Often considered the online TJX of China, Vipshop (“VIPS”) is the leading online discount retailer of apparel, cosmetics, and home goods products in Mainland China. The company boasts a growing ecosystem of 44M quarterly active customers, more than 20K brand partners and almost 200B of annual Gross Merchandise Value (“GMV”).

Eric Shen and Arthur Hong founded the company in 2010, after spending 35 years collectively working in consumer electronic products distribution in China. They currently hold 12.0% and 6.9% stakes in the company, respectively. VIPS also counts Tencent (China’s largest Internet ecosystem) and JD (China’s largest 1P Ecommerce platform) among its key investors.

A confluence of factors in recent quarters have depressed VIPS’s valuation to an extremely attractive level: LTM P/E of 6.2x and 2021 EV/EBITDA 3.3x. VIPS’s net cash on its balance sheet is about a third of its market cap! At this level, even if VIPS is not growing its earnings, it can simply use its earnings to repurchase its shares and generate 15-20% EPS growth. The company’s superior return on capital and cash generation (ROA/ROCE ~ 10%/20%, negative working capital) gives us the assurance that VIPS will have no trouble executing such share repurchases.

After delving into the bear theses, we have concluded that the headline risks – delisting, VIE ban, regulations – are overblown and manageable. US shareholders of VIPS can continue owning VIPS shares – in the US or HK stock exchanges – and reaping the benefits of VIPS’s durable & growing franchises. Moreover, VIPS’s short-term growth & margin issues are explained by high base effect and mix issues.

Management has been working on several initiatives – including upstream integration/verticalization, Super VIP membership, private labels (made-for-Vipshop products), and offline outlets – which will strengthen VIPS’s franchise and buttress its business moats. We will monitor such initiatives closely in upcoming years. We strongly believe that with good execution, VIPS will be able to protect its defensive niche in discount retailing of apparel, cosmetics, and home goods. Over time, investors will recognize VIPS’s franchise value and pay appropriate multiples for this company.

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