Vipshop Alert:A quieting in choppy waters

Solid 4Q growth and nice 1Q guidance

    Vipshop delivered solid 4Q results and 1Q guide, likely nudging tentativeinvestors back into a more constructive view after several quarters ofturbulence. Revenue grew 36.5% yoy to RMB18.98bn, 4% higher than DBeand consensus. Active customer growth (+39% YoY) was largely in line withDBE. The beat mainly came from a rebound in ARPU (+20% QoQ). Grossmargin dipped by 90bps QoQ due to year end promotions, Largely offset bysavings in marketing expense. Non-GAAP operating margin was therefore flatQoQ. Non-GAAP net margin beat DB by 1ppt on FX gains from the cross boardbusiness. The 28% YoY 1Q midpoint guide is above consensus/DBe of 26%.2017 gross margins may remain soft on continued promotions, while the fullyear non-GAAP margin should remain at 5%. We expect Vipshop 2017 totalrevenue to grow by 27% YoY.

    In-line customer growth; beat on ARPU recovery

    The company has seen a better balance between customer growth and ARPUthanks to the new landing page for new users. Growth in total active customer(+39% YoY), new users (+21% YoY) and repeat users (+40% YoY) were allsolid. Customer attrition rate declined to 16.8% from 37.8% in 3Q. SuccessfulSingles Day and anniversary promotions drove average user acquisition cost toRMB89 from RMB97 in 3Q. We expect ARPU momentum to continue in 2017.User acquisition cost should remain largely under control.

    Cashflows remain positive, faster payment at year-end

    Vipshop continued to generate positive operating cashflow and FCFF. We sawfaster payment to suppliers at year-end due to seasonality. Supplier financeand consumer finance balances totaled RMB878mn (+67% QoQ) andRMB2.17bn (+45% QoQ) respectively. The company finished the first trancheof its RMB dominated ABS of RMB300mn in Jan 2017, and is also preparingfurther follow-on ABS offerings. We expect cash flows and working capital toremain largely healthy in 2017.

    Tweaking up TP by 1% to US$15.3

    We lift FY17/18/19/E revenue by 1%/2%/2% and largely maintain non-GAAPnet margins. We view Vipshop as offering an attractive valuation at 14.4xFY17E P/E. Our valuation is based on a 0.8x PEG against FY17-19E EPS CAGR.Risks: competition, slower traffic and sales growth, unfavorable workingcapital changes, higher investment.