While U.S. stocks continue notching record highs, shares of Chinese companies keep walking backward. The SPDR S&P China ETF (GXC 0.95%), which tracks the performance of major Chinese companies listed in the U.S. and China, is down 9.5% year to date versus the S&P 500's gain of 20%.
For long-term China bulls, though, this marks an opportunity to buy the dip. Investing legend Charlie Munger, for instance, has been racking up shares in e-commerce giant Alibaba.
But beyond Alibaba, the China sell-off has unlocked other potential value plays. Among them is Vipshop (VIPS 1.22%), an under-the-radar e-commerce stock that's down about 55% year to date.
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A proven track record
Compared to Alibaba and Pinduoduo, Vipshop is a much smaller business -- which partly explains why it's not as well known outside China. And unlike its bigger rivals, Vipshop focuses entirely on discount retail. Think of Vipshop as the online version of TJX Companies' TJ Maxx or Ross Stores.
Vipshop serves two customer groups: discount shoppers and brand owners. For shoppers, the value proposition is crystal clear. Vipshop offers a wide range of deeply discounted branded items. For brands, Vipshop is a convenient way to monetize large amounts of excess inventory or off-season products. In addition, Vipshop's lower prices effectively widen the addressable market for these brands, as they reach customers who may not have been able to afford those goods.
By attracting high-quality brands, Vipshop can provide an extensive selection of not just any lower-priced goods -- but those that shoppers want. As a result, Vipshop's customers keep coming back for more. Repeat shoppers made up 76%, 80%, and 81% of Vipshop's total active customers in 2018, 2019, and 2020 respectively. Last year, this customer segment accounted for 98% of Vipshop's total sales. Such a loyal customer base means Vipshop has no problem attracting brand owners and retaining existing ones. Underscoring this is that the number of brand owners on Vipshop grew 2.5 times between 2015 and 2020. As Vipshop expands its brand partnerships, it can keep attracting more shoppers.
A major breakthrough for Vipshop came in 2017 when JD.com (JD 2.08%) and Tencent Holdings (TCEHY 3.56%) bought major stakes in the company. As part of the arrangement, Tencent and JD.com integrated Vipshop into its own marketplaces, helping the discount e-tailer grow its user base. All these factors combined explain how Vipshop managed to grow active customers from 61 million in 2018 to 84 million in 2020, a 37% increase.
Financially, revenue grew from 84.5 billion yuan to 101.9 billion yuan (roughly $15.94 billion) between 2018 and 2020. The steady rise in sales also led to improved operating leverage, helping profits more than double from 2.1 billion yuan to 5.9 billion yuan (roughly $920 million).
Shares are on sale
Betting on a proven business model -- like Vipshop's -- is a time-tested way to make money from investing. But it's equally important for investors to make sure they are not overpaying for the stock.
The good news, though, is that Vipshop may be trading at a massive discount. After falling over 70% from a peak of $46 a share hit in March this year, Vipshop is trading at nine times earnings. Alibaba, for perspective, trades at more than double that multiple.
To be clear, Vipshop's low valuation is not entirely unjustified. Nearly all major Chinese stocks have come under fire, facing -- among other things -- a worsening U.S.-China relationship and pressure from Chinese regulators. So far, Vipshop seems to have escaped the regulatory dragnet. But that's no guarantee this will always be the case. Moreover, investors are generally steering clear of Chinese stocks. As long they continue to do so, Vipshop's valuation may remain at depressed levels.
But at the stock's current price, investors appear to be well compensated for these risks.
Still in the eye of the storm
Vipshop has a successful, proven business model. And with the backing of internet giants JD.com and Tencent, Vipshop is well positioned to ride the growth of e-commerce in China. In the short term, however, the tide is not in favor of Chinese stocks. With investors generally unexcited about investing in China, Vipshop's shares could fall even further. With all this in mind, new investors must be willing to hold on to the stock for the long term -- and ride out the storm.
