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2013 Investment Research Report Of Vipshop- An Undervalued Stock You Can Strong Buy (China Alternative Investments Group)

|About: Vipshop Holdings Limited (VIPS), Includes: DANG, SYUT, TJX

2013 Investment Research Report of Vipshop


Investment Advice: Strong Buy

Target Price: USD 60

China Alternative Investments Group

China Venture Capital Group

June 5th, 2013

Miachael Ai


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Table of Contents

Chapter One Overview

Chapter Two Company Profile

Chapter Three Business Model

Chapter Four Management Team

Chapter Five Industry Analysis

Chapter Six Competitive Advantages

Chapter Seven Growth Strategy

Chapter Eight Great IPO in 2012

Chapter Nine Bright Future in 2013

Chapter Ten Investment Advice

Chapter Eleven Phase One of PIPEs Fund for China Concepts Stocks (for Vipshop in particular)

Chapter One Overview

Vipshop, a representative of China concepts stock and Chinese economy, went public in 2012 in spite of the uncertain and difficult environments then with the assistance of specialized investment banks. Going against the market, its IPO could be counted as one of the most classic cases on Wall Street. It was achieved through the cooperation of the issuer and the investment banks, which made Vipshop a bright spot and a star in the global capital market in the year of 2012. As the representative of the investment funds in Asia, China Alternative Investments Group (China AIG) recognizes the investment highlights of Vipshop to be: one of a kind in the field of flash sales in China with prominent core competence and growth strategy, reasonable and advanced business model, and excellent management team with strong execution and rich experiences in international business management and the retail industry. China AIG considers that Vipshop is bound to continue to lead the development of the flash sales industry in China, the most populous country around the world, or even the whole region of Asia. It will have an absolute advantage in the industry within Asia as well. Therefore, China AIG believes that Vipshop is substantially undervalued at present and thus rates it as Strong Buy with the target price being USD 60.

In response to Greenwich Research Group's malicious short selling of Vipshop, China AIG will analyze and present major misleading terms in its report instead of making another detailed analysis of the company, so as to judge the outlook and future of Vipshop from the perspective of a third party. China AIG would like to remind Wall Street that it is necessary to take the competitive position, long-term value and strategy of the target company into consideration when estimating its value. Investors are supposed to make rational choices rather than follow the advices of an organization that attach little importance to business ethics. Being the economic center of the US, Wall Street needs to regain its confidence of creating value against the backdrop of economic downturn in Europe and the US, and establish a virtuous mechanism to show investors the value of great companies. To better understand Chinese companies and economy, on-the-spot investigations are much more useful than statistics.

Without doubt Vipshop is going to meet up with challenges in the future such as the threat of competition, short-selling and communication with overseas capital markets. We think that the market is dynamic and potential large rivals are not able to pose a threat to Vipshop in a short time as they have to prepare proprietary assets, clarify their positioning, restructure its internal management and strategy and solve the problems of inadequate publicity for self-built platforms and the high costs of the transformation. China AIG believes that Vipshop has an unrivalled position in China's flash sales industry and it is substantially undervalued due to the accusation of the short-seller. In order to prove its belief in the long-term investment value of Vipshop, China AIG announced today that it planned to establish a dual-currency PE fund of China Concepts Stock to exclusively invest in the company. It is about to lead investors who recognize the fact that Vipshop is undervalued to make joint investments in this listed company, which will be enabled to further realize its growth strategy, improve the warehouse logistics center and publicity and make acquisitions. Qualified investors around the world can register on andobtain investment rights by promising to subscribe Vipshop's shares. Specific operation methods and steps are detailed on the website. The rights and obligations of investors are subject to legal documents including PPM, partnership agreement and others. The only right to interpret the above contents is vested in China AIG.

Chapter Two Company Profile

Vipshop, the full name of which is Guangzhou VIPSHOP Information and Technology Co.Ltd, was incorporated in Guangdong Province in August, 2008. The website of was launched in the same year. It was co-founded by Shen Ya and Hong Xiaobo, who are traditional Wenzhou businessmen and had been partners to do consumer electronics products foreign trade. Together with three investors who were their classmates at Cheung Kong Graduate School of Business and came from the same town with them, Shen and Hong raised RMB 30 million as the initial fund.

The business model of Vipshop is "brand discount + flash sales + guaranteed authenticity", namely the model of "flash sales". This model was first adopted by Vente Privee, a French company established in 2001, and then transformed by the American website Gilt to focus on the discount sales of luxury brands. In the early stage Vipshop also attempted to do discount sales of luxury brands but found them not to be the best option for online discount sales in China due to the limited number of luxury users there and Chinese customers' consumption habits. At the end of 2008, Vipshop started to promote clothing of second- and third-tier domestic brands and the number of orders began to grow. Thereafter Vipshop positioned its market as products of second- and third-tier domestic brands and the customers it attracted were mostly from second- and third-tier cities.

Henceforth Vipshop entered a period of rapid growth. In 2009 the number of its orders rose to 71,000 and then soared to 927,000 in 2010. Vipshop got a joint venture from Sequoia Capital and DCM in December 2010 with the amount of financing being about USD 20 million, and then received another USD 50 million in May 2011.

On February 18, 2012, Vipshop filed an application for listing to the US SEC and went public at NYSE on March 23 with an issue price of USD 6.5 and a financing amount of about USD 71.5 million. According to the prospectus, it was Goldman Sachs and Deutsche Bank, two internationally renowned investment banks that helped Vipshop with its overseas listing.

News released in the evening on May 28, 2013 (Beijing Time) said that Greenwich Research Group, an investment research organization, issued a report last Friday, claiming that Vipshop (NYSE:VIPS) was under suspicion of financial fraud and misleading investors. News released in the morning on May 29, 2013 (Beijing Time) said that Vipshop made an announcement as a response to the recent speech and assertion of the short-seller, which, as it considered, included a lot of mistakes and speculations without proofs. Also it believed that Greenwich Research Group had an overall misunderstanding of the business model of Vipshop.

Greenwich Research Group claimed in the report that the business model of Vipshop did not work in China. The reason why Vipshop did not get a sufficient supply from premium brands was that those brands were unwilling to sell their products through such channels. Therefore Vipshop was obliged to sell low-end products. However, China AIG thinks that the strategy of Vipshop is quite clear. When a company is still small, it must actively adapt to the market environment; while big companies can attempt to change the environment. Choosing second- and third-tier domestic brands and targeting at customers of second- and third-tier cities, Vipshop could enter the market more easily and achieve success more quickly. Greenwich Research Group ought to understand the strategy, positioning and core competitiveness in the market segment of Vipshop first.

Chapter Three Main Business Model-Flash Sales

Vipshop is a B2C website dedicated to providing fashion brand clothes, cosmetics, luggage, accessories, perfumes, and etc. to customers with a bulk discount on the retail prices. Discounted goods are presented on the homepage of the website every day in the form of "Daily Selection" (10:00 am Beijing Time). Usually the amount and the buying time are restricted (for example, one customer can buy two items of one kind at most and a Shopping Cart can hold no more than 20 items).

Vipshop adopts the emerging business model, that is, "flash sales". It operates in the following way: first, the purchasing team establishes cooperative relationships with brand owners and buys their stocked goods at extremely low prices, paying 10-15% deposit (some long-term partners may even not require the deposit); second, Vipshop promotes the goods on the website in the form of "Flash Sales", "Great Sales" and etc.; third, after the promotional campaigns, Vipshop returns the unsold goods to the suppliers (within 15 days after the promotions). The whole process lasts about 40 to 50 days.

Promotional methods like flash sales are perfect for the industry of discount selling: (1) traditional sales can attract a lot of customers soon after the discounts are offered, but this effect would diminish over time; while the model of flash sales can improve the freshness of goods and Vipshop's daily sales can continuously stimulate consumption or even get customers to be "addicted"; (2) the high frequency of flash sales and the large amount involved in it can help suppliers to quickly clear their inventories; (3) the low deposits and the right to return the unsold goods to suppliers enable Vipshop to put less in the working capital and quickly circulate capital. Thus it has a high operating leverage and might gain an explosive growth within a short time.

Up until now, Vipshop has established cooperative relationships with more than 1,900 brands (many are cooperated repeatedly) and held 11,500 promotional campaigns. The high discount, low price and guaranteed authenticity it provides prove to be quite attractive to customers and thus easily generated word-of-mouth advertising. Since the Internet is not subjected to geographic restriction, this oral spreading is really powerful with the emerging of SNS. In 2011, the delivery range of Vipshop covered 330 cities around China.

On May 15, 2013 (Beijing Time), Vipshop released its unaudited financial statement for the first quarter of 2013 up to March 31. It shows that the revenue of Vipshop in the first quarter was USD 310.7 million, increasing by nearly 207% YoY. This was mainly the result of a sharp rise in the number of active customers, which grew by 170% YoY and reached 2.8 million. Besides, the total number of orders increased by 187% to 8.8 million YoY. In the fourth quarter last year, Vipshop reported quarterly profit for the first time; while in the first quarter this year, it achieved a net profit of USD 6.3 million. The success of Vipshop's model stimulated other e-commerce companies to follow its lead. Currently, big e-commerce companies such as TMALL, JD, Dangdang and Vancl have all launched models similar to that of Vipshop.

Chapter Four Management Team

The prospectus of Vipship points out that Chinese e-commerce does not completely depend on the Internet and business operation capability is also significant. The two founders of Vipshop had done trade before and quite a few of its executives are experts of the retail industry. For example, its COO was the vice president of previously and is familiar with the e-commerce industry in China. The management team members of Vipshop are listed below:

Shen Ya: co-founder, Chairman and CEO, 18 years' experience in consumer electronics products distribution, previously chairman of Guangzhou NEM Import and Export Co. Ltd., EMBA from Cheung Kong Graduate School of Business

Hong Xiaobo: co-founder, Vice Chairman, 12 years' experience in consumer electronics products distribution, previously chairman of Societe Europe Pacifique Distrbution

Jiang Jing: COO, 20 years' experience in China's retail sector, previously VP of (NYSE: DANG), worked at Carrefour Chongqing, Carrefour China Headquarters, China Resources Vanguard, etc. co in succession

Tang Yizhi: VP, 10 years' experience in logistics industry in China, Northern China logistics director of Tesco, previously senior logistics director of

Yang Donghao: CFO, previously CFO of Syuntra International In (NASDAQ: SYUT)

Hong Meijuan: VP, 20 years' experience in merchandise retail industry, previously VP of Grand Pacific Mall

Cai Xianfeng: GM of Shanghai branch, 19 years' experience in retail industry, previously president of IGA

Most members of the management team of Vipshop are graduates from prestigious schools such as Harvard and Cheung Kong Graduate School of Business, having abundant industry knowledge and rich enterprise management experiences. The fact that these leaders could gather talents and get several rounds of ventures from VC like Sequoia Capital and DCM can fully prove the excellence of the management team and the strong ability of the leaders. In particular, the team showed strong desire for advancement and the entrepreneurship of pursuing breakthroughs trying to go public in the US with the help of investment banks in 2012 when China Concepts Stock had not restored to the previous state yet.

ChapterFive Industry Analysis- Strong Consumption Demand

The market demand of discount retail industry in China: discount retail is in great demand in China. A report from Frost & Sullivan reveals that the scale of China's discount retail market in the year of 2010 was RMB 56.5 billion and is expected to reach RMB 568.1 billion in 2015. The size of flash sales market in China was RMB 3 billion in 2010 and is expected to reach RMB 107.4 billion in 2015.

The investment research organization Greenwich Research Group asserted in its report that "the sustainability of the profit rate is extremely weak in a fiercely competitive market. The profit rate of enterprises in this industry commonly ranges from 6% to 7%, so Vipshop's gross profit margin is not accountable". However, China AIG considers on the basis of the above Frost & Sullivan report that flash sales has just started up, the competition is still not intense and the industry is quite lucrative. Leading companies can make high profits. China AIG thinks that Greenwich Research Group should learn more about the development of flash sales industry in China before jumping to any conclusion.

On the one hand, there are a lot of customers in China who are sensitive to prices but also love pursuing fashion brands, and thus have strong demands of discounted brand products. Nonetheless, the BTL discount retail channels are still not developed especially in second- and third-tier cities. On the other hand, suppliers are in need of clearing the inventories. Taking clothing for example, there exist a number of second- and third-tier brands that are in fierce competition and under great pressure concerning the inventory. Vipshop provides them with a new low-cost marketing channel to replace high-cost BTL promotions. In addition, the market positioning of Vipshop is quite accurate. It locked the target onto the second- and third-tier brands and cities in the early stage and set the per customer transaction as RMB 200 (slightly higher than Taobao's RMB 100 to 150). Vipshop is thus needed badly by both suppliers and customers, which, together with the popularity of online shopping in China in recent years, constituted an excellent market opportunity for Vipshop.

The combination of the strong consumption demand, abundant supply of stocked goods and imperfection of BTL discount sales in China created great space for Vipshop to develop online discount retailing. Flash sale, a burgeoning e-commerce model, enables Vipshop to have a high operating leverage. Taking advantage of the word-of-mouth effect in the era of social network, Vipshop did the right thing with the right model at the right time and achieved explosive growth within three years after its incorporation. It has become one of the channels for customers to look for discounted brand products and for suppliers to deplete inventories.

Chapter Six Rivals and Competitive Advantages

We made a simple comparison between American and Chinese companies.



Profit margin of TXJ, the US giant in the brand discount industry (source:
  2007 2008 2009 2010 2011 2012
Operating Revenue(thousand USD) 17104013 18336726 18999505 20288444 21942193  
Gross Profit Margin 24.20% 24.50% 24.10% 26.20% 26.90%  
Operating Profit Margin 7.40% 6.90% 7.60% 9.60% 9.90%  
Profit margin of, a Chinese company (source:
  2007 2008 2009 2010 2011 2012
Operating Revenuethousand USD) 446864 766060 1457652 2281680 3618972  
Gross Profit Margin 18.26% 16.61% 22.48% 22.17% 13.83%  
Operating Profit Margin 17.42% 11.46% 0.75% 0.65% 7.86%  
Profit margin of Vipshop, a Chinese company (source:
  2007 2008 2009 2010 2011 2012
Operating Revenuethousand USD)     280 3,258 22,714 69,211
Gross Profit Margin     8.15 9.85 19.08 22.32
Operating Profit Margin     51.35 25.92 47.32 2.10

Data source: Wind Information, sorted out by China AIG Vipshop TXJ
Industry e-commerce flash sales flash sales
Model and Positioning Comprehensive B2C focus on the discount sales of leftover stock unknown
Competitive Strategy Passive contraction Active expansion Internationalization
Products and Services Online book selling etc. Discount sales Discount sales
Customers China China US, Canada, etc.
Area China China US, Europe, etc.
Development Potential Stuck in a dilemma Very promising ordinary

Data source: WIND Information, sorted out by China AIG

Based on the above comparison, China AIG holds that TXJ is the most appropriate object of comparison for Vipshop as they are comparable with regard to industry, positioning, strategy, development potential, products and services, customers, area, finance, and etc.

Since August 22, 2008, Vipshop has been focusing on building a leading online discount retail website and establishing its brand, which is the direct reason for its success. It has revolutionized the online store user experiences for both brand owners and customers and we think with the advantages (listed below) Vipshop is able to provide great services to brand owners and customers.

1.Leading online discount retailer that provides services to brands

2.Rapidly growing number of loyal customers

3.Specialized flash sales channel for fashion brands

4.Powerful network effect

5.Efficient operation

6.Experienced management team with rich industry knowledge

7.Renowned buyer team and supporting system

Chapter Seven Targets and Strategies of Vipshop

Vipshop aims to become an online shopping platform for brand products in China and a lifestyle as well. It plans to expand the customer base, deepen the cooperative relationships with brand owners, improve the platform and achieve its goal to the best with the strategies as follows: to improve customer experiences and loyalty through innovation; to strengthen relationships with brands and increase options for products; to promote the brand name of to attract more customers; to improve Vipshop's working capital management and the construction of IT infrastructure; and to seek for opportunities of strategic alliances and acquisitions.

On May 16, Vipshop's executives, including Chairman and CEO Shen Ya and CFO Yang Donghao, attended a teleconference after the financial statement of Vipshop was released. Questions were raised regarding the fact that the company's cash and cash equivalents mounted to about USD 370 million and the new expansion plan of Vipshop in this and next year. Yang Donghao, CFO of Vipshop, answered that "in the future we will invest on the expansion of storage and the construction of IT infrastructure. We are going to spend some cash to buy land and build warehouses this year. At present we are negotiating with some local governments about land buying. As to the IT infrastructure construction, we have already put more into the construction of mobile products and platform, which led to the rise of costs of IT and technology from the fourth quarter of 2012 to the first quarter this year."

The prospectus shows that costs of warehousing and logistics occupied the largest part of the operating expenses. Compared with traditional retailers, e-commerce companies need not spend on BTL stores but have to pay more for warehousing and logistics. The marginal costs of customer acquisition, administrative management, technology and etc. will become lower and lower as the scale expands, yet the warehousing and logistics costs will stay constant. The ratio of warehousing and logistics costs to the revenue of Vipshop was as high as 21.8%, 17.8% and 19.89% in the year of 2009, 2000 and 2011 respectively. Profitability in the future largely depends on whether this expense can be reduced. With the expansion of Vipshop's scale and the improvement of its operating efficiency, the ratio of its total operating expenses to the revenue has been gradually falling. The ratios of technology and content costs, administrative costs and marketing costs all dropped greatly, with the ratio of administrative costs declining from 23.2% in 2009 to 5.2% in 2011, and that of marketing costs falling from 10.8% in 2009 to 6.63% in 2011. And these two expenses are likely to continue to drop in the future. Though the ratio of warehousing and logistics costs remains high, the average cost per order is declining due to the scale effect in recent years. In addition, the substantial growth of Vipshop's warehousing and logistics costs in 2011 largely resulted from the fact that the company built three warehousing & logistics centers in Jiangsu, Sichuan and Beijing in September, November and December respectively (there was only one center in Guangdong before that). The total area of these three centers amounted to 82,000 square meters. The logistics efficiency of Vipshop is about to be greatly improved once the newly built centers become fully functional. It is also worth noting that although at present most of Vipshop's distribution is outsourced to the third party, the company has started to build its own distribution team in cities such as Beijing, Shanghai and Guangzhou since 2011 to improve distribution efficiency and service quality.

As reported by Wang Cuiyi from Beijing Business Today on May 27, 2013, the competition in the e-commerce industry is not limited to fierce price wars, but involves the competition of logistics as well. Vipshop, which has made profits, publicly announced the other day that it plans to invest USD 200 million to build three new large warehouses in the next few years in order to speed up its distribution. The company also targeted at TJY, the originator of discount retail in the US. Yang Donghao, CFO of Vipshop, indicated that the area of each new large warehouse that Vipshop is about to build will be around 100,000 square meters, equivalent to the total area of 16 or 17 football fields. However, he also pointed out that it is not easy to find lands of such size in China, especially because Vipshop intends to build the warehouses in thickly populated areas in eastern China rather than in the West where land is abundant.

Based on the above facts, China AIG concludes that Vipshop expects to build a complete logistics service chain and offer one-stop shopping services to customers. China AIG thinks that this strategy is right and visionary, which can establish sustaining core competitiveness for Vipshop and attract both brands and customers.

Moreover, through building its own warehousing and logistics centers and distribution system, Vipshop promises to its future customers with updated and diversified services. Also it sends a positive signal to the capital market: the strategy of providing enough logistics support to customer services can improve customer loyalty and thus it is quite reasonable that the customer base has been expanding. It is expected that with the perfection of the distribution system, the customer number of Vipshop will soar to a new high.

To build its own warehousing and logistics centers and distribution system also shows that Vipshop is committed to the flash sales market in China and determined to actively explore the market. The company's pricing and services will be very competitive after logistics expenses are reduced due to the scale effect, which would prove the advancement of its strategy and internal system. Some market researchers worry that large e-commerce companies, such as TMALL, JD, Dangdang and Vancl, would pose threats to Vipshop since they all introduced similar models. But China AIG holds that it requires special resources and tacit knowledge to successfully operate the model of flash sales rather than adding several new pictures and links on the website. Some new entrants are speculating or faced up with high transformation costs. Also they don't have the ability or resources to provide one-stop services with their logistics service systems. Therefore currently they are not attractive enough to customers. China AIG would like to remind potential entrants that cautious decisions are needed before entering or quitting new businesses so as to avoid strategic mistakes.

Besides improving its logistics delivery system, Vipshop also put more into marketing and the mobile platform. Shen Ya, Chairman and CEO of Vipshop, remarked that "during the year of 2012, Vipshop had been employing promotional methods that can directly bring in new customers; while this year we plan to do more about brand building of and increase the investment in marketing in hope of attracting more customers. We will set a limit to the expenses of marketing to ensure that the ratio of it to the total revenue is not higher than that of last year. However, as the total sales figure is to rise significantly, the specific amount of marketing expenses will grow a lot."

Vipshop conducted a large-scale promotional campaign for the first time that lasted two days starting from April 19, 2013. It achieved a big success with the sales figure and number of orders hitting a record high. The company will organize such activities in the future mainly to reward customers. It was a beneficial and innovative marketing attempt in the view of China AIG.

In the report published on Seeking Alpha, Greenwich asserted that "the information provided by Vipshop in its response is obscure and misleading, especially when it comes to the traffic data counted by Alexa, a supplier of web traffic rankings." China AIG considers this accusation to be unjustified for the following reasons: 1) Alexa is not quite popular in China and many Chinese users usually refer to the research statistics from companies like iResearch rather than Alexa. The data resources and statistical methods are different between Chinese and American data providers possibly due to cultural differences. Hence it is more reasonable to use the data from data providers in China when evaluating Chinese companies. Also Alexa cannot gather the information of visitors who do not use it. 2) Investors pay more attention to the fundamentals of companies, thus Alexa's data can only be used as one of the references, let alone possible mistakes and inaccuracies in it. 3) Alexa is only concerned about certain aspects but investors do not care about Alexa rankings. 4) China Concepts Stocks had experienced short-selling in the past two years. In consequence many Chinese companies are now stricter with financial audits and internal control. Vipshop showed a strong growth momentum after IPO and has no motivation to make fake data. 5) Greenwich is supposed to learn about the industry, company, business model and logic behind the strategies in order to understand the connotation of the growth of customer number. However, without qualified and quantified analysis, it generated a report simply on the basis of Alexa's traffic statistics, suspecting Vipshop of making fake data. It is unscientific and irresponsible. Greenwich should be responsible for its behavior.

Chapter Eight Great IPO in 2012

After the 2011 credit crisis of China Concepts Stocks, the American capital market lost faith in them and Chinese companies were temporarily forbidden of IPO in the US.

No China Concepts Stocks had successfully gone public in the US after the IPO of in August 2011. Vipshop was the third Chinese company that filed the application of listing to the US SEC in the year of 2012 (and the first China Concept Stock that went listed successfully after the credit crisis). It is also the third Chinese e-commerce company listed in the US following and Mecox Lane, serving as a weather vane for Chinese companies, especially Internet companies that want to go public in the US.

Company Name Listing Date Underwriter Listing Location December 8, 2010 Credit SuisseMorgan Stanley NYSE
Mecox Lane October 26, 2010 Credit SuisseUBSOppenheimer & CoRoth Capital Partners NASDAQ
Tudou August 17, 2011 Credit SuisseDeutsche Bank Securities NASDAQ
Vipshop March 23, 2012 Deutsche Bank SecuritiesGoldman Sachs NYSE

Data source:

In its report Greenwich Research Group said that "not many in China have heard of Vipshop, let alone shopping on it". However, China AIG believes that Vipshop has definitely drew many attentions from enterprises within the industry and VCPE as it is a star among overseas listed Chinese companies of TMT industry in 2012. Also, profitable companies like Vipshop, no matter in China or the US, would not care how many people pay attention to them. The words of Greenwich Research Group reveal that it lacks understandings of Chinese TMT industry, VC development in China, the significance of overseas listing for Chinese enterprises and the US capital market as well.

Statistics show that on March 23, 2012, the issue price announced by Vipshop was USD 6.5, down by 23.5% upon the lower limit of the price range (USD 8.5 to 10.5) announced before. Vipshop planned to issue 11 million shares with the overallotment option being 15%. The financing scale was USD 71.5 million, lower than USD 100 billion as expected previously.

Investment banks helped the company to launch roadshow, mainly targeting at institutional investors in order to attract investments from them. Nevertheless in the report published on Seeking Alpha, Greenwich Research Group claimed that "Vipshop is a Chinese website that is dedicated to special sales. Its recent IPO was not recognized by Wall Street. The issue price fell from USD 10.50 at the beginning to USD 6.50 and only 11.2 million shares were issued." "In other words, few institutional investors were interested in Vipshop 12 months ago, yet this situation changed abruptly in September 2012. At present the PB of Vipshop is 11 times and the prospective PE in 2013 is 78 times."

China AIG judges that Greenwich does not know much about how investment bank help companies to go public and we can make an analysis of this issue from three perspectives:

1. The perspective of investment banks

1) The pricing of IPOs is a kind of science and also an art as well. Empirical studies have proved that "overpricing of IPOs may intensify the competition in the industry" Maksimovic and Pichler2001Goldman Sachs and Deutsche Bank, which helped Vipshop to go public, are professional organizations and played a key role in the successful listing of the company, which was not looked upon favorably in 2012.

2) Timing is also very significant, which is one of the focuses in the work of investment banks. "Companies would delay the IPOs if their shares are undervalued in the market and wait until the valuation is fair or overrated" Lucas and McDonald1990After the credit crisis in 2011, the US capital market did not fully restore its trust in China Concepts Stocks in 2012. The willingness of investment banks to cooperate with Vipshop reflected their confidence in the company and also their own professional competence. It was the management team and the investment banks that co-decided to let Vipshop go public. Greenwich Research Group was partial, incorrect and misleading to investors when saying that no one was willing to subscribe Vipshop's shares.

3) Usually the method of book building is adopted for IPOs. Investment banks would first release an initial range of pricing, then gather potential investors' indications of interest through roadshow, and determine the issue price at last. Issue prices set by investment banks on the basis of investors' information would be disadvantageous towards those investors who provide real information. To tempt investors into providing real information, investment banks would issue new shares at a relatively low price and allocate more quotas to investors who have provided information. Greenwich argued that Vipshop was not recognized by Wall Street based on the fact that its issue price fell from USD 10.50 at the beginning to USD 6.50 and the issuing scale shrunk to 11.2 million. However, that was a common approach adopted by investment banks and thus there is actually no logic relation between its argument and the evidence it used.

4) To ensure the success of IPOs, investment banks would make adjustments to the issue prices for several times in order to find the most reasonable price. Usually their pricing is quite accurate because failed IPOs would greatly damage their reputations, which is harmful for the attraction of new businesses. Wall Street should have faith in the accuracy of Vipshop's pricing, which was determined by Goldman Sachs and Deutsche Bank, the lead underwriter of Vipshop.

5) IPO underpricing can help to improve after-market liquidity and turnover. It is the changes rather than the absolute value of wealth that issuers are concerned about. Shareholders prior IPO would subtract the loss due to underpricing from the increase in wealth in IPO and work out the net increase of wealth. To protect their own reputation, investment banks would actively and accurately set IPO price. Investment banks are able of proper pricing through responsible investigations and book building. Usually they know what the listing price will be when determining the issue price. The reason why they set a lower issue price is not that they don't know the bargain price in the secondary market, but that they consider the original price to be higher than the actual value of the IPO shares and the issue price they set is more close to that. Wall Street ought to trust the authoritativeness of Goldman Sachs and Deutsche Bank's pricing for Vipshop.

6) Investment banks often declare that they are more willing to allocate shares to long-term holders than to flippers. According to Wind Information, long-term shareholders of Vipshop include globally renowned investment organizations such as KEYWISE CAPITAL MANAGEMENT LTDPASSPORT CAPITAL, LLCTIGER GLOBAL MANAGEMENT LLC, SAC CAPITAL ADVISORS LP and DAVIS SELECTED ADVISERS, which are all very confident in the company's future performance. Besides, some Chinese and foreign media were wrong to say that investors had withdrawn because VC organizations as investors in the primary market need to quickly withdraw after IPO, which is a normal and rational strategy of investment quit and has nothing to do with the quality of the listed company. But the fact that the above funds stick with Vipshop shares reflects their recognition of the company's long-term value.

  Shareholder Name Number of Direct Share Holding(share) Percentage in issued ordinary shares (%)
2013-03-31 KEYWISE CAPITAL MANAGEMENT LTD 2,014,461.00 1.83
2013-03-31 PASSPORT CAPITAL, LLC 1,046,234.00 0.95
2013-03-31 TIGER GLOBAL MANAGEMENT LLC 850,000.00 0.77
2013-03-31 SAC CAPITAL ADVISORS LP 716,536.00 0.65
2013-03-31 DAVIS SELECTED ADVISERS 687,407.00 0.62

Data Source: Wind Information

2. The perspective of issuers

Issuers possess more information than investors, who cannot distinguish "good IPOs" from "bad IPOs". To send a signal about the stock quality, high-quality companies would underprice the IPO, through which they might suffer some loss in IPO but would gather more capital when issuing additional shares at a price as high as that in the secondary market. On the other hand, it is difficult for low-quality companies to copy this model because they may not able to balance the loss in IPO with SEO in the secondary market. Therefore, the Vipshop's underpricing reflects its confidence.

3. The perspective of investors

In the year of 2012 the global economy was in a downturn and the capital market had little faith in China Concepts Stocks after the credit crisis. Vipshop's successful IPO proved the excellence of the company, the recognition of institutional investors and the significant role of its underwriter. China AIG believes that there never lacks well-informed and patient investors, who can be categorized into two types. One is those with information, who only subscribe IPO shares that is priced lower than the actual value so as to obtain high returns. The other is those without information, who don't know the actual value of the shares and have to subscribe all of them. Such investors can easily acquire overpriced IPO shares as many as they have subscribed because the informed investors would not buy such stocks. However, it's hard for them to get the underpriced IPO shares as they have expected since the informed investors are more favored. Therefore, the rate of return of the investment on IPO shares is relatively low for uninformed investors. Underpricing offers are commonly seen because the issuers hope to attract those uninformed investors and ensure that they get fair returns, so as to make the IPO market sustain Rock,1986Nevertheless, Greenwich Research Group said that no one was willing to subscribe Vipshop's shares due to its poor quality. Based on the analysis above, it is fair to say that Greenwich know little about the company and its statement not only is partial and false, but also deceives and misleads investors.

In its report Greenwich Research Group provides evidences for its accusation of Vipshop as such: "Here are some of the comments on Vipshop from an investment banker colleague in China with vast experience in Chinese IPOs: Business friends in China think the financials are misleading." China AIG considers such "evidences" are untenable without the information of the real identity of these "colleagues" and "friends".

Chapter Nine Bright Future in 2013

In the opinion of China AIG, the high share price that Vipshop enjoyed in the early period when the trading volume was small can be attributed to its high quality, great management team, investment banks' recognition and low IPO price. But the reason why the company's trading volume rose steadily and remained high even if some investors quit was that the American investors started to believe in Vipshop and accept its model, recognizing it as TJX in China.

Data source: Google Finance, 2013

It has been less than five years since the incorporation of Vipshop . But on May 25, 2013 (Beijing Time), Yang Donghao, CFO of the company said in an interview with Wall Street Journals that Vipshop is planning to become the Chinese version of TJX, which is the giant of discount sales in the US and operates brands such as T.J., Maxx and Marshalls.

Yang Donghao revealed that Vipshop plans to spend USD 200 million building three new large warehouses in the next few years in order to achieve its target for growth. Each will have an area of about 100,000 square meters. Also he pointed out that though the population base of China is large, the scale of discount clothing market in China is similar to that in the US at present. Yang said that Vipshop expects to establish a leading status in China's fragmented discount clothing market.

Vipshop released its financial statement for the first quarter of 2013 earlier this month. It shows that the revenue of Vipshop in the first quarter was USD 310.7 million, increasing by nearly 207% YoY. This was mainly the result of a sharp rise in the number of active customers, which grew by 170% YoY and reached 2.8 million. Besides, the total number of orders increased by 187% to 8.8 million YoY. In the fourth quarter last year, Vipshop reported quarterly profit for the first time; while in the first quarter this year, it achieved a net profit of USD 6.3 million. In the meantime, TJX also published its financial statement, saying that its first-quarter sales volume rose by 7% YoY to USD 6.2 billion and the net profit was up by 8% YoY, reaching USD 452.9 million. The profile of TXY is presented below:

The TJX Companies, Inc. (NYSE:TJX), incorporated on May 12, 1987, is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer.

T.J. Maxx and Marshalls (referred to together in the United States as Marmaxx) is off-price retailer in the United States with a total of 1,867 stores as of January 28, 2012. Both chains sell family apparel (including footwear and accessories), home fashions (including home basics, accent furniture, lamps, rugs, wall decor, decorative accessories and giftware) and other merchandise. TJX differentiates T.J. Maxx and Marshalls through different product assortment (including an assortment of fine jewelry and accessories and a designer section called The Runway at T.J. Maxx and a line of footwear, men's offering and a juniors' department called The Cube at Marshalls), in-store initiatives, marketing and store appearance. HomeGoods is the off-price retailer of home fashions in the United States. Through its 374 stores, the chain offers a range of home basics, giftware, accent furniture, lamps, rugs, wall decor, decorative accessories, children's furniture, seasonal and other merchandise.

Winners is the off-price apparel and home fashions retailer in Canada. The merchandise offering at its 216 stores across Canada is comparable to T.J. Maxx and Marshalls. In March 2011, the Company introduced the Marshalls chain to Canada, and opened a total of six Canadian Marshalls stores during the fiscal year ended January 28, 2012. Like Marshalls in the United Stated, TJX's Canadian Marshalls stores offer a footwear department and a juniors' department called The Cube, differentiating it from the Winners chain. HomeSense chain has 86 stores with a merchandise mix of home fashions similar to HomeGoods.

T.K. Maxx is the off-price retailer of apparel and home fashions in Europe. With 332 stores, T.K. Maxx operates in the United Kingdom and Ireland, as well as Germany and Poland. Through its stores and online Website, T.K. Maxx offers a merchandise mix similar to T.J. Maxx, Marshalls and Winners. HomeSense brought the home fashions off-price concept to Europe, opening in the United Kingdom. Its 24 stores offer a merchandise mix of home fashions in the United Kingdom similar to that of HomeGoods in the United States and HomeSense in Canada.

We made a comparison between TXJ and Vipshop (up until June 4, 2013):

Time of Incorporation 1976 2008
Time of IPO 1989 2012
Exchange NYSE NYSE
Target Market US, Europe, Canada, etc China
Market Price USD 50.55 USD 29.75
Market Value USD 36.448 billion USD 1.616 billion
Operating Revenue of the First Quarter of 2013 USD 6.2 billion USD 310.7 million
Net Profit of the First Quarter of 2013 USD 452.9 million USD 5.8 million

Data sourceGoogle Finance 2013, TJX Companies, Inc.

Data sourceGoogle Finance 2013, Vipshop Holdings Ltd

China Alternative Investment Group maintains that Vipshop is the Chinese version of TJX with long-term investment value. Although Vipshop is just a start-up company compared with TJX with regard to the development history, market value and scale, it is the leader in the flash sales industry in China where the market is undeveloped and huge which thus endows Vipshop with a greater potential of development than TJX that mainly targets at the mature markets in the US, Europe and Canada. Vipshop possesses the ability and resources to become the champion in online flash sales in China or even the whole Asian area.

Chapter Ten Investment Advice



Cut-off Date 2013-03-31 2012-12-31 2011-12-31 2010-12-31 2009-12-31  
Type Quarterly Report Annual Report Annual Report Annual Report Annual Report --
Indexes USD,yuan)
Earnings per share-basic 0.06 0.11 3.38 0.18 0.03 --
YoY Growth Rate(%) 135.29 96.75 1777.78 500 -- --
Earnings per DR-basic 0.12 0.22 -- -- -- --
YoY Growth Rate(%) 135.29 -- -- -- -- --
NAV per share 1.807 0.8154 -- -- -- --
YoY Growth Rate(%) 145.38 -- -- -- -- --
ROE 4.3983 18.7804 2623.5387 143.4775 -- --
YoY Growth Rate(%) 123.76 99.28 1928.54 -- -- --
ROA 1.2496 3.3449 116.2406 84.1951 -- --
YoY Growth Rate(%) 126.57 97.12 38.06 -- -- --
Summary of Income Statement USD, thousand yuan)
Gross Operating Revenue 310,658.68 692,112.96 227,142.88 32,582.12 2,804.83 --
YoY Growth Rate(%) 206.79 204.7 597.14 1,061.64 -- --
Operating Profit 4,171.85 14,506.89 107,482.01 8,445.09 1,440.22 --
YoY Growth Rate(%) 143.85 86.5 1,172.72 486.37 -- --
Percentage of Sales (%) 1.34 2.1 47.32 25.92 51.35 --
Profit before Taxation 7,691.78 8,765.90 107,271.52 8,365.85 1,380.71 --
YoY Growth Rate(%) 189.58 91.83 1,182.26 505.91 -- --
Percentage of Sales (%) 2.48 1.27 47.23 25.68 49.23 --
Net Profit 5,841.17 9,472.07 107,271.52 8,365.85 1,380.71 --
YoY Growth Rate(%) 168.03 91.17 1,182.26 505.91 -- --
Percentage of Sales (%) 1.88 1.37 47.23 25.68 49.23 --
Summary of Balance Sheet USD, thousand yuan)
Total Assets 535,989.90 398,917.12 167,435.32 17,132.69 2,739.84 --
YoY Growth Rate(%) 171.02 138.25 877.29 525.32 -- --
Total Liabilities 352,965.22 316,334.31 149,146.12 27,244.27 4,289.80 --
YoY Growth Rate(%) 186.29 112.1 447.44 535.09 -- --
Shareholders' equity attributable to the Company 183,024.68 82,582.81 18,289.20 10,111.58 1,549.96 --
YoY Growth Rate(%) 145.74 351.54 280.87 552.38 -- --
Total Shareholder's Equity 183,024.68 82,582.81 18,289.20 10,111.58 1,549.96 --
YoY Growth Rate(%) 145.74 351.54 280.87 552.38 -- --

Data source: Wind Information

Based on the above analysis, China AIG concludes that Vipshop is substantially underestimated. We are optimistic about the long-term value of the company and maintain the rate of "Buy" with a target price of USD 60 per share.

Date Organization Rate Target PriceUSD
2012-05-02 Oppenheimer   7.50
2013-05-28 Goldman Sachs Buy 41.90
2013-05-28 PIPEsr Jaffray Buy 55.00
2013-05-17 Deutsche Bank Buy 36.50
2013-05-28 Deutsche Bank Hold 36.50
2013-06-02 China AIG Strong Buy 60.00

China AIG recognizes the investment highlights of Vipshop to be: one of a kind in the field of flash sales in China with prominent core competence and growth strategy, reasonable and advanced business model, and excellent management team with strong execution and rich experiences in international business management and the retail industry. China AIG considers that Vipshop is bound to continue to lead the development of the flash sales industry in China, the most populous country around the world, or even the whole region of Asia. It will have an absolute advantage in the industry within Asia as well. But the company is also facing up risks and challenges:

10.1 Competition Risks

The business model of Vipshop is a combination of brand discount, flash sales and guaranteed authenticity, namely the model of "flash sales". Its excellent performance in the capital market drew attention from not only investors but also many counterparts. Quite a few of e-commerce companies are about to enter this field. Yet China AIG believes that Vipshop has won the first mover advantage and got recognition from customers with its accurate positioning. Late comers ought to think two things over before entering the industry. One is whether the conflicts within their price systems would lead to unclear positioning. The other is whether they have enough ability to handle the whole process and system of flash sales. At present Vipshop has already established deep relationships with brands and customers and developed unique core competency.

10.2 Customer Risks

Vipshop needs to establish a business process centered upon customers. While developing new customers, it must also maintain the service level with old customers in order to gain the advantage of customer resources gradually. China AIG thinks that though the company has already built a service system, it still needs to spend more energy and time strengthening it so as to rise to future challenges. More professional buyer team and better logistics distribution system are both needed to improve customer services.

10.3 Operation Risks

The explosive growth of Vipshop during the past three years can be attributed to some extent to the high operating leverage allowed by the model of "flash sales". Currently, Vipshop's annual operating revenue is as much as USD 227 million, the value of its inventory amounts to USD 64 million, and suppliers' account payable has reached USD 88 million. To maintain its growth momentum, Vipshop has been increasing the investments in purchasing, warehousing and logistics, marketing and etc. Consequently a major issue for the company now is to improve operation efficiency and manage the cash flow. China AIG estimates that this operation pressure will gradually be relieved with the increased efforts in marketing, perfection of logistics system and the rise of the number of customers.

In addition, China AIG suggests that in the future Vipshop should pay more attention to its relationship with brand owners, build a customer-centered business system and a supporting logistics system and enhance its own strength through external growth methods like acquisitions.

Chapter Eleven Phase One of PIPES Fund for China Concepts Stocks

China AIG believes that Vipshop is substantially underestimated. As an excellent representative of Chinese companies, it is misunderstood and unfairly treated in the US capital market because of Wall Street's misconception of the company's business and China Concepts Stocks as a whole, as well as the attacks from short-sellers and speculators. Some small or uninformed investors also suffered serious losses. China AIG, being the representative of alternative investment institutions in Asia, has an obligation to prove Vipshop's long-term investment value to Wall Street. We expect to set up a private capital market ( through cooperation and communication, aiming to protect the interests of investors around the world and support more companies with long-term investment value.

Since we consider Vipshop to be substantially underestimated, we plan to establish a PIPES fund for China Concepts Stocks in order to avoid the speculation and defamation from short-sellers and support the long-term growth of Vipshop. If you recognize the long-term value of the company or intend to invest on it, please vote to subscribe Vipshop's shares on the alternative investment platform ( Your investment will be managed by China AIG to buy Vipshop's shares or issue new shares with a repurchase agreement. The rights and obligations of investors are subject to legal documents including PPM, partnership agreement and others. Specific operation methods and steps are detailed on the website (

The only right to interpret the above contents is vested in China AIG, an alternative investment organization in Asia focusing on the investment and capital management of Angel investment, VC, PE, FOF, hedge fund and real estate finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.