Based in Guangzhou, China, Vipshop Holdings (proposed VIPS) scheduled a $106 million IPO with a market capitalization of $463 million at a price range mid-point of $9.50 per ADR for Friday, March 23, 2012.
VIPS is one of six IPOs scheduled for this week (see our IPO calendar) with nine more on deck for the week of March 26.
VIPS is China's leading online discount retailer for brands.
VIPS is running of low gross margin in the 20% with a high loss rate. For example in the December 2011 quarter revenue was $105 million up 98% from the September quarter and losses increased to $64 million from $18 million, some of which are due to stock compensation charges.
VIPS has too many "layers of risk" to be interesting, it seems. Therefore, based on the issues discussed below, we would pass on the VIPS IPO.
The price to sales ratio, however, is 1.1, low for a Internet-based company that is growing top line revenue, but the price-to-earnings ratio is -2. Part of the loss is due to non-cash compensation expenses but still, -2 is one the lowest negative ratios we've seen. On a relative basis -2 if much worse than, for example, -100.
The price to book value is 4.1, which is in range for an Internet-based company. The main financial issue with VIPS is its continuing high loss rate.
One American Depository Share equals two ordinary shares
GET OF OF JAIL FREE?
VIPS is yet another China-based company that wants to go public through a convoluted organizational structure designed to protect the true business owners. See organizational chart here
As a result, it may be difficult for a shareholder to effect service of process within the United States upon VIPS officers, or to enforce against VIPS or their judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
In addition, there have been well-known problems with auditing issues for China-based companies.
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VIPS is China's leading online discount retailer for brands as measured by total revenues in 2010, the number of registered members as of June 30, 2011 and the number of monthly unique visitors in December 2011, according to the Frost & Sullivan Report. VIPS offers high-quality branded products to consumers in China through flash sales on the vipshop.com website.
As of December 31, 2011, VIPS had 12.1 million registered members and over 1.7 million cumulative customers, and has promoted and sold products for over 1,900 popular domestic and international brands.
A majority of customers have placed orders to purchase products from more than once. Orders placed by repeat customers accounted for 66.2%, 86.7% and 91.9% of our total orders in 2009, 2010 and 2011, respectively.
VIPS began operations in August 2008 and have grown significantly since then. In the years ended December 31, 2009, 2010 and 2011, VIPS fulfilled over 70 thousand, over 0.9 million and over 7.2 million customer orders, respectively.
VIPS net loss in 2011 reflected non-cash share-based compensation expenses in an aggregate amount of US$73.9 million.
VIPS began operations in August 2008.
DOING BUSINESS IN CHINA
VIPS operations are affected by the regulations and industry policies related to the online retail market.
VIPS is affected by the complexity, uncertainties and changes in the PRC regulation of the internet industry. Due to PRC legal restrictions on foreign equity ownership of and investment in the online retail sector in China, VIPS relies on contractual arrangements with its consolidated affiliated entity, Vipshop Information, and its shareholders to conduct business in China.
VIPS faces risks associated with its control over its variable interest entity, because control is based upon contractual arrangements rather than equity ownership.
RETAIL SALES GROWTH IN CHINA
According to the Frost & Sullivan Report, retail sales are projected to constitute 44.5% of China's GDP in 2015, compared to 39.4% in 2010. However, China's retail market is still at the relatively early stage of development. Chinese consumers, equipped with increasing purchasing power for lifestyle products and services, are highly brand conscious and price sensitive, yet the availability of discount retailers and outlet malls within China's retail ecosystem is extremely limited.
DISCOUNT RETAIL GROWTH IN CHINA
According to a Frost & Sullivan Report, China's discount retail market size in 2010 and 2011 was US$8.9 billion and US$14.7 billion, respectively, compared with US$61.4 billion and US$65.1 billion in the U.S.
China's discount retail market accounted for 0.4% and 0.5% of the total retail market in 2010 and 2011, respectively, compared with 1.4% and 1.4% for the same periods in the U.S., according to the Frost & Sullivan Report.
Frost & Sullivan projects that discount retail sales in China will reach RMB568.1 billion in 2015, representing a CAGR of 58.7% from 2010, as discount retail channels become more developed and diversified.
ONLINE GROWTH IN CHINA
The Internet is enabling Chinese consumers to more easily research and purchase products and services online. According to the Frost & Sullivan Report, the number of online shoppers in China grew from 80 million in 2008 to 187 million in 2011. The number is projected to grow to 363 million in 2015, representing a CAGR of 18.0% from 2011 to 2015. Driven by the increasing number of online shoppers, as well as higher purchase volumes per shopper, the online retail sales revenue in China is expected to grow from RMB774 billion in 2011 to RMB2,551 billion in 2015, representing a CAGR of 34.8%, according to the Frost & Sullivan Report.
FLASH SALES MARKET GROWTH IN CHINA
Flash sales represent a new online retail format combining the advantages of e-commerce and discount sales channels. The flash sales market in China is estimated to grow from RMB3.0 billion in 2010 to RMB107.4 billion in 2015, according to the Frost & Sullivan Report.
Unlike leading flash sales models in the U.S. and Europe, the flash sales market in China has quickly expanded beyond selling primarily luxury brands and services. China's flash sales market encompasses a broader range of brands and products, appealing to a larger base of consumers.
While sales of apparel products comprised of 59.3% of total online flash sales market in China in 2010, they are projected to decrease to represent 43.1% of the total flash sales market in 2015, as other growing product categories such as household goods, cosmetics and other lifestyle products account for a larger portion of the market, according to the Frost & Sullivan Report.
VIPS believes that the flash sales market will increase as a percentage of total retail sales in China as merchandising expertise, economies of scale and fulfillment and logistics capabilities of flash sales companies continue to improve.
ENFORCEABILITY OF CIVIL LIABILITIES
VIPS was incorporated in the Cayman Islands in order to enjoy certain benefits, such as political and economic stability, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands.
These disadvantages include a less developed body of Cayman Islands securities laws that provide significantly less protection to investors as compared to the laws of the United States, and the potential lack of standing by Cayman Islands companies to sue before the federal courts of the United States.
VIPS's organizational documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between VIPS, its officers, directors and shareholders, be arbitrated.
Substantially all of VIPS's operations are conducted in China, and substantially all assets are located in China. A majority of VIPS officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States.
As a result, it may be difficult for a shareholder to effect service of process within the United States upon VIPS officers, or to enforce against VIPS or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
ORGANIZATIONAL STRUCTURE DIAGRAM
VIPS's primary competitors include major B2C e-commerce companies in China that sell a broad range of products and services online, such as Taobao Mall, 360Buy and Dangdang (DANG), and other online discount retail companies in China.
USE OF PROCEEDS
VIPS expects to net $95 million from its IPO. The proceeds are allocated as follows:
- US$80.0 million to fund capital expenditures for expanding fulfillment capabilities;
- US$5.0 million to fund capital expenditures for further enhancing IT systems; and
- the balance for general corporate purposes, including funding working capital and potential investments in and acquisitions of complementary businesses.