If You Are In The China Trade, Vipshop Is Worth A Look

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Vipshop Holdings Limited (NYSE:VIPS) is cash-rich, and runs an online marketplace with a lot of traffic and close to 5.6 pages per visit. In my view, if more international brands sign partnerships with VIPS, and the brand gets even more recognized, free cash flow will likely follow. Under my discounted cash flow (“DCF”) models, I believe that the fair price for VIPS could be close to $15-$16. Even considering certain risks from regulators in China, in my view, the stock is worth having a look at.

Vipshop: Large Partners And A Stock Repurchase Program

Vipshop is an online discount retailer for brands in China. VIPS offers high quality and popular brands to consumers at a significant discount from retail prices.

Management signed agreements with well-known international brands as well as local brands in China. Since these international brands are working with VIPS, I believe that the company is really doing a great job, and is well-respected in the retail industry.

Source: Company’s Website

The amount of traffic reported includes on average four minutes per visit and 5.6 pages per visit, which are, I believe, great figures. In my view, the company’s figures are not that far from massive online conglomerates founded many years ago.

If this information is not sufficient to justify a due diligence about the company, let’s note the most recent stock buyback program. VIPS announced a large stock buyback plan, which includes repurchase of shares worth around $1 billion. I believe that the program may generate stock demand, which may bring the stock price up.

On March 31, 2022, the Company announced a share repurchase program authorized by its board of directors under which the Company may repurchase up to US$1 billion of its ADSs or Class A ordinary shares for a 24-month period. As of June 30, 2022, the Company had repurchased US$177.1 million of its ADSs under the program. Source: Quarterly Report

Sales Growth Will Likely Go Back In 2023 And 2024

Most investors may not expect great figures for the year 2022. Keep in mind that management announced a decrease in sales growth in the next quarter. With that, I believe that most analysts are expecting positive sales growth in 2023 and 2024. With this in mind, I wondered whether taking a position in the stock would make sense right now.

For the third quarter of 2022, the Company expects its total net revenues to be between RMB21.2 billion and RMB22.4 billion, representing a year-over-year decrease rate of approximately 15% to 10%. These forecasts reflect the Company’s current and preliminary view on the market and operational conditions, which is subject to change. Source: Quarterly Report

Analysts expect 2024 net sales of CNY116.051 billion with net sales growth of 4.11%. In addition, the EBITDA would be CNY7.939 billion with an EBITDA margin of 6.84%. 2024 net income would stand at CNY5.553 billion with a free cash flow of CNY7.082 billion and a free cash flow margin of 6.10%. Among the reasons to research the stock, there is the fact that the FCF (free cash flow) margin is expected to increase from close to 2% in 2021 to around 6% in 2024.

Source: marketscreener.com

Balance Sheet Includes A Small Amount Of Debt And Plenty Of Cash In Hand

As of June 30, 2022, cash and cash equivalents were equal to $2.431 billion along with a restricted cash of $157 million. With short-term investments of $615 million, in my view, the company’s liquidity is quite substantial.

The company’s total amount of accounts receivable is equal to $48 million, so I believe that clients pay fast, which appears beneficial. The total current assets are equal to $4.4 billion. Considering that the total amount of liabilities is equal to close to $3 billion, in my opinion, the balance sheet appears quite stable.

VIPS also reports property and equipment worth $2.2 billion, deposits for property and equipment worth $38 million, and land use rights of $1 billion. I believe that the total number of properties owned and leased is considerable. The company appears to be investing in real estate in China, which may offer further upside potential if the properties gain value.

Source: 20-F

VIPS also reports expertise in the M&A markets. Keep in mind that VIPS reports intangible assets worth $50 million and goodwill worth $87 million. Finally, total assets are equal to $8.9 billion, close to 2x the total amount of liabilities, which certain investors may appreciate.

Source: Quarterly Report

I wouldn’t be worried about the total amount of liabilities, as the company does not report financial debt. VIPS reports a short-term loan worth $265 million, accounts payable worth $1.8 billion, advance from customers worth $196 million, and accrued expenses and other current liabilities worth $1.08 billion. Total current liabilities are equal to $3.4 billion, which is lower than the total amount of current assets. Finally, total non-current liabilities are equal to only $373 million, and total liabilities are equal to $3.8 billion.

Source: Quarterly Report

A Larger Customer Base, More Brand Partnership Agreements, And Acquisition Of Offline Competitors Would Imply A Valuation Of Almost $15-$16

Under normal conditions, I would say that VIPS will likely enhance sales growth thanks to more brand recognition and larger customer base. Considering the total amount of cash, VIPS has sufficient resources to pay marketing campaigns as well as to sign more brand partnership agreements.

We plan to further increase our sales through enhancing our brand recognition, growing our customer base, and increasing customer spending on our Vipshop Online Platform. Source: 20-F

I am very optimistic about the company’s acquisitions of offline retail businesses. In my view, if the company’s brand continues to be recognized, offline sales may also grow, which may drive the company’s revenue growth up. Management discussed some of the most recent acquisitions in a recent annual report.

In addition, we seek to expand into the offline retail business to supplement our online business and have for this purpose acquired control in various entities in the past years, including Shan Shan Commercial Group Co., Ltd., or Shan Shan Outlets, a leading player in the offline outlet management industry in China. We also operate offline retail stores under our own Vipshop brand to expand sales channel and clear our inventories more effectively. Source: 20-F

Finally, I also appreciate the information I received about VIPS’ business initiatives in the loan industry. VIPS appears to be collaborating with banks to offer loans to clients. In terms of diversification, I believe that this new initiative may bring a lot of stability to VIPS and its shareholders.

We have participated in the internet finance sector for a few years. Starting from 2019, we have scaled back our internet finance business, which currently serves as a supporting function for our core online retail business. We primarily cooperate with banks and third-party consumer financing companies to provide consumer loans to our customers, and charge the banks and third-party consumer financing companies channel fees at certain percentages of the loan amounts. Source: 20-F

By 2029, I assumed net sales of CNY135 billion with a net sales growth of -4%, in addition to an EBITDA of CNY9.244 billion and an EBITDA margin of 6.80%. Free cash flow would stand at CNY7.2 billion, and the free cash flow margin would be 5.30%. With a WACC of 7%, I obtained NPV FCF of CNY34.835 billion.

Source: Bersit’s DCF Model

If we assume an EV/EBITDA multiple of 2x, the exit value would be close to CNY18.487 billion. The NPV of exit would be CNY10 billion. The implied enterprise value would be CNY56.354 billion or around $7.794 billion. With a cash of $2.430 billion and a debt of $283 million, the implied equity would be $9.941 billion, and the internal rate of return would stand at 6.89%. Finally, the implied fair price would be close to $15.6.

Source: Bersit’s DCF Model

My Worst-Case Scenario Would Include A Valuation Of $8.5 Per Share

Let’s keep in mind that the VIPS was incorporated in the Cayman Islands. VIPS’ subsidiaries, which are mostly located in China, own most of the cash, properties, and assets. It means that VIPS will most likely have to deal with laws of China. Certain investors from the United States may not like that. It is a risk for investors who may not understand how business works in China.

Source: 20-F

VIPS may also run into trouble if regulatory bodies in the United States become more strict about the way auditing needs to be done in China. Let’s keep in mind that VIPS may receive less foreign investments if the shares don’t trade in the United States. The company discussed some of these risks in the annual report:

For example, we face risks associated with regulatory approvals on overseas offerings, anti-monopoly regulatory actions, and oversight on cybersecurity, data security and data privacy, as well as the lack of inspection on our auditors by the Public Company Accounting Oversight Board, or the PCAOB, which may impact our ability to conduct certain businesses, accept foreign investments, or list and conduct offerings on a United States or other foreign exchange. Source: 20-F

The approximate data for 2029 were as follows. With net sales of CNY73 billion and net sales growth of -15%, VIPS would report an EBITDA of CNY3.6 billion and an EBITDA margin of 5%. Moving on to the free cash flow, I would expect FCF of CNY1.8 billion and a free cash flow margin of 2.5%. If we assume a WACC of 25%, which appears conservative, the NPV of FCF would be CNY22 billion.

Source: Bersit’s DCF Model

I also obtained a net present value of the exit value of $461 million, which implied a total enterprise value of CNY23 billion or $3.201 billion. With cash of $2.4 billion and debt of $283 million, the equity would be $5.35 million with an IRR of 0.5%. Finally, the fair price would stand at close to $8.5 per share.

Source: Bersit’s DCF Model

Conclusion

Vipshop Holdings Limited reports a significant amount of cash in hand and a small amount of debt. The company’s website traffic has a large number of pages per visit, and well-known international brands work with management. In my view, VIPS has sufficient cash to launch marketing campaigns to increase brand recognition as well as to sign new partnership agreements. I also believe that investors don’t take into account potential acquisition of offline competitors.

In my view, the sum of future free cash flow would justify a valuation that may be larger than the current market price. Even considering the risks for investors in the United States, in my opinion, Vipshop Holdings Limited stock is worth taking a look.