Chinese Basket Is Hot, Vipshop Is Not

Chinese stocks have had a good to great year thus far despite the shedding of copious tears, noisy shouting and screaming from the roof-tops and sweaty-palmed hand-wringing by the darksiders.

Many of the names are up 2x compared to the Nasdaq , where most of the best and biggest Chinese companies trade via their ADS issues. However, there is a host of Chinese companies that are still cheap and trade at less than even a market multiple despite the move this year for the overall Chinese sector.

Vipshop, the Chinese online discount retailer, is a premier example of an undervalued name in the sector and a name that just made a 52 week low last week.

Back on August 16, Vipshop reported numbers for Q2 that missed on both counts as far as Street estimates were concerned.

The company reported earnings of $0.18 per share on revenues of $2.58 billion. The Street had been expecting earnings of $0.19 per share on revenues of $2.6 billion. Revenues were up over 30% year-on-year although earnings did not keep pace with the growth of a paltry 5% in comparison.

Eric Shen, chairman and chief executive officer of Vipshop, said, "Specifically, our total active customers for the trailing twelve months ended June 30, 2017 reached 58.8 million, representing a 32% year-over-year increase." 

Donghao Yang, CFO of Vipshop, further commented, "In the second quarter of 2017, we made significant strides in the expansion of our logistics footprint and the enhancement of our logistics capabilities. We currently have approximately 27,000 last mile delivery staff and approximately 3,500 delivery stations. Meanwhile, we continue to make solid progress in the exploration of the Internet finance spin-off, which overtime will improve our cash flow and earnings."

Shares of Vipshop which were trading at $11 and small change per share the day of earnings and dropped to a low of $8.72 per share over the course of the next week and a half or so. Meanwhile, the sellsiders dropped their forward estimates from $0.98/share for 2018 down to $0.86 per share as it currently stands.

Also, subsequent to the company's Q2 earnings report, HSBC and Daiwa lowered their ratings on Vipshop to Reduce and Hold respectively.

At $8.35 per share, Vipshop currently trades at roughly 9.7x estimated 2018 earnings and is valued at roughly 0.37x estimated sales of $13 billion for 2018 (Street consensus). Even with lowered estimates as a result of the Q2 miss, sellsiders are still expecting revenues to grow 20% in 2018 over 2017 and earnings estimates are factoring in 24% growth year-on-year.

There has also been intermittent chatter of Vipshop being an attractive takeover chatter, although investing in the hopes of a takeover can be a test of patience at best and an exercise in futility at worst. Having said that the attractive valuation of Vipshop could easily attract interest from a  bigger Chinese rival or from a Western company looking to make some serious in-roads into China like Walmart did with JD.com in mid-2016.

The major drag on profits and thus earnings has been the significant spending/investment in building out Vipshop's delivery capabilities. In addition, the internet finance business has also dampened current profitability. Once the company has built out its delivery capabilities and has spun-off/divested/reduced the drag from its internet finance business, investors should see a significant improvement in operating metrics and expanded profits as well.

An investment in Vipshop is definitely worth a look at current levels.

However, investors should not be blindly long and strong but should instead be cautiously long and strong.

My fair value for Vipshop is between $14-$16 per share having slashed my forward multiples lower to adjust for the miss on Street estimates in Q2.

Shares of Vipshop closed at $8.35 on October 6, 2017.

(Long VIPS)

Original Link
https://www.forbes.com/sites/jaysomaney/2017/10/10/chinese-basket-is-hot-vipshop-is-not/#78ff9d335010