Vipshop Holdings:Stable growth outlook,rising FCF and attractive valuation;still Buy

What's changed

In tandem with our China E + Commerce: Shopping Re-Imagined reportpublished today (Feb 28), we lift our earnings estimates for Vipshop (VIPS)– China’s leading online discount retailer for brands focusing on flashsales, with estimated revenue growth of 25%/18%/16% in 2017E/18E/19E(vs. 122%/74%/41% yoy growth in 2014/15/16). We believe online appareland maternity/infant related products will continue to expand steadily inChina driven by millennials and new mothers. Meanwhile, we believe thediscount market will continue to appeal to new online shoppers, wherewe estimate >70% of 200mn new shoppers over 2017E-20E will come fromlower-tier cities. In our view, VIPS’ 16x 2017E P/E is attractive vs. China ecommerceplayers/global offline discount retailers trading at averages of25x/20x, respectively. Buy

Implications

We fine-tune our earnings estimates and raise 2017E-19E revenue andEPADS by 0-6% on our expectations of a more favorable 2020E GMVoutlook for the industry; see E+Commerce: Shopping Re-Imagined reportfor additional details. Vipshop reported Rmb2.6bn FCF (excl. impact fromInternet Finance) in 2016, vs. Rmb(1.6bn) in 2015, and we expect FCF togrow healthily at a 44% CAGR in 2017E-19E. With this report, we transfercoverage of VIPS to Ronald Keung from Piyush Mubayi.

Valuation

Our 12-month TP is still based on an 85%/15% blend of Fundamental/M&Avaluations at 20X/25X 2018E P/E (unchanged) and increases 2% to US$20(from US$19.6) after factoring in the forecast changes. Our new TP implies2018E P/E of 21x vs. current 14x 2018E P/E.

Key risks

Competition or new entrants (both online/offline), GMV slowdown, higherthan-expected fulfilment costs/capex and inventory write-down risks.