Goldman Sachs Downgrades Vipshop, Says Other Chinese Internet Picks Hold More Upside Potential

Chinese online discount retailer Vipshop Holdings Ltd – ADR VIPS is likely to suffer margin erosion in the coming quarters as it invests heavily in marketing in a bid to attract new users, according to Goldman Sachs.

The Analyst

Analyst Ronald Keung downgraded Vipshop from Buy to Neutral and reduced the 12-month price target from $19.20 to $13.10.

The Thesis

Vipshop is facing intense competition on the ground, with likely downside risk to the consensus earnings estimate, Keung said in a Wednesday note.

The underperformance of Vipshop stock relative to the S&P 500 Index since it was added to Goldman's Buy List in March 2014 is due to a slowdown in growth and renewed market concerns over user growth and margin pressure, the analyst said.

Goldman revised its P/E multiple estimate from 20 times to 15 times on the basis of slower projected earnings and revenue growth beyond 2019.

The firm increased net revenue estimates for 2018-2020 to account for expected contributions such as the Vipshop WeChat mini program and JD.Com Inc(ADR) JD flagship store.

Keung trimmed the earnings per ADS estimates for the 2018-2020 period by 6-8 percent due to a lower non-GAAP net profit margin assumption.

"We downgrade Vipshop to Neutral as we see more upside in other China internet companies in our coverage universe," the analyst said.