Daiwa has upgraded Vipshop (VIPS) to buy from hold following the news that social media firm Tencent (700.HK) and e-commerce giant JD.com (JD) will team up to invest a combined $863 million Chinese discount online retailer.
Under the agreement announced on Monday, Tencent will acquire a 7% stake via the acquisition of new issued shares for USD604 million, while JD.com will acquire a 5.5% stake for $259 million. The deal will give Vipshop access to Tencent's Weixin Wallet and JD.com's mobile application and the main page of its Weixin Discovery shopping entry.
Daiwa analyst John Choi says deal eases concerns he had on Vipshop, including:
1) decelerating revenue and user growth on the lack of notable category expansion, and 2) net margin pressure due to decreasing efficiency on user acquisition. Fundamentally, we believe the deal could reverse Vipshop's deceleration trend for new active customers in the coming quarters while leading to both top- and bottom-line upside potential in 2018-19E. This, along with the premium paid (55% to the last closing price), should drive a near-term re-rating of the stock, in our view.
The analyst says the traffic support from Tencent and JD.com will benefit Vipshop's top and bottom lines:
Tencent will grant a Level-2 access point to Vipshop in WeChat (in WeChat Wallet page), while JD.com will direct traffic to Vipshop in JD's mobile app and its H5 landing page (through WeChat's shopping tab). Vipshop is likely to open a flagship store on JD.com (similar to Suning's store on Tmall), where Vipshop effectively becomes a merchant on JD's marketplace. This should cause a GMV upside in both JD's 3P business and Vipshop's 1P business. The additional traffic from Tencent and JD should reduce Vipshop's couponing level and improve marketing efficiency, resulting in a stabilising net margin outlook in the coming 1-3 years. We raise our 2017-19E earnings by 1-15% to factor in stronger GMV growth and net margins, offset by a higher share count from the deal (c.10% dilution).
Choi also raises his target price on the company to USD17 a share, (from USD10) due to the likelihood an earning rebound.
Shares in the company surged 39% in Monday trading on the news.