Vipshop Holdings (VIPS) is trading sharply higher today (+44%) on news that Tencent Holdings (TCEHY), an internet giant in China and JD.com, China's largest retailer, will invest a total of US$863 million in cash in Vipshop.
In case you're not familiar, VIPS is a Chinese online discount retailer that specializes in selling luxury brand name products via what are known as "flash sales," which are events where VIPS will offer deeply discounted merchandise for a short period of time. VIPS' largest category is apparel but they also focus on fashion items, shoes and cosmetics. Smaller categories include home goods, leisure travel packages and other lifestyle products.
VIPS prices products on its website at significant discounts, typically ranging from 30-70% off the original retail price, which is one of the key elements in the "thrill and excitement" shopping experience that VIPS creates. Its attractive pricing is made possible by cost savings achieved through volume discounts, in particular for off-season or slower-moving inventory. The absence of physical retail space and related overhead costs also helps to keep costs low.
VIPS uses mostly a consignment business model so they do not purchase most of the merchandise they sell. By not purchasing inventory upfront, this allows VIPS to use very little working capital. Its customer breakdown is 75% female and 25% male. Of note, VIPS' cosmetics business got a lot bigger when VIPS acquired a 75% stake in Lefeng.com, an online cosmetics retailer, in February 2014. While VIPS specializes in apparel, the goal was to broaden VIPS' categories.
The company has been capitalizing on the lack of large online discounters in China, as this is a new concept there. The stock made its IPO debut in March 2012 and was a huge mover in 2013-2014 and peaked at just above $30 in early 2015. However, the stock has been trending lower since then as the company has struggled.
Turning to today's news, Tencent and JD.com will subscribe for newly issued Class A shares of Vipshop in the amount of US$604 million and US$259 million, respectively. The purchase price will be US$65.40 per Class A share, which is equivalent to US$13.08 per ADS of Vipshop, five of which represent one Class A share.
The purchase price represents a 55% premium over VIPS' closing price on Friday. After closing, Tencent and JD.com will own, taking into account existing holdings, approximately 7% and 5.5%, respectively, of Vipshop's total issued shares. The Class A shares issued to Tencent and JD.com will have a two-year lock up restriction.
Also, Tencent and JD.com have entered into business cooperation agreements with Vipshop, under which Tencent will grant Vipshop an entry on the interface of Weixin Wallet enabling Vipshop to use traffic from Tencent's Weixin platform, and JD.com will grant Vipshop entries on both the main page of JD.com's mobile app and the main page of its Weixin Discovery shopping entry, and will assist Vipshop in achieving certain GMV targets through JD.com's platform. VIPS will continue to operate as an independent e-commerce platform and further build e-commerce capabilities in fashion (including apparel, shoes, bags and accessories) and cosmetics categories.
In sum, this is clearly very positive news for VIPS, a retailer that has been struggling, on a number of levels. Not only do they get a significant equity investment and at a very nice premium, they also get to partner with two major internet names in China to help boost their sales. It's also a vote of confidence that makes investors take notice of VIPS and think there is some good potential here with VIPS if these two big internet names like what they see.