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Rating Action:

Moody's assigns first-time Baa1 rating to Vipshop; outlook stable

 The document has been translated in other languages

20 Feb 2017

Hong Kong, February 20, 2017 -- Moody's Investors Service has assigned a Baa1 issuer rating to Vipshop Holdings Limited.

This is the first time that Moody's has assigned a rating to Vipshop.

The rating outlook is stable.

RATINGS RATIONALE

"The Baa1 rating reflects Vipshop's fast-growing operations and dominant position in China's underserved discount retail market," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

"In addition, its consignment business model with last mile delivery capabilities results in minimal inventory risks and a high degree of customer stickiness," adds Choi.

"The rating also considers Vipshop's strong financial profile, with profit margins that consistently exceed those of industry peers and steadily growing cash flows," adds Choi.

Vipshop is the largest discount apparel retailer by gross merchandize value (GMV) in China, according to Frost and Sullivan, with an estimated market share of 14%-15% in 2016.

Moody's forecasts the company's revenue to grow by 30%-35% per annum in the next two years and surpass RMB70 billion by 2017, from RMB40 billion in 2015.

The solid revenue growth will be driven by its strong merchandizing relationships and consignment business model, a comprehensive logistics network that covers most of the country, and a high degree of customer stickiness.

As of 30 September 2016, Vipshop employed a professional team of over 1,600 merchandizers covering more than 10,000 suppliers. Its strong track record of sales distribution underpins Vipshop's large scale and ability to use the consignment model for over 90% of its sales.

The consignment business model allows Vipshop to return any unsold inventory after the promotional period back to suppliers, thereby minimizing inventory risks and working capital requirements.

At the end of September 2016, Vipshop had five large warehouses located around China spanning a total of 1.7 million square meters. Over 90% of orders are fulfilled and delivered by this in-house logistics system.

Moody's views the ownership of an end-to-end logistics system as critical to a retailer, because it ensures the authenticity of the products and a smooth customer shopping experience. With this logistics system, Vipshop can achieve 2-3 days of delivery time on average, resulting in 94% of its orders coming from repeat customers in 2016.

The rating also reflects Vipshop's solid financial profile, as seen by its steadily growing scale, high and stable gross margins of around 24%, strong cash flows and low leverage, as measured by adjusted debt/EBITDA of 1.4x as of end-September 2016. Moody's expects that the company will maintain its debt leverage at around 1.5x-2.0x level in the next 12 to 18 months.

Vipshop's liquidity profile is strong. At end-September 2016, Vipshop held total cash and equivalents plus short-term investments of RMB4.9 billion, more than sufficient to cover its short-term debt of RMB3 million.

Moody's points out that Vipshop's issuer rating also incorporates: (1) execution risks, capital requirements, and access to funding as the company grows its user base and expands its business scope, and (2) the potential contingent liabilities associated with its in-house finance unit.

Vipshop primarily focuses on merchandize categories with high gross margins. However, if the company starts increasing the proportion of lower gross margin categories -- such as infant milk formula -- in an effort to cross-sell more products, leveraging its existing customer base, it will come into more direct competition with larger peers. Such heightened competition in turn would raise its selling expenses and capital requirements.

Vipshop's nascent financing service provides credit to consumers and suppliers. The company plans to grow its loan book prudently and only in support of and in line with its core retail business needs.

Moody's expects the financing service will remain small relative to Vipshop's core business in the medium term. The company's strong financial profile is expected to accommodate any potential contingent liabilities arising from the securitization of the loan receivables. Nevertheless, should the company rapidly grow its loan book and/or should the transparency of the loan book decline, this could pressure its rating.

The stable rating outlook reflects Moody's expectation that Vipshop will maintain its strong market position in China's discount apparel retail market and carefully balance its growth targets with a solid liquidity and financial profile and low debt leverage.

Upward rating pressure is limited in the near term, considering the execution challenges stemming from the company's rapid business growth and intense competition.

Nevertheless, the rating could be upgraded over the medium to long term if the company can achieve its growth targets while maintaining a sustainable strong financial profile.

Specifically, the rating could be upgraded if: (1) debt/EBITDA remains consistently below 1.0x; (2) there is positive and growing free cash flow (after capital expenditure and dividends) for a prolonged time; and (3) the company maintains a strong net cash position.

On the other hand downward rating pressure could arise if the company: (1) fails to fend off competition and experiences substantial declines in market share, or substantial disruptions in its discount apparel retail business that could adversely affect revenue growth and cash flow generation; (2) deviates from its prudent financial policy and grows its user base, business scope or financing unit at the expense of its currently strong financial profile; or (3) engages in aggressive acquisitions that pressure its balance sheet liquidity or raise its overall risk profile.

Specifically, the issuer rating could be downgraded if: (1) debt/EBITDA rises above 2.0x-2.5x; or (2) the company fails to achieve positive free cash flow over a prolonged period; or (3) if the finance unit sees a liquidity crunch and requires substantial capital injections.

The principal methodology used in this rating was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Vipshop Holdings Limited is an online discount retailer for brands in China. Vipshop offers branded apparel, home products, cosmetics and other consumer goods to consumers in China at a significant discount to retail prices. The company was founded in August 2008, and listed on the New York Stock Exchange in 2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Lina Choi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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