Credit Suisse Downgrades VipShop, OPMs Likely Peaked At Historical High In Q4

Credit Suisse’s Evan Zhou downgraded the rating for Vipshop Holdings Ltd – ADR VIPS to Neutral, while reducing the price target to $13.50. The analyst cited the lack of expansionary initiatives to drive further growth as well as lackluster EPS growth with margin peaking as concern areas.

VipShop reported its 4Q results significant ahead of expectations. Total net revenue of Rmb13.9 bn, represented 60 percent sequential growth and 65 percent y/y growth. The figure beat the consensus and Credit Suisse estimates of Rmb13.4 bn, and this beat was driven by “a strong active customer base and improved order frequency,” Zhou said.

VipShop recorded adjusted diluted EPADS of Rmb1.18, ahead of the Credit Suisse estimate of Rmb1.08. Zhou wrote, “4Q's strong beat came in at the cost of a larger dip in GPM, which dropped 80 bp YoY to 24.1%, due to higher promotional activities to drive top line.”

Despite the better-than-anticipated results, the company issued a conservative guidance for 1Q16, which came in at Rmb11.9- Rmb 12.3 bn, with the midpoint missing consensus of Rmb12.3 bn.

“Apart from increased cross-border e-commerce (5% of GMV by 4Q) and ramp-up of baby and maternity category, we still haven't seen the major evolutionary initiatives from management's outlook to help the company elevate to the next level,” Zhou commented.

VipShop’s high 4Q new customer addition of 8.4 mn was supported by two major promotions, neither of which is planned for 1Q. The company would need to maintain the new addition run-rate at 8-9 mn for the next three quarters. This would be tough “without major investment on margins,” the analyst believes.

“VIPS's OPM has likely peaked out at the historical high of 6.9% in 4Q. Both GPM and OPM are likely to trend downwards in 2016. We estimate a 30 bp contraction in non-GAAP NPM in 2016. This would make EPS growth to lag top-line growth in the coming quarters,” Zhou added.