Vipshop Holdings: A Solid Valuation Play

Summary

  • Solid valuation play with strong fundamentals.
  • Owner-operated business with a meaningful ownership stakes in the company.
  • Cooperation with JD.com and Tencent provides opportunity for future growth.

Investment Thesis

Vipshop Holdings Ltd. is a Chinese online retailer with a focus on sale of discounted branded products in limited quantities for a short period of time, also known in the retail industry as a flash sales business model. The stock price went through a roller-coaster ride when in the first two months of this year generated a return of 60% just to give it all back and ended this month with a YTD loss of nearly 40%.

In the past few months, the stock was affected by the investigation of Chinese regulators for unfair retail practices, which continued with a selloff due to the block trade tied to the collapse of hedge fund Archegos. If this was not enough, then the current discussion about the regulation of Chinese e-commerce companies is putting additional pressure on the stock performance. In the following paragraphs, I want to show that behind the negative sentiment hides a company with growing revenues and solid fundaments which are unfairly discounted at the current price.

Source: Bloomberg

Company Overview

Before jumping straight into operational characteristics, it is always good to look at the ownership structure of the company. The company has two classes of shares. Class B shares are 100% owned by its CEO and founder Eric Ya Shen, who owns 12% of total shares. Another co-founder Arthur Xiaobo Hong owns 6.9% of total shares. These two founders together own 19% of the company stock. It is always good to see that both founders have “skin in the game” and their ownership stakes constitute majority of their net worth. Other major investors are Tencent and JD.com which altogether hold a 17% stake in the company, which I consider to be a proof that Vipshop is a solid company, not just some e-commerce scam.

This alliance with Tencent and JD.com serves to protect Vipshop’s business model from major competitors, especially Alibaba and Pinduoduo, due to lowering acquisition costs of new customers and at the same time re-directing these customers to the Vipshop platform. At the end of Q1 2021, Vipshop had 46 million customers, GMV of USD 7.1 billion, and cooperated with approximately 21,000 brands. That is quite impressive compared to what this business is currently worth.

Valuation

With Chinese tech companies, it is generally true that they are either loved or hated. You can buy them either with a huge premium or a big discount compared to their intrinsic value. In case of Vipshop, I would argue that is unfairly discounted, which makes it an attractive buying opportunity at current prices.

There are several ways how an investor can look at the valuation of the company. In this analysis, I look at the valuation from several perspectives. More specifically, I look at the multiples of the company versus its historical multiples, the multiples of the competition, and finally multiples of the market itself. I understand that some might argue that a proper valuation of the company requires a DCF analysis, but in this case, I think that relative valuation is sufficient to prove the point.

At current levels, VIPS is trading approximately 30% below its 2-year average. Comparing VIPS to index SP500, the difference is even more striking. The same pattern is visible if you compare VIPS to its closest competitors: Alibaba, Pinduoduo and JD.com.

From a fundamental perspective, VIPS looks like a solid investment. It is net cash positive (USD 2.3 billion in 1Q21) and generates over USD 1.1 billion in FCFF with FCFF yield over 11%. Based on the management comments, it expects to grow revenues from 20% to 25% in Q2 and c. 30% in FY21. Additionally, it expects to repurchase USD 500 million worth of shares in next two years.

Summary

After a string of negative events in the past 4 months, VIPS underwent a path from being a darling of the market to become a total underdog. Even though the stock collapsed more than 60% from the top, the underlying business is still intact and fundamentally strong. The business itself is net cash positive, generating positive FCFF. All in all, VIPS is a valuation play which offers 30% to 40% discount at the current price. Can VIPS trade even lower? Yes, it definitely can. However, patient investors who are willing to slowly build their position and who can wait for the valuation gap to close can be rewarded with above-average return in the not-so-distant future.

Author: Roman Vitasek, Seeking Alpha

You might also like