Key Takeaways:

• Vipshop’s revenue increased 13.6% in the second quarter, and its net profit jumped 64%
• The company expects its revenue growth to slow sharply to 5% at best in the third quarter amid mounting signs of trouble for the Chinese economy

By Warren Yang

The investor mood for Vipshop Holdings Ltd. (NYSE:VIPS) is oddly gloomy.

Vipshop’s total net revenue increased 13.6% year-on-year to about 28 billion yuan ($3.8 billion) in the second quarter. Its profitability improved even more thanks to cost reductions, which led to a 23% increase in its gross profit and an even greater 64% gain in its net profit. Both the revenue and net profit beat analyst expectations.

But that’s where the fun ends.

Vipshop said it expects its third-quarter revenue to increase just 5% at best from a year earlier, or to not grow at all in a worst-case scenario. That would be a sharp slowdown not only from the second quarter, but also from the first, when the company’s revenue grew 9%, signaling it was on a promising path to recovery from the prior year’s Covid 19-inflicted slump.

Shen went on to say return rates for apparel purchases tend to be higher than for other products, and increasing caution among consumers isn’t helping. Woes among consumers first showed up earlier in the year with sharp declines in sales for big-ticket items like cars, PCs and smartphones. But now the mood appears to be trickling down the food chain to less expensive items like apparel as well.

“When they place their orders, they have to think over and over and then the return rate would be trending higher,” Shen said.

Other key data the bureau reported for last month, from retail sales to industrial production, all missed analyst projections. Worse yet, consumer prices declined in July, putting China into the unusual position of facing deflation at a time when the rest of the world is grappling with high inflation rates. None of that looks too encouraging.

Ticking Bombs

The economic gloom is also manifest in a growing number of larger ticking bombs in the corporate sector. For one, major property developer Country Garden (2007.HK) recently defaulted on bond payments as it faces huge losses. Many worry the company may be one of many dominoes to ultimately fall in China’s sagging property sector, creating a drag on the whole economy.

In another ominous sign, Zhongrong International Trust, a state-backed trust firm, also missed payments for its wealth management products to three listed companies earlier this month. This is no small matter as it suggests that China’s financial sector may also be facing liquidity problems.

Troubles in the important real estate sector alone can be bad enough, and an ailing financial system just makes matters all the more worrisome.

By contrast, Vipshop has reported a net profit every quarter since 2013. Such profitability is a valuable virtue for this kind of Chinese company as many of its peers have trouble cutting losses despite fast revenue growth. And in the current climate, even the fast revenue growth from previous years is quickly becoming a distant memory.

Vipshop shares are down sharply from a peak they reached in 2021, but are still up many-fold from their IPO price from 2012. They trade at a trailing price-to-earnings (P/E) ratio of about 11, a fair multiple considering its rapidly slowing growth. But the figure is still far smaller than the 20 for Alibaba and 18 for JD.com.