This online Chinese discounter is in a rapid growth phase. Please note the advisor recommends a half position.
Vipshop Holdings (VIPS)
from Cabot China & Emerging Markets Report
Smartphones are supplanting PCs as the preferred way for younger Chinese to email, chat, take and exchange pictures and videos, watch TV and movies and play games. And as more smartphones are sold (think about the implications of Apple’s tie-up with ChinaMobile, the largest cellular service provider in the world), everything is happening online.
And that everything includes shopping. Increasingly prosperous Chinese love to shop, and being online brings the entire retail world to their phones.
Vipshop Holdings offers fashionable merchandise, including clothing, shoes, accessories, cosmetics and more, all at discounted prices. But what really makes Vipshop special is that sales are all discounted online flash sales. That means limited amounts of each product are offered for limited amounts of time, and at a significant discount to full retail, usually 50% to 70% below original retail. Clothing is the biggest sales category (over 40% of total sales) with shoes and bags accounting for over 10%. But the flash sales model can include a huge variety of goods, so close to half of sales come from miscellaneous goods.
Vipshop has an extensive network of around 6,000 partnerships with fashionable Chinese and international brands to offer their goods at discounted prices. This allows young Chinese professionals to purchase quality brands that they otherwise couldn’t afford. China has no national discount chains, so Vipshop is becoming one, but doing it online.
Results have been outstanding, with three full years of astonishing revenue growth—1,059% in 2010, 597% in 2011 and 205% in 2012—and strong growth through the first three quarters of 2013 averaging 170%. The company turned profitable in the third quarter of 2012, and EPS has improved steadily, rising from 17 cents in Q1 2013 to 26 cents in Q3.
This is one of the best stories around, with one foot in each of the prime Chinese investment themes, mobile and retail. Vipshop has been going up long enough that some investors are asking how long it can go on. We see a stock that put in a flat nine-week base in November and December and broke out in early January.
Please note: The China/EM portfolio is intended to have ten equal-dollar positions. We recommend taking half a position, or 5% of the amount allocated to emerging markets exposure.
Paul Goodwin, Cabot China & Emerging Markets Report, www.cabot.net, 978-745-5532, January 30, 2014 and February 6, 2014