Vipshop Holdings Ltd-ADR (NYSE: VIPS):
Background Vipshop (“Vipshop or the Company”) is an online discount retailer for brands in China. The Company sells and distributes womenswear, menswear, footwear, accessories, sporting goods, and home products via its e-commerce platform (vip.com). Vipshop also owns several brick & mortar discount stores in China called Shan Shan Outlets. Vipshop has traded on the New York Stock exchange via ADR since 2012. The company’s historical returns have been strong: My position has posted a ~60% profit since purchase (as of 8/2/2023). The stock is currently trading for ~$14.50.
Market Analysis The Chinese economy has been victim to three years of stringent Covid restrictions. In 2022, the economy grew at the slowest rate in three decades. Vipshop peaked in value in March of 2021 with a high of $45.25. Since then, the stock has been steadily declining along with the rest of the Chinese economy. However, the Company is positioned to surge as the Chinese economy rebounds.
In 2022, 46.3% of retail sales in China occurred online. Additionally, China has the world’s largest digital buyer population of more than 840 million people. The gross merchandise value of the Chinese e-commerce market was $6,225B in 2021. Vipshop has an emerging position in the retail e-commerce market with $16.7B in TTM sales. The comparison of these statistics suggest that Vipshop is still a small player on a massive stage. However, the Company is rapidly penetrating the market with consistently strong growth. The Company has been growing at a 30.32% net income CAGR over the past 5 years. Strong net income growth suggests that management is effectively managing its capital structure to catalyze growth and return value to shareholders.
Another attractive element of VIPS is the counter-cyclical nature of discount retail. Many Chinese consumers have searched for discounted goods during recent economic turmoil. The Company’s recent Q3 FY2022 management presentation suggested that 83% of active customers are repeat customers. Additionally, 99% of order volume is made by repeat customers. Vipshop has been able to establish an extremely loyal base during the COVID-19 pandemic. Leadership suggests that their core future growth initiative is new customer acquisition. If Vipshop can acquire a steady stream of new customers and maintain existing customer loyalty, the Company will outperform the broader e-commerce market.
Fundamental Analysis Current Ratio (3Q2022): 1.30. A current ratio greater than one suggests that the Company has been conservatively managing its current assets due to the turmoil in the Chinese economy. As conditions improve, management will be able to deploy more short-term capital and catalyze greater return. Debt-Equity(3Q2022): 6.93. Vipshop is heavy financed by long term debt. This suggests that equity holders will realize a strong return with small movements in net earnings. Interest Coverage (3Q2022): +130 times interest earned. Which suggests that VIPS has a very low chance of missing an interest payment. Return on Equity (TTM): 16.66%. According to NYU’s stern school of business the average ROE in the online retail industry is 4.58%. VIPS significantly outperforms the market. Earnings Per Share (TTM): $0.87. It’s important to note that most analysts are forecasting higher future earnings: consensus estimate for 2023 EPS is $1.30. Additionally, Vipshop has beat earnings expectations the past 4 quarters in a row.
These fundamental characteristics combine to make Vipshop a very attractive investment. Management has been able to utilize high degrees of leverage while maintaining conservative control of short-term liabilities while the company significantly out earns their long-term interest hurdle. ROE numbers are already strong and EPS numbers are likely to improve.
Competitive Landscape The Chinese discount retail E-commerce market is an industry heavily fragmented with small players. This means that Vipshop is able to jockey for leading position with a relatively small top-line compared to the total addressable market. Key competitors include JD.com, and Alibaba. JD.com is only second to Alibaba in gross merchandize value. Both companies have boasted strong performance through the past several months. Additionally, in January Alibaba’s consumer finance unit, Ant Group, received approval from regulators to raise $1.5B. Investors believe the company will pursue an IPO. This was seen as a sign that Chinese regulators are easing economic restrictions. As a result, Chinese e-commerce stocks such as Vipstock, Alibaba and JD.com soared.
It is evident that these Chinese companies have been forced to be conservative by legislators. Alibaba and JD.com are giants compared to Vipstock. However, all companies in Chinese retail are set to benefit from decreased economic restrictions. Additionally, VIPS has strong fundamentals, impressive brand loyalty, and dedicated management. VIPS can steal market share from larger players by differentiating themselves via an excellent product and customer focused service.
Relative Valuation By looking at a small group of comparable companies, you can attempt to value Vipshop relative to its peers in retail ecommerce (See the comparable set below). I included one relevant American peer: Overstock.com.
The comparable multiple range centers around 5bps of the median comparable. I can then use the multiple range to imply an intrinsic value that is in line with the Company’s peers (See below for the resulting implied price ranges.)
As you can see, P/E multiples of peers suggest that the stock is undervalued at its current price. The market will eventually adjust VIPS stock price into the comparable multiple range. I would like to point out the heavily inflated trailing P/E of competitor JD.com: JD.com has been highly overvalued in the past. Vipshop holds several competitive advantages from an investment standpoint.
Conclusion Vipshop is well positioned to benefit from strong e-commerce tailwinds in China. As a small player in the broader market, Vipshop is positioned to return outsized gains. To date, Company management has successfully grown and engaged an extremely loyal customer base. There are currently 93.9M active Vipshop customers. Future growth will be dependent on the successful acquisition of China’s remaining online shoppers (>746M in untapped customers). Fundamental analysis suggests that VIPS has a strong historical income statement and balance sheet. Relative valuation indicates that the intrinsic value of VIPS could be between $24-$27. Currently trading around $15.00, value investors should see a huge potential upside. I am confident in my position in VIPS. The stock will benefit from accelerated performance as the Chinese economy rebounds.