STOCKS: Vipshop a Solid Third in E-Commerce, Banking on Bargains

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Bottom line: Vipshop looks like a strong bet due to its position as a focused e-commerce leader among consumers who are most interested in bargains and less concerned about famous brands.

Vipshop trives on bargain focus

So far this series on my favorite Chinese stocks has focused on big names like Tencent (HKEx: 700) and Fosun International (HKEx: 656), which are sector leaders with strong, focused management. But hiding behind these giants are a field of lesser-known second- and third-largest players in their sectors offering even better growth potential because they are far smaller and at an earlier stage in their development.

One such name is Vipshop (NYSE: VIPS), which has carved out a place as China’s third largest e-commerce company by honing in on shoppers who are more interested in bargains and less concerned with big-name brands. While some may call this area a niche, it’s really more of a focus since it encompasses quite a large segment of the Chinese shopping population.

Vipshop’s strong execution on its focus area has helped the company post growth that is twice as fast as industry leader Alibaba (NYSE: BABA), and also well above the second largest player JD.com (Nasdaq: JD). Vipshop posted 65 percent revenue growth in its latest reporting quarter, versus 32 percent and 52 percent for Alibaba and JD.com, respectively. But unlike JD.com, which is still losing big money, Vipshop is also quite profitable and has been for a while.

I started following Vipshop back in 2012, when the company made its IPO on the New York Stock Exchange at the height of a frigid climate for Chinese Internet companies. The offering initially flopped, but the stock later became turbocharged as serious investors and later some speculators realized what a strong and profitable growth story the company had to tell.

The US-listed stock is currently trades at 17 times its IPO price, marking a tidy return for anyone who was smart enough to buy it back in 2012. The shares were actually more than twice that level just a year ago, and at one point were trading more than 40 times above their IPO price at the height of a rally for Chinese stocks in the first half of 2015. But a short seller attack, combined with a broader correction in China’s domestic stock markets, have brought the shares back down to current levels that look a bit more realistic.

Like all the stocks I’m profiling in this series, my reasons for liking Vipshop are more about the company’s management and style, which are the real reasons behind its strong growth. In some ways the company is like the e-commerce equivalent of Ctrip (Nasdaq: CTRP), a leader that I’ve always admired for its ability to stay focused but still quite innovative in its core area of online travel services.

Unlike Alibaba and JD.com, which have ventured into numerous new directions that often take them far outside their core area, Vipshop remains squarely focused on e-commerce and how to boost its following among China’s millions of bargain hunters. That focus is clear in the company’s ability to attract new users, whose number jumped 51 percent last year to 36.6 million. It’s quite rare these days for top companies in their sectors to consistently post growth of 50 percent or more, which testifies to Vipshop’s potential.

Richly Valued

From a valuation perspective, Vipshop is relatively pricey at a price-to-earnings ratio of 30, versus about 17 for Alibaba. JD isn’t comparable, since it’s still losing money, and hasn’t said anything about profits anytime soon. But Vipshop’s multiple looks relatively reasonable due to its much faster growth rate than Alibaba, whose growth is far slower due to its huge size.

From a market valuation perspective, Vipshop is a clear number three with a market value of $6.5 billion. That’s a sizable figure, but still quite small compared to JD.com’s $35 billion and Alibaba’s $180 billion. But here again, small size should work to Vipshop’s advantage since it should have far more opportunities to expand than its far larger 2 rivals.

While Vipshop’s rise has been rapid and relatively smooth, it hasn’t come without a few hiccups. The short seller attack last year questioned Vipshop’s method for tallying its revenue, and marked the start of the sell-off that ultimately caused the shares to lose more than half of their value. (previous post) More recently the company was at the center of another scandal when it was discovered that bottles of Moutai liquor being sold in one of its promotions were fake. (previous post)

These kinds of growing pains are inevitable, and are more the result of inexperience in the case of the Moutai scandal, and simple overvaluation in the short-selling case. At the end of the day Vipshop still looks like a well-run, solid bet in the e-commerce space with plenty of room for growth, and could represent a good buy at its current valuation.

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