Vipshop Q1 Shows Triple-Digit Growth

Morgan Stanley recently met with management at major Chinese Internet companies and came back with the following takeaways.

Here are analyst Philip Wan and team:
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Flash sale apparel e-commerce Vipshop (VIPS) has top-notch warehouse and logistics management and of course investors want to know more about that. Vipshop is building more warehouses and may start to buy delivery companies, according to Morgan Stanley:

   Vipshop has received positive feedback from major suppliers for the colocation initiative; helping to reduce warehouse costs and save reverse logistics costs for its suppliers. Vipshop has secured more land for self-built warehouses at favorable land costs offered by local government. In addition, currently ~50% of Vipshop’s orders are fulfilled in-house (i.e., VIPS and its invested affliates) and this percentage is expected to reach 70% by end 2015. As order volume ramps up and order density becomes higher, Vipshop may seek to take controlling stakes in these delivery companies in which it currently has minority interests. The company remained cautious about cross-border eCommerce, believing there are policy-level uncertainties among the regulators. In terms of M&A activities, the company is considering bolt-on acquisitions in mobile commerce verticals such as the mother & baby category. In 2015, Vipshop will continue to focus on its core discount flash sales business market, since its current market share is still at low- to mid-single-digit level. The company currently covers 80% of the existing apparel companies in China and will seek to increase SKUs/sales per brand. Vipshop is confident in its competitive position in its core discount flash sales and doesn’t think increasing flash sales focus from bigger competitors will be a large threat in view pf the highly flexible operational/warehousing system required for apparel flash sales....blogs.barrons.com/asiastocks/2015/01/07/china-internet-q­ihoo-jd-vipshop-ctrip-yy-morgan-stanley-takeaways/?

If VIPS has 625 million fully diluted ADS by 2019, an $11.34 EPS would lead to $7.1 billion in net income. That's almost as much as the $7.5 billion in annual income that BABA is forecasted to make in 2015. The chart below from 2013 shows the expected growth rate of Chinese eCommerce to 2020. The estimate of 3,834.7 billion yuan in 2015 to the estimate of 10,345.9 billion yuan in 2020 implies an annual average growth rate of 22%.----

Analysts expect the five-year growth rate on BABA to be 31.45% but that may be assisted by the company's plans to expand globally. A 22% growth rate on BABA implies a net income of $16.6 billion in 2019 on its existing Chinese and international operations. A 45% profit margin means revenue would be $37 billion annually. It seems extremely unlikely that VIPS will approach these type of numbers.....

If VIPS can capture 10% market share, I estimate 2019 revenues to be $24.7 billion. 2014 revenue is estimated to be $3.65 billion. If that were to grow at 22% annually for the next five years that would lead to $9.9 billion in revenue while maintaining a 4% market share. Increasing market share to 10% implies a 2.5x multiple on revenue for $24.7 billion. A 15% margin leads to $3.7 billion in revenue, or a $5.91 EPS for 2019, about half of the EPS implied by the five-year growth rate.

An expected growth from $0.30 EPS in 2014 to $5.91 EPS in 2019 leads to a five-year growth rate of 81.51% instead of 106.79%. While not quite meeting the lofty analyst expectations set out in the analyst expectations listed on Yahoo Finance, the 81.51% growth rate still results in a very cheap PEG ratio of 0.89 for 2014. If investors believe my two major assumptions that VIPS can grow its share of the Chinese eCommerce market to 10% from 4% and can improve margins from 2-3% to 15% in the next five years, then VIPS represents a great long-term investment for above average growth. A $5.91 EPS would imply a $60 to $120 stock price in five years using a P/E Ratio of 10 to 20.
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