categories are growing strongly, with JNBY up 23% in the 6 months ending December, CROQUIS up 19.5%, jnby by JNBY up 34%, less up by 45% and Pomme de terre up by a staggering 201%. I believe that each of these brands has potential for at least several hundred standalone stores. The company has proven very adept at designing and expanding new brands and I believe this trend will continue way into the future.
Pomme de terre is the fastest growing brand in terms of the number of stores, up 19% in the last 6 months. Less and jnby by JNBY both grew 18%, while CROQUIS stores expanded by 11% over the same period. The company actually closed one JNBYHOME store and ended the year with 2 stores. The pace of expansion is really staggering and JNBY plans to add at least 200-250 stores per year over the next several years, which is roughly in-line with the 270 stores added over the past 12 months. Out of the 1768 stores they operated at the end of calendar year 2017, 40 of them are located overseas, mainly in Hong Kong, Taiwan but also United States, where they have one store in Seattle and two in San Francisco. Also the CEO Wu Jian announced in February, that they are looking for distributors in Europe, and the company is preparing for international expansion.
Chinese apparel market
The exact size of the apparel market in China remains unknown, as various consulting companies or regulatory bodies report conflicting numbers. The only thing we can say for sure is that the market is really huge and expanding faster than those of Europe or United States. According to the Hong Kong Trade and Development Council (HKTDC), the overall apparel market for adults in China was worth 1,144 billion RMB ($180 billion) in 2016 and the market for children was worth 145 billion RMB ($23 billion). The apparel market for women grew 5% during 2016, and is expected to continue on this trajectory at least until 2019. The menswear market was up 4%, while the market for children's apparel grew 7%. The sportswear market was the fastest growing segment, up by 12% in 2016. This compares to growth of 1% for the European clothing market (Source: Euratex) and 3% growth for the U.S. apparel industry. China is growing faster simply because they started at a lower base and still have many years to go. If we assume that it will grow in-line with GDP at 5-6% per year, that's still double the rate of US and nearly 6 times that of Europe.
The Chinese apparel market is highly fragmented with over 10,000 brands fighting for customer's attention. According to Fung Business Intelligence, JNBY had a market share of 0.4% in 2015 and was the 38th most popular womenswear brand in China. JNBY brand is visible only in the womenswear category, as shown in the table below. Brands like CROQUIS, less or Pomme de terre and not yet so popular or known around China, and I believe there is significant room to expand them.
The Chinese apparel market is highly fragmented with over 10,000 brands fighting for customer's attention. According to Fung Business Intelligence, JNBY had a market share of 0.4% in 2015 and was the 38th most popular womenswear brand in China. JNBY brand is visible only in the womenswear category, as shown in the table below. Brands like CROQUIS, less or Pomme de terre and not yet so popular or known around China, and I believe there is significant room to expand them.
As we can see the industry is still consolidating, as the best brands have around 1% of market share, and 6 out of 10 most popular ones are foreign. JNBY has its own unique style that targets mainly women between 25-30 and is growing faster than most of their competitors. The company has also set-up their own fabric development team to provide unique and original designs for women clothing. The group also buys environmentally friendly materials for garment manufacturing like organic cotton jersey, recycled nylon or VITA fabric. JNBY also has their own teams, that inspect third-party supplier factories before and during the textile manufacturing process, to ensure the highest quality of their end products.
Source: Fung Business Intelligence
The company's primary competitors are Koradior Holdings, La Chapelle, China Lilang, Heilan Home (menswear) and Giordano.
Heilan Home is the elephant in the room. Their revenue and market cap just outmatches others, according to estimates Heilan (and their brand HLA) hold around 4% of the menswear market in China. Tencent and JD.com both bought a minority stake in Heilan Home recently, which is a part of their online to offline e-commerce strategy. Given their large size, growth has slowed down but is still a respectable 7%. Their net profit margin is 18%, second to only China Lilang which has 25%. JNBY is the third most profitable retailer, It's also the second fastest growing company in the group, behind only Koradior Holdings, which increased revenues by 38%.
It seems that JNBY is the most expensive from the group based on their P/E ratio alone. That might be a bit misleading as it's growing way faster than average and taking market share from competitors. It's also still small compared to Heilan Home or La Chapelle, based on their revenue. In addition, the company has room to improve profit margins further (although it already has the highest gross margin from the group), thanks to better cost control and increasing leverage over suppliers, which would reduce their P/E further. I am so optimistic on JNBY primarily because they earn very high returns on capital, are continuously launching new successful brands and have recently begun their international expansion. I don't think they will be very successful in Europe, as their designs are very different from those popular here, but I might be wrong in the end. On the other hand, United States has a very large Chinese population, and they might capture some market share there.
It seems that JNBY is the most expensive from the group based on their P/E ratio alone. That might be a bit misleading as it's growing way faster than average and taking market share from competitors. It's also still small compared to Heilan Home or La Chapelle, based on their revenue. In addition, the company has room to improve profit margins further (although it already has the highest gross margin from the group), thanks to better cost control and increasing leverage over suppliers, which would reduce their P/E further. I am so optimistic on JNBY primarily because they earn very high returns on capital, are continuously launching new successful brands and have recently begun their international expansion. I don't think they will be very successful in Europe, as their designs are very different from those popular here, but I might be wrong in the end. On the other hand, United States has a very large Chinese population, and they might capture some market share there.
Summary
JNBY is a very well managed and fine business with lots of growth potential. The valuation is on the high end of its historical range now, but I don't mind paying a bit more for such a good company. I think they are on the verge of a major expansion phase and even though I'm a bit late to the party, with their shares up almost 200% over the past year, there is still plenty of upside left. I believe the company will grow revenues by at least 25% over the next several years, and net income should grow even faster thanks to economies of scale, which means revenues would hit around 8 billion RMB in 2023. I have put 8% of my portfolio in the stock at a price of 17.6 HKD. Good luck in investing!
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