Fitch Ratings has affirmed China-based online retailer Vipshop Holdings Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'.
The Outlook on the IDR is Stable.
The affirmation reflects our expectation that Vipshop's performance will be resilient, supported by its high brand recognition and loyal customer base. Its strong financial profile with a deep net cash position provides a buffer for the company to weather economic turbulence.
Vipshop's ratings also reflect the company's merchandising capabilities and sound relationship with brand partners. The ratings are constrained by the niche nature of discount retail relative to the overall Chinese e-commerce industry, lack of diversified business segments and fast-changing competitive landscape.
Key Rating Drivers
Resilient Revenue Growth: Fitch expects Vipshop to benefit from the increasing trend of consumers looking for value-for-money products, which should support its revenue growth amid a weak macroeconomic environment. However, we expect revenue growth to moderate to low single digits in 2024 due to weakened consumer spending power. Active user growth will also moderate as the company adopts a more focused approach to target high-quality users with disciplined marketing spending.
Improved Profitability: We expect Vipshop's cautious user acquisition and focus on quality growth to support profitability in the medium term. We forecast EBITDA margin to improve to 9%-10% in 2023, from 8.5% in 2022, and remain stable afterwards.
The improvement in profitability is driven mainly by an increase in gross margin and a reduction in administrative costs. The increased contribution from apparel-related products, which have a higher margin than other product categories, supports the gross margin expansion. Fulfilment expenses as a percentage of revenue may stay high due to the higher percentage of returns for apparel-related products, but the incremental costs can be offset by lower administrative expenses.
Strong Financial Profile: We expect Vipshop's conservative management strategy to support its strong financial profile, with positive free cash flow supported by robust cash flow generation and the controlled pace of offline expansion. We forecast capex to be in the range of CNY3 billion to CNY4 billion per year, mainly for expansion of its offline store, Shan Shan Outlets, and headquarters construction. We expect the company to utilise its cash for share repurchases over the next one to two years. It spent over USD700 million on share repurchases in the first three quarters of 2023.
High Customer Loyalty: Fitch expects the loyalty of Vipshop's key customer base to support its revenue generation. The company has focused more on growing its 'super VIP' customers, as they spend more than other users and shop more frequently. Super VIP users contributed to 41% of online net gross merchandise value in 2022. We believe such loyalty will continue, supported by deep discounts and quality inventory on Vipshop's platform due to its strong merchandising capabilities and close relationships with brand partners.
Intense Competition: Vipshop faces strong competition from larger e-commerce platforms and live-streaming and short-video platforms, which requires continuous efforts from the company to keep up with changing consumer tastes and behaviour and stay relevant. That said, it should maintain its leading position in the discount retail industry, given its strength in merchandising and consistent offerings of deeply discounted products.
Limited Diversification: Vipshop focuses on apparel-related categories, which contribute around 70% of revenue. Its product offerings are narrower than those of large e-commerce platforms, which results in a smaller addressable market for Vipshop. Its niche focus on discount retail also makes Vipshop sensitive to the inventory cycles of its brand partners.
Derivation Summary
Vipshop compares favourably with rated brick-and-mortar retailers in Asia due to its larger operating scale, stronger market position - particularly in the discount apparel category - and a net cash position.
Vipshop is rated higher than major US retailers such as Macy's, Inc (BBB-/Stable) and Kohl's Corporation (BBB-/Negative). Vipshop benefits from the structural shift towards online retail, as it has a strong market position in its niche compared with US offline retailers, which are forced to invest heavily in omni-channel platforms. Vipshop's net cash position also offers it significantly better financial flexibility.
Vipshop's ratings are below those of Chinese internet majors such as Alibaba Group Holding Limited (A+/Stable) and Baidu, Inc. (A/Stable), as it has a much smaller operating scale and narrower business focus.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
High-single-digit growth in 2023, moderating to low single digits in 2024-2026
EBITDA margin of 9%-10% in 2023-2026
Capex of CNY3.5 billion-4 billion in 2023-2026
No common dividends; share repurchases of CNY5 billion in 2023 and CNY4 billion in 2024-2026
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
We do not expect positive rating action in the medium term until there is a significant increase in scale or an improvement in revenue diversification, while maintaining a strong financial profile.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Evidence of increased competition that leads to a sustained decline in revenue or profitability
EBITDAR net leverage of above 2.0x for a sustained period (2022: -1.1x)
Negative free cash flow for a sustained period
Liquidity and Debt Structure
Net Cash Position: Vipshop had CNY18.8 billion in cash at end-September 2023 and CNY452 million in short-term investments, consisting of financial products offered by commercial banks. The company has ample liquidity to cover its short-term debt balance of CNY791 million.
Issuer Profile
Vipshop is China's leading online discount retailer, operating under the 'flash sale' model. It is one of China's leading online retailers overall and the largest retailer in the apparel space.
Summary of Financial Adjustments
The readily available cash balance has been adjusted to reflect the negative working-capital cycle, with the equivalent of the net working capital balance being classified as restricted cash. Short-term investments are classified as readily available cash. In addition, EBITDA does not include share-based compensation under selling, general and administrative expenses.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
VIPSHOP HOLDINGS LIMITED 
