Analyst: There's More To The Vipshop Rally Than Hope

One analyst is impressed with the remarkable recovery in shares of Chinese e-commerce company Vipshop Holdings Ltd – ADR VIPS since early December. 

The Analyst

Bernstein analyst Bhavtosh Vajpayee upgraded shares of Vipshop from Underperform to Outperform and increased his price target from $9.20 to $23.50.

The Thesis

The recent recovery seen in the shares of Vipshop is not just riding on hope, but on a "punchy alliance" with both Tencent Holdings Ltd TCEHY and JD.Com Inc(ADR) JD, Vajpayee said in a Tuesday note. (See the analyst's track record here.) 

The tie-ups will help Vipshop's growth efforts, with customer acquisition costs likely to fall and underutilized logistics manpower set to become more productive, Vajpayee said. 

Bernstein said the 6-percent market share Vipshop enjoys in the apparel e-commerce market could be used as a building block by JD, although the analyst said merchandising integration with JD should have been a part of the deal.

Longer-term, Bernstein expects the strategic dilemma of growth versus profitability will reappear.

"Our upgrade is premised on the assumption that the choice VIPS makes then will be more constructive than the 'whatever it takes/growth at all costs' approach that crushed the stock in 2017," Vajpayee said. 

Bernstein raised its 2018-2019 revenue estimate for Vipshop and assumed more constructive margin scenarios ahead. Although the firm expects new share issuance to Tencent and JD to mitigate 2018 earnings per share growth, it upwardly revised its 2019 non-GAAP earnings per share estimate by 35 percent.

Bernstein's 2018 and 2019 EPS estimates are 10 percent and 36 percent above consensus, respectively. 

The Price Action

Vipshop shares are up over 44 percent over the past year. From Dec. 8, the stock has added a whopping 89 percent.

The stock closed Tuesday up 10.62 percent at $16.04. 

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