VipShop Holdings Ltd. (VIPS, $15.67):
“Not So ‘VIP’ Anymore”
By: Justin
Nguyen, AIM Student at Marquette University
Summary
• VipShop Holdings Ltd. (NYSE:VIPS) is a Chinese online retail
platform that specializes in discount sales of products from domestic and
international partners. The company product offerings include apparel for men,
women, and children, accessories, electronic, and other lifestyle products.
• VIPS recorded a second quarter
earnings miss and provided a modest estimate YoY growth of 5-10% in Q3.
• The company is under pressure of
the Chinese government’s new regulations upon tech companies.
• President Xi Jinping’s “common
prosperity” idea presses tech tycoons to distribute wealth.
• VIPS announced a share
repurchase program in March 30, 2021 of $500 million. As of June 30, 2021, $301
million worth of ADRs have been repurchased yet share is still down almost 70% from
the all-time high in March.
Key
points: VipShop Holdings Limited was pitched and added to the AIM International
Fund in April of 2021. Since then, the company announced its Q2 earnings with
$4.6B in revenue and $227.8M in operating income, reflecting increases of 22.8%
and 18.6% YoY in respective order. However, the company provided a disappointing
revenue guidance on Q3 that only estimates growth of 5-10%. This historically
low figure was alarming as VIPS is expected to benefit from the shift towards
e-commerce due to the pandemic.
Additionally, tech and consumer
discretionary companies like VIPS are under pressure from the Chinese
government. Rules regarding unfair competition were addressed by the State
Administration for Market Regulation, some of which include the ban of fake
reviews, mishandling of consumers’ data, and abuse of market power practiced by
these firms. Further, China also imposed a ban on internet companies that could
pose data security threat from listing overseas, an action that implies more tightening
control over tech companies that would challenge VIPS’s growth.
In broader views, Beijing has been
signaling their intent to emphasize on manufacturing as the core of the economy
rather than the consumer discretionary industry. This is demonstrated through the
fact that many manufacturing firms, such as semiconductor companies, are still
strongly supported amidst regulations squeeze experienced by the tech industry.
The government is also restricting access to videogames, media, and other entertainment
platforms. Recently, President Xi Jinping emphasized “common prosperity” as a
theme for China’s growth in the future, implying the support for tech companies
like VIPS will no longer be as strong as it was in the past.
What
has the stock done lately?
VIPS was pitched and added into
the AIM fund at a price target of $34.04. The company announced its shares
repurchased program of $500M in March of 2021 when share price hit a record-high.
As of June 30, 2021, $301M of ADR has been repurchased yet the company’s
valuation still fell 70% since March. This signals a really negative view from
investors regarding the Chinese investment landscape for tech companies like
VIPS.
Past
Year Performance: VIPS has decreased 8.36% in value in the past year
and 44.65% YTD. The company may experience a slight upward trend short-term due
to share repurchase effort but reaching the all-time high in March seems
unrealistic.
My
Takeaway
Estimations indicating slow growth in addition to negative perspectives from the Chinese government are reasons why this stock should be sold from the AIM International fund. The actions implemented by China do not seem to be temporary as demonstrated through their “common prosperity” theme and emphasis on manufacturing. Thus, the investment thesis pitched may no longer hold, which indicates a sell.
