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No VIP treatment greets NY debut

As the first Chinese company to go public in the United States since August, online discount retailer VIPshop.com hasn't done much to allay overseas concerns that investing in China-based companies is a risky business.

VIPshop shares began trading on the New York Stock Exchange on March 23. Since then, they have dropped more than 30 percent. Initial public offerings by Chinese companies came to a halt last year amid fraud allegations by short sellers like Muddy Waters and Citron Research. VIPshop was testing the waters, which must have felt very chilly when it raised only US$71.5 million in its IPO, 39 percent less than targeted.

Rumors were swirling around that the company received no orders from investors during its pre-launch roadshow in Hong Kong and that its biggest shareholders were asked to subscribe for 20 percent of the issue themselves.

The issue price was finally set at US$6.50 a share, which was 23.5 percent below the low end of its proposed price range. It's hard to tell whether investors were shunning or fleeing VIPshop. Is this company being assessed on its own merits or is it being tarred with the same brush that has turned investors sour on all Chinese Internet companies, no matter what their prospects?

Certainly investors had reasons to be cautious. The four-year-old company has yet to turn a profit. Founded in 2008, VIPshop merchandises brand clothing, cosmetics, handbags, leather goods and other accessories -- all at big discounts offered for limited times only.

The company received US$70 million from venture capitalists, starting from 2010, and reported US$107 million in losses last year, 12 times that of 2010.

Critical eye

The US stock market is surely no stranger to start-ups doing IPOs to cover their losses and fund their expansion, such as Amazon, the global online retail giant that was the first in its industry to go public in 1997.

It's only been little more than a decade since the dot-com crash taught investors to judge Internet-related start-ups with a critical eye where future profitability and market valuation are concerned.

It would be unrealistic to expect VIPshop to get any VIP treatment from US stock investors since its earnings are far from sufficient to cover its expenses. That makes some investors feel they are pouring money into a bottomless pit. Despite an impressive sevenfold increase Though gross profit margin improved from 8.1 percent in 2009 to 19.1 percent last year, expenses excluding equity options still ate up about a third of the total revenue.

Poring through the figures in company's prospectus, it's hard to see any quick turn from red to black. Expenses related to filling orders, which include shipping, handling, packaging and logistics, accounted for nearly two-thirds of expenses last year, compared with less than half in 2009 and 2010.

That was due, in part, to rental costs for three more self-operated logistics centers. The additional logistics support could be a money-bleeding strategy in the near term. Economies of scale don't seem to be working well for the company. Orders last year rose eightfold, while the cost of delivery services edged down only 0.08 percent per order.

I think the firm's logistics operations face high pressure from the "flash sales" business model, which relies on limited-time deep discounts on off-season brand goods. Online flash sales are popular in China, especially in smaller cities where physical outlets haven't made a presence. Consulting firm Frost & Sullivan reckons China's online flash sales will be worth 107.4 billion yuan (US$17 billion) in 2015, a 36-fold increase from 2010.

Harsh competition

But there are a lot of competitors in the market, and flash sales don't usually produce big orders. VIPshop's average order is about 200 yuan. Some analysts have shown concerns over VIPshop's business model. They worry that income from heavy discounting will be hard put to catch up with delivery-related costs under the current model.

I hope market observers who blame VIPshop's woes on general bearish sentiment toward Chinese overseas-listed stocks will take a closer look at individual companies rather than lumping them all in one reject basket.

The US stock market is inviting and also intimidating. Fourteen Chinese companies listed in the US in the first eight months of last year, while 29 were delisted in 2011 after investors lost confidence and their prices fell to the floor. The market has always been fair to companies that know how to spend money wisely and harsh on companies that don't seem to know how to make money.

No wonder rumors are floating around that some Chinese online retailers are looking at VIPshop's performance and postponing plans to do their own IPOs overseas - at least for the moment.


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