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Samarkand Global: cross-border e-commerce stock to ride the wave of Chinese economy stimulus?


Samarkand Global [AQSE:SMK] has recently announced their 2023 annual report, along with receiving an accolade at the Ecommerce Awards 2023.

This comprehensive analysis by The Armchair Trader delves into Samarkand’s strategic positioning and its ability to leverage China’s burgeoning e-commerce sector, linking western cosmetic brands with Chinese consumers.

Macro-economic context: China’s consumer market

China is currently the world’s second‑largest consumer market for cosmetics. To understand the intricacies of cross-border e-commerce in China, it is sensible to examine key economic indicators surrounding consumer spending and confidence.

According to the National Bureau of Statistics, the total retail sales of consumer goods from January to July amounted to 26.4 trillion yuan, marking a year-on-year growth of 7.3%. Data from Fitch indicates a resilient rebound in both retail sales and disposable income in China, despite ongoing disruptions due to the COVID-19 pandemic.

Samarkand chart, retail sales

Samarkand chart, disposable income

Post-pandemic reopening has induced a surge in consumer confidence, further bolstered by recent economic stimulus. The advent of China’s ‘Golden Week’ and the Mid-Autumn Festival, a seven-day national holiday, is likely to encourage consumer spending, although a significant portion will be contributed by travel spending.

Chinese consumer confidence

Samarkand chart

Despite these optimistic indicators, China’s economy is still facing headwinds. Recent findings from the China Beige Book indicate a dip in consumer spending in September, particularly in food and luxury goods. The property sector remains in trouble, and export orders have shown signs of weakening. Such trends may prompt some brands to reconsider their market strategies in light of a potentially ‘fragile’ economic outlook in China.

Turning our focus to Samarkand’s core business, Chinese e-commerce platforms have reported a 5% uptick in Gross Merchandise Value (GMV), and live-streaming platforms have experienced double-digit growth.

Although domestic brands maintain a strong market share, foreign brands in beauty and nutrition are reclaiming some ground on online platforms like Tmall. A report by McKinsey reveals that a mere one-fifth of consumers are opting for cheaper brands, while premium and luxury labels, especially international ones, are witnessing an uptick.

By 2025, high-quality products are projected to capture over half of the cosmetics market. McKinsey also said in the report, “While uncertainties linger and there may well be headwinds ahead, we remain confident in the long-term prospects of China for consumer companies.”

Samarkand Global actively expanding its portfolio

Since our last note on the company, Samarkand Global has been actively expanding its portfolio and brand awareness. The company has entered four new partnerships with high-end brands, including Dr. Organic, ByNacht, Manta Hair, and Umberto Giannini. Each of these brands brings a unique offering, from Dr. Organic’s natural skincare products to Umberto Giannini’s vegan, cruelty-free haircare range.

In addition to new partnerships, Samarkand has extended its existing relationships. A notable extension is a three-year agreement with ilāpothecary, an award-winning British brand known for its 100% natural products that combine functional beauty and wellness. This brand has already had a successful launch on Douyin, and Samarkand aims to further accelerate its growth in the Chinese market.

Samarkand has also signed a new agreement with King Power, a leading duty-free operator. This move aligns with Samarkand’s strategy to channel high-quality products not just to China but globally.

On the recognition front, Samarkand was awarded Silver for Best Cross-Border Campaign at the eCommerce Awards 2023. This recognition serves as a testament to the company’s effective cross-border strategies.

In light of the volatile geopolitical situation between China and the West, Samarkand’s board is also encouraging expansion into regions outside of China. This approach showcases Samarkand’s continuous efforts to diversify its portfolio, increase brand awareness, and adapt to market conditions.

Continuous topline growth and cost cutting – road to profitability

In the recently announced annual report of FY 2023, Samarkand Global posted some promising results: annual group revenues rose 5.4% to £17.5m, despite stagnant sales in China at £11.7m due to ongoing pandemic effects. UK and other global revenues grew by 16% to £5.8m, boosted by last year’s acquisitions.

Revenue from Brand Ownership surged 48% to £6.7m, while Nomad Technology dropped 19.3% to £6.0m due to brands reducing exposure to the Chinese markets, and Distribution remained steady at £4.4m. The group’s gross margin improved to 55% from last year’s 50%, primarily due to a higher revenue contribution from Brand Ownership.

Selling and distribution expenses dropped to 31% of revenue, down from 42% in 2022, due to efficient use of bonded warehouses in China and targeted brand investments. Administrative expenses also fell to 44% of revenue, from 49% last year, following cost adjustments and a reduced headcount.

Adjusted EBITDA, a non-GAAP measure used to assess underlying profitability, showed losses narrowing to £2.2m from £6.2m in 2022. It is estimated that Samarkand will be profitable in FY 2025, given the effort of accelerated brand ownership growth and increased efficiency of capital utilisation.

Samarkand now is trading at 20p, the lowest since it listed. (52 week range 20.00-55.00). The price reflects how investors still have bearish views on businesses that have a great exposure to the Chinese market. However, considering Samarkand’s continued development of its own brand ownership, diversifying its business across other regions, and the expected timeline to become profitable, investors should pay attention to this cross border e-commerce innovator.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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