Date: 5/16/2018

Vipshop Holding Ltd (NYSE: VIPS)

$ 12.08

Data Overview Summary

Target Price $17.61
 The company registered members exceeded 300 million of which
Potential Upside/Downside 49%
nearly 58 million are active customers representing a CAGR of 44.8%
52 Week High-Low $19.14 - $7.79
and 43.2% respectively over the past 5 years.
Beta (5-year monthly) 2.35
 Its revenue growth driver is its core business model – selling high
Market Capitalization $7.96B
quality retail products at deeply discounted prices for a limited period
Dividend Yield N/A of time creating the element of “thrill and excitement” providing
Industry Diversified e-commerce customers with a unique shopping experience.
Current Ratio 1.23x  The company operates in a highly competitive market, this includes
Debt/Capital 26.0% major B2C e-commerce companies in China such as Alibaba and
EBITDA Margin 5.1% JD.com.
Price/Earnings (P/E) 26.79  The company’s financial health is sound, albeit some fundamentals
Price/Book (P/B) 3.56 lack behind, particularly profitability.
Price/Cash Flow (P/CF) 7.83
Earnings Yield 3.7%

Net Debt/Equity 1.76 Abbreviated Financials

Value Score : B Income Statement (RMB MIL) FY0 FY-1
Revenue 72,912 56,591
P/E rel to industry A Gross Income 16,294 13,597
P/B rel to industry B EBITDA 3,752 3,683
EBIT 2,690 2,708
P/E/G Ratio to Industry E
Pretax Income 2,541 2,666
P/S rel to industry A Net Income 1,892 1,993
P/CF rel to industry A Common Shares 659 659

EV/EBITDA rel to industry A Balance Sheet (RMB MIL) FY0 FY-1

Piotroski F-Score 3 Cash & ST Investments 10,222 10,514
Growth Score : C Fixed Assets 6,661 4,467
Total Assets 37,983 25,094
Proj. EPS Growth (𝐹1/𝐹0 ) 12.3% Current Liabilities 19,258 14,583
Hist. EPS Growth (𝐹0 /𝐹−1) 2.8% LT Debt 4,095 4,382
Total Liabilities 23,732 19,313
CFO Growth (𝐹0 /𝐹−1) - 65.3% Total Shareholders’ Equity 14,251 5,782
CFO Growth (𝐹0 /𝐹−2) -48.8%
Return on Equity (ROE) 18.9% Cash Flow Statement (RMB MIL) FY0 FY-1
Net Income 1,892 1,993
Dividend Growth (𝐹0 /𝐹−1) n/a Cash From Operations 983 2,831
EBITDA Growth (𝐹0/𝐹−1) 1.9% Capital Expenditures -2,475 -2,172
Cash From Investments -2,033 -1,669
Momentum Score : C
Cash Dividends Paid 0 0
Last Earnings Surprise D Cash From Financing 7,170 -393
Earnings Momentum C
Operating Margin Growth D
Sales Growth B Consensus Recommendation Author
▼
Analyst Earnings Revision E ██████████████████ Glen Borg
Growth Momentum C Sell Strong Buy Equity Research Analyst
# of Analysts: 23 Contact Number: +356 99747380
Value Momentum A Upgrades Last 30 Days: 1 Email: glen.borg.gir@gmail.com
Downgrades Last 30 Days: 12 LinkedIn: linkedin.com/in/glenborg/

1
Company Overview
VipShop Holding LTD (“VIP”, “the firm”, “the company”) is an online discount retailer for brands in China. The company
offers high quality well known branded products to consumers in China through flash sales mainly on its vip.com website.
The company operates through three segments namely sales, product distribution and offering of goods on its online
platform. By year end 2017, the company’s total orders amounted to 335 million – an average of nearly six orders per
active user. The company reported revenue of ¥72,912 million in FY2017, a 28.8% growth over the previous year end
(FY2016: ¥56,591 million).

Through its flash sales model, the company sells limited quantities of discounted branded products online for limited
periods of time. The products vary considerably over 17,000 domestic and international brands, including apparel for
women, men and children, fashion goods, cosmetics, home goods and other lifestyle products.

Reasons to Buy
I. Innovative business model. VIP has successfully managed to attract a large number of customers, specifically
bargain hunters. When visiting malls and retail shops to do our shopping, most of us are on the look for “value for
money” items unless we need something specific. VIP through its online platform provides its customers the ability
to explore for deeply discounted items in one convenient place. Additionally, it included the element of thrill and
suspension as sale deals are offered for limited quantity and time. Its business model has been proven successful
attracting more than 300 million registered members and 58 million active users.

II. Growing logistics network. The company is investing on its logistics network and warehouse capacity to fuel further
growth in China. Moreover, the company is also leasing warehouses outside China to support its cross-border
presence.

III. Potential expansion outside China. The company’s main aim is to obtain market share in China. However, had the
company consider an aggressive expansion of its business model outside China, the company’s outlook would
radically change.

Reasons to Sell
I. Intense competition in the industry. Although the company managed to attract and retain customers, generating
substantial revenue growth, its weak profitability margins indicate that its ability to generate free cash flow to its shareholders
in the future may not improve due to the intense competition from large competitors such as Alibaba and JD.com.

II. Weak competitive advantage. VIP’s competitve advantage relies on its ability to offer deeply discounted products
to its customers through its innovative business model. Due to its simplicity, other large firms can easily reproduce
the same business, which will lead to further detoriation of the company profitability as it starts losing market
share.

III. Limited growth in China. China’s population is the largest in the world, amounting to nearly 1.4 billion people in
2017. By FY2017, the company managed to attain more than 300 million registered users or 21.4% of the total
population. The improvement in China’s economy over the past years and the growing middle class shall
eventually result in more customers using the companies services and products. Nevertheless, the growth in China
is still limited going forward.

IV. Downturn in economy. A prolonged slowndown in global economy, particularly in China could potentially have a
significant impact on the companies growth drivers as it may lead to a reduced level of online purchasing activities,
which could materially impact VIP’s business and financial conditions.

2
Ratio Analysis
Profitability Ratios Industry Median FY2016 FY2017 % Change
Gross Margin (Gross Profit/ Revenue) 45.2% 24.0% 22.3% -7.1%
EBITDA Margin (EBITDA/ Revenue) 9.1% 6.5% 5.1% -21.5%
Operating Margin (EBIT/ Revenue) 3.1% 4.8% 3.7% -22.9%
Net Margin (Net Income/ Revenue) 2.2% 3.5% 2.6% -25.7%
Return on Assets (Net Income/ Average Assets) 2.8% 8.8% 6.0% -31.8%
Return on Equity (Net Income/ Average Equity) 7.1% 42.4% 18.9% -55.4%
Asset Turnover Ratio (Revenue/ Total Assets) 1.66x 2.26x 1.92x -15.0%

Liquidity Ratios Industry Median FY2016 FY2017 % Change

1.5x 1.0x 1.3x 30.0%
Current Ratio (Current Assets/ Current Liabilities)
1.1x 0.7x 1.0x 42.9%
Quick Ratio ((Current Assets – Inventories )/ Current Liabilities)
- 0.3x 0.5x 66.7%
Cash Ratio (Cash & Cash Equivalents/ Current Liabilities)
- 59.3x 121.3x 104.6%
Defensive Interval Ratio ((Cash + Receivables)/Daily Cash Expense)

Solvency Ratios Industry Median FY2016 FY2017 % Change

- 43.1% 26.0% -39.7%
Gearing Ratio (Total Debt/ (Total Debt + Total Equity))
0.3x 0.1x n/a n/a
Net Debt to EBITDA (Net Debt/ EBITDA)
- 17.5% 13.2% -24.6%
Debt to Asset Ratio (Total Debt/ Total Assets)
2.5x 4.3x 2.7x -37.2%
Financial Leverage Ratio (Total Assets/ Total Equity)
- 88.5x 25.1x -71.6%
Interest Coverage Ratio (EBITDA/ Interest Expense)

Efficiency Ratios Industry Median FY2016 FY2017 % Change

Inventory Turnover Ratio (Cost of Sales/ Average Inventories) 7.8x 9.0x 9.5x 5.6%
Days of inventory on hand (DOH) 47.0x 40.5x 38.5x -4.9%
Receivables Turnover Ratio (Revenue/ Average Receivables) 16.8x 16.9x 11.2x -34.3%
Days of sales outstanding (DSO) 21.7x 21.7x 32.7x 50.7%
Payables Turnover Ratio (Cost of Sales/ Average Trade Payables) 6.86x 5.72x 5.71x -0.2%
Number of days of payables 53.2x 63.8x 63.9x 0.2%
Working Capital to Sales Growth (Working Capital/ Revenue Growth) 1.7% -3.8% 4.6% n/a

Valuation Hypothesis
Our model price is $17.61, 49.9% more than the current price of $12.08 (as of 15 May 2018). The model price is calculated
using a 10 year Discounted Cash Flow approach with a weighted average cost of capital (WACC) of 18% - gradually
decreasing over time as the company becomes more stable - and a terminal growth rate of the Free Cash Flow to the Firm
of 6%. The WACC reflects the current financial structure of ¥63.51 billion in market value of equity and ¥5.00 billion in
market value of debt. The cost of debt used is 3.59% based on the estimated company default spread and the cost of equity
is 19.11% which reflects the country risk premium and the high beta of 2.35.

Revenue

We expect revenue growth to marginally decline averaging 14% p.a. in the next 5 years. We incorporate possible
fluctuations in revenue growth according to our assumptions on revenue growth drivers. This is based on the expectations
for the company to keep performing well – increase active users mainly through China - in the next couple of years,
however, due to the intense competition by large firms – observed from the weak profitability margins – revenue growth
is expected to deteriorate over time. Our model does not incorporate the possibility that the company operates in different
geographic regions.

3
Operating Margins

In 2017, operating margins stood at 3.7%, declining from the previous two years (FY2016: 4.8% & FY2015 5.2%). The cause
for this decline is due to an extensive marketing strategy implemented in 2015. We believe the company will not require
marketing expenses at current levels and will be able to reduce this expense over time as they rely more on “word of
mouth”. We therefore expect operating margins to gradually increase to not more than 5%, however, we also incorporate
in our model the likelihood of operating margins to further tighten in case additional marketing is eventually required. We
believe the company’s competitive advantage is not robust but will be able to attain or improve its current operating
margins.

Tax Rate

We use an effective tax rate of 24%.

Equity Valuation Distribution

The below distribution in figure 1 shows the substance of our hold recommendation. We run a Monte Carlo Simulation with
50,000 iterations to generate possible future scenarios according to our base assumptions mentioned previously. The
current quoted price lies just above the 40 percentile. This implies that the intrinsic value has an approximately 40% chance
of being under the current price of $12.08 given the range of possibilities used in our assumptions. Consequently, it has a
60% chance of being above the current market value. As a result we have an adequate amount of confidence to issue a buy
recommendation on the stock.

Figure 1: Distribution of estimated value per share

4
Price History (Currency: USD)

$20 90,000
$18 80,000
$16 70,000
$14
60,000
$12
50,000
$10
40,000
$8
30,000
$6
$4 20,000

$2 10,000
$0 0
4/19/2016 8/19/2016 12/19/2016 4/19/2017 8/19/2017 12/19/2017 4/19/2018

Volume ('000) Closing Price

Figure 2: Price Chart – Past 2 years

Disclosures

The analysts contributing to this report do not hold any shares of this stock. The revenue and stock price forecasts are the
Gorilla’s Investment Research (GIR) consensus estimates. Additionally, the analysts contributing to this report certify that
the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. GIR
certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific
recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this
report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not
guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be
construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are
subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities
herein mentioned. GIR may have a position long or short in the securities mentioned and buy or sell the securities from
time to time. GIR uses the following rating system for the securities it covers which results from a proprietary quantitative
model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock
over the next 1 to 24 months. The model assigns each stock a rank from 1 through 5. GIR Rank 1 = Strong Buy. GIR Rank 2
= Buy. GIR Rank 3 = Hold. GIR Rank 4 = Sell. GIR Rank 5 = Strong Sell.