Tuesday, September 14, 2021

An International Equity holding: VipShop Holdings Ltd. (VIPS, $15.67): “Not So ‘VIP’ Anymore” By: Justin Nguyen, AIM Student at Marquette University

 

VipShop Holdings Ltd. (VIPS, $15.67): “Not So ‘VIP’ Anymore”

By: Justin Nguyen, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 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.

Source: FactSet

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.

Source: FactSet