Chinese e-commerce site Vipshop (VIPS 1.22%) is often overshadowed by market leaders Alibaba (BABA 2.59%) and JD.com (JD 2.08%). Vipshop controlled just 1.8% of China's e-commerce market last year, according to eMarketer, putting it in a distant fifth place behind Alibaba, JD, Pinduoduo (PDD 3.13%), and Suning -- in that order.
Yet Vipshop is surprisingly resilient. The stock was cut in half last year over concerns about its slowing growth and tumbling margins. However, it rebounded about 40% this year as its growth stabilized, its margins improved, and it continued gaining new customers.
Image source: Getty Images.
Vipshop's recent first-quarter report indicates that turnaround is still on track. Its revenue rose 7% annually to 21.3 billion RMB ($3.2 billion), beating estimates by $220 million. Its adjusted net income grew 12% to 816 million RMB ($122 million), or $0.18 per American depositary share (ADS), which cleared expectations by $0.02. Let's see why Vipshop continues to grow as other e-commerce underdogs fizzle out.
Understanding Vipshop's business
Vipshop was one of the first flash-sale sites in China. Its first-mover advantage in that niche helped it remain relevant in the crowded e-commerce market even as larger marketplaces like Alibaba's Tmall launched similar flash-sale sites.
In late 2017, Vipshop received a shot in the arm when Tencent (TCEHY 3.56%) and its e-commerce partner JD co-invested $863 million in the company. That investment gave Tencent a 7% stake in the company and boosted JD's stake from 2.5% to 5.5%. Tencent subsequently raised it to 8.7%.
Vipshop launched shopping mini programs for Tencent's WeChat, the most popular messaging app in China, and bundled its Prime-like "Super VIP" plans with Tencent Video subscriptions. JD also integrated Vipshop's flash-sale marketplace into its own. By the fourth quarter of 2018, nearly a fourth of Vipshop's new customers were coming from Tencent and JD's platforms.
Image source: Getty Images.
The key numbers
During the first quarter, Vipshop's total number of active customers grew 14% annually to 29.7 million as its total orders increased 29% to 116.5 million. Over the past year, Tencent and JD's support clearly boosted Vipshop's growth in active customers as its total orders kept climbing:
|
Metric |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
|---|---|---|---|---|---|
|
Active customers |
2% |
6% |
11% |
13% |
14% |
|
Total orders |
25% |
31% |
29% |
35% |
29% |
Year over year. Data source: Vipshop quarterly earnings.
Vipshop's number of Super VIP subscribers -- who get exclusive or early access to promotional events, special discounts, and free shipping and returns -- also continues to grow. It finished 2018 with 3.2 million Super VIP subscribers, compared to less than 1 million a year earlier. The growth of that platform, along with its WeChat mini programs and JD integration, could lock in shoppers and widen Vipshop's moat against bigger rivals like Alibaba and Pinduoduo.
The company's flash-sale model sounds like a low-margin one, but it uses loss leaders to convince shoppers to purchase other products. Its gross and operating margins, which both improved year over year, indicate that it isn't sacrificing margins to boost sales:
|
Metric |
Q1 2018 |
Q4 2018 |
Q1 2019 |
|---|---|---|---|
|
Gross margin |
20.2% |
20.6% |
20.4% |
|
Operating margin* |
4.4% |
4.3% |
4.9% |
Data source: Vipshop quarterly earnings. *Non-GAAP.
That's a rare accomplishment for a discount e-tailer in China. For example, Pinduoduo, which promotes group purchases of cheap generic products, generates triple-digit sales growth but remains deeply unprofitable.
The road ahead
Vipshop runs a tighter ship than Pinduoduo and other smaller e-tailers, but it still anticipates slower growth. It expects its revenue to rise just 0% to 5% annually in RMB terms during the second quarter due to an uncertain outcome for an upcoming promotional campaign in mid-June.
However, Vipshop could also be sandbagging its guidance, since it previously forecast 0% to 5% sales growth for the first quarter yet delivered 7% growth. It didn't provide any earnings guidance, but analysts expect its adjusted earnings to stay roughly flat.
For the full year, Wall Street expects Vipshop's revenue and earnings to rise 4% and 7%, respectively. Though its forward P/E of 10 reflects that slower growth rate, it's a reasonable valuation for a company that controls a stable e-commerce niche in the world's most populous country.
Vipshop's stock probably won't rally soon, due to escalating trade tensions, the slowdown in China's economy, and the depreciating RMB. However, the stock's downside is limited as these levels, and it might rebound on any good news about China.
