Flash Sales Boost Vishop

02/11/2014 10:00 am EST

Focus: ETFs

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Our latest featured stock is thriving where two major trends in modern China meet. The first is the rapid adoption of mobile technology; the second is online retailing, explains Paul Goodwin, editor of Cabot China & Emerging Markets Report.

As more smartphones are sold, everything is happening online. And that includes shopping. Increasingly prosperous Chinese love to shop, and being online brings the entire retail world to their phones.

Vipshop Holdings (VIPS) offers fashionable merchandise, including clothing, shoes, accessories, cosmetics, and more, all at discounted prices.

But what really makes Vipshop special is that sales are all discounted, online, flash sales. That means limited amounts of each product are offered for limited amounts of time, and at a significant discount to full retail, usually 50% to 70% below original retail.

Clothing is the biggest sales category (over 40% of total sales) with shoes and bags accounting for over 10%. But the flash sales model can include a huge variety of goods, so close to half of sales come from miscellaneous goods.

Vipshop has an extensive network of around 6,000 partnerships with fashionable Chinese and international brands to offer their goods at discounted prices.

This allows young Chinese professionals to purchase quality brands that they otherwise couldn't afford. China has no national discount chains, so Vipshop is becoming one, but doing it online.

Results have been outstanding, with three full years of astonishing revenue growth—1,059% in 2010, 597% in 2011, and 205% in 2012—and strong growth through the first three quarters of 2013 averaging 170%.

The company turned profitable in the third quarter of 2012, with earnings of one cent per share. EPS has improved steadily, rising from 17 cents in Q1 2013, to 20 cents in Q2, and 26 cents in Q3. After-tax profit margins have also improved every quarter.

This is one of the best stories around, with one foot in each of the prime Chinese investment themes, mobile and retail.

We think it's possible to take a small position in VIPS, although an earnings report date hasn't been released, and those results will likely shape the stock's future. We recommend adding a half position to our portfolio and watching closely.

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