VIPS: Rebuttal To Mithra's Forensic Accounting And Short Thesis

| About: Vipshop Holdings (VIPS)


Mithra's short case is based on questionable analysis.

This article addresses the key points raised in the short thesis.

VIPS management is in the penalty box for bungling up the per-announcement, but the company's business model is not broken.

Mithra Forensic Research recently published a short article on Vipshop (NYSE:VIPS) questioning the company's financials. I was initially not interested in responding as I have a very small trading position I picked up in low $13's, however the misrepresentations were too much for me to pass on. Let's delve straight into Mithra's numbers (92, 30, 800, 50, 2 and 5) and address each of them head on.

Number 92: At least $92M is missing or has been redirected from Fixed Assets

Mithra first accuses the company of redirecting $92M of funds from the recently reported $128M in capex (to secure land for future office space). He then goes on to explain that this amount shows up in increases to "Other Long-Term Assets". Hence the right question to ask would be why is this capex captured under OLTA accounts and not as Deposits for Land. This could simply be a timing issue from an accounting perspective. VIPS could have made the deposits towards the end of Q3, but not completed the regulatory registration work to book these assets as PP&E. Looking at VIPS's historical financial statements, OLTA has been an insignificant bucket on the company's balance sheet, so this is not a dumping ground for underhanded transactions as Mithra implies.

Number 30: Dismal quality of earnings at 0.30 year-to-date

I am not going to try to reverse engineer Mithra's quarterly cash flow statements, but will tackle his two underlying flaws from what the company reports - the real CFFO and amount of accounts payable.

For FY2014, VIPS reported CFFO of $506M. Mithra claims the real amount would be $88M based on his forensic models, which honestly amuses me. Look at VIPS annual report and anyone can calculate that the CFFO before working capital changes would have been $254M. And anyone who took a basic accounting course in school would know that the retail industry is net working capital negative, i.e., working capital is a source of cash for a retailer with a growing revenue base. So, in a nutshell, it is fair to accept VIPS' 2014 CFFO at $506M and expect them to grow in 2015, as the company grows it revenue base by 50%+.

Regarding Mithra's claims around VIPS significantly delaying payment to its vendors ... the payment terms have actually marginally improved for VIPS' vendors in the past two years (see table below). It is not the size of accounts payables, but the ratio of AP to COGS that Mithra should be looking at.

2013 2014
Accounts Payable 477 987
Cost of Goods Sold 1289 2835
AP/COGS 37% 35%
Days Payables Outstanding 135 127

Number 800: $800M in capex and share buybacks in next two years, despite lack of sustainable CFFO

Having established VIPS will be generating $500M+ of CFFO in the next couple of years, the company can afford to spend $800M in Capex and share buybacks during that period. Besides, Mithra indicates the company's reported cash balance is only $557M, which is grossly incorrect. As of 9/30/15, VIPS also has held-to-maturity securities worth $406M (short-term bank deposits), implying VIPS's cash and cash equivalent stands at $963M or 73% more than what Mithra would lead us to believe.

Number 50: $50M of vendor financing implies manipulation of accounts and funneling cash in and out of VIPS

Mithra himself acknowledges that lots of internet companies in China provide factoring for their vendors, so why focus on a $50M average daily balance for VIPS? Put $50M in context of $4000M of COGS for FY2015 and we are looking at a paltry 1.25% of COGS. My suggestion - get over it.

Number 2: VIPS revised guidance on Q3 results two days before the release dates

Of all the numbers thrown out by Mithra, this one is the most legitimate. This shows the immaturity of VIPS management in handling communications with public capital markets. I too do not buy the argument that it took management time to finalize with their auditors whether a 5% revenue miss constituted a material disclosure. Management should have come out earlier with the pre-announcement or just disclosed it on earnings release, especially when they claim a 5% miss does not constitute a material disclosure in their view. The market punished VIPS with a stock price drop of 30%, so hopefully management learned their lesson. Also of note was management's honest admission that they were overly aggressive in their projections and this was the first time in the 12 quarters since they went public they had missed their projections.

Number 5: Estimated $5M cost of an investigation pales in comparison to the $7 billion Cost of Confidence

VIPS' management has already responded to these claims and I do not see a reason for the company to spend anything to undertake a transparent forensic investigation. Management should be spending their energy on talking to institutional investors (Tiger Global's investment is a sign of confidence), buying back shares to prove they believe the company's stock is undervalued (underway) and focus on executing and growing their business model to win back the market's trust.

Disclosure: I am/we are long VIPS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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