E-COMMERCE: Moutai Scandal Wipes Shine Off Vipshop

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Bottom line: Vipshop shop shares could see some upside if the company improves its public relations and its revenue and profit growth stabilize at current levels.

Vipshop dogged by fake liquor scandal

A scandal involving pirated liquor is cooling down former e-commerce high-flyer Vipshop (NYSE: VIPS), in an episode reminiscent of a much larger brouhaha that devoured sector leader Alibaba (NYSE: BABA) almost exactly a year ago. In this case, the scandal involving fake Moutai liquor has been dragging on for more than 2 weeks now, and the latest development has Vipshop apologizing for its lack of transparency in handling the incident.

Some are saying this particular scandal could just be the tip of the iceberg, and that numerous other fake products could be lurking on Vipshop’s website that specializes in bargains for lesser-known brands. But in my view, slowing growth is the real cause for concern among Vipshop investors, many of whom are taking advantage of this news as an excuse to sell their stock.

Vipshop shares are down nearly 20 percent since the scandal first broke right around Christmas, when the company was inundated by complaints from irate consumers who said Moutai liquor they bought in an online promotion was fake. (previous post) For anyone not too familiar with China, Moutai is the nation’s most famous brand of local liquor called baijiu, and individual bottles often cost 1,000 yuan ($150) or more.

Now Vipshop has issued a formal apology for its lack of transparency when the crisis first broke, saying it kept its silence at the request of police who were investigating the supplier of the fake liquor. (Chinese article) The company had previously said it would refund money to people who bought the fakes, but a consumer group criticized it for lack of transparency on a number of points in the process. Reports say talks between the company and the consumer group are continuing.

Vipshop shares fell 3 percent in the last trading session on Wall Street last week, extending a steady series of losses since the scandal first broke. But the bigger news is the nearly 40 percent drop in Vipshop shares since early November, as investors worried about the company’s slowing growth.

Vipshop’s latest earnings look respectable enough, with revenue and profit up 63 percent and 90 percent, respectively, in its third-quarter results announced in November. But those numbers are quite a bit slower than 2 years earlier, when the company’s revenue soared nearly 150 percent in the third quarter of 2013 and it surged into the profit column after reporting a loss the previous year.

Deflating Multiple

After the recent sell-off, Vipshop shares trade at a multiple of 38, which is quite a bit lower than Alibaba’s price-to-earnings (PE) ratio of 58 and is roughly comparable with the little known online cosmetics seller Jumei (NYSE: JMEI). It’s also worth noting that China’s second largest e-commerce company, JD.com (Nasdaq: JD), has a negative PE because it has yet to ever make a profit.

One of the bottom lines in all this is that Vipshop has to do a better job at public relations, not only in times of crises like during the Moutai scandal, but also during more normal times. Many investors know about Alibaba and JD.com, but far fewer are aware of Vipshop, even though the company’s market value of $8 billion is far larger than better-known Chinese Internet names like Sina (Nasdaq: SINA) and Sohu (Nasdaq: SOHU).

The other bottom line is that Vipshop will need to get more aggressive in battling the pirates, though that problem should be relatively minor due to the company’s focus on lower-end products and unknown brands. At the end of the day, the company’s stock could see some considerable upside if it improves its public relations, cleans up its site, and its growth stabilizes at current levels.

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