Jp Morgan Analyst Report for Vips

Asia Pacific Equity Research

30 August 2013

Vipshop

Robust growth story remains intact

Overweight

VIPS, VIPS US Price: $40.50

▲ Price Target: $51.00

Previous: $35.00

We assume coverage of Vipshop with an Overweight rating and a Jun-14 PT of US$51. We believe Vipshop’s key value proposition as an online inventory clearance channel is intact. Despite an increasing number of new entrants, Vipshop remains a clear leader in China's online flash sales market. In our view, the impact from competition is likely to be insignificant in the short term, while in the mid to longer term, it may intensify gradually.  We expect insignificant impact from new entrants into the flash sales market in the near term as Vipshop’s core strength is its coverage and user base in lower tier cities among relatively lower-end users. Most of its e-commerce peers are better positioned in higher-tier cities among relatively higher-end user bases. We estimate Vipshop's active user base is approximately 1-2% of China's e-commerce population. We think the market is large enough for multiple players to co-exist.  Margin improvement from sales and marketing expense likely to slow down. We expect sales and marketing expense as a percentage of revenue to decrease by 10bps in 2014, vs 70bps in 2013 and 200bps in 2012. This is because: 1) growing online ads inventory pricing (e-commerce-related ads inventory pricing declined in 2012 due to bursting of the e-commerce bubble in 2011) and 2) more efforts to gain users.  Key earnings growth drivers. Vipshop is likely to benefit from: 1) a growing online flash sales market, 2) under-penetrated online flash sales user base 3) improving logistics efficiency, 4) high user retention rate.  Overweight with a PT of USD51. PT is based on 2014E non-GAAP FD EPADS of USD1.83, FY14-16E EPADS CAGR of 31% and a PEG of 0.9x. PT implies a 2013E P/E of 53x and a 2014E P/E of 28x.

China Internet Alex Yao

AC

(852) 2800 8535 alex.c.yao@jpmorgan.com...