Vipshop Holdings Ltd – ADR (NYSE: VIPS), an online retailer of brands in China, which offers its products at discounts to retail prices, will get a cash boost of $863 million after a sale of shares to social media firm Tencent Holdings Ltd (HKG: 0700) and e-commerce giant JD.Com Inc (ADR) (NASDAQ: JD).
Shares in Vipshop surged over 39% Monday after the announcement of the deal under which Tencent will receive newly issued shares worth $ 604 million amounting to a 7% stake, while JD.com will acquire 5.5% for $ 259 million. The acquirers are paying a 55% premium on the shares.
Apart from the acquisition of shares, the arrangement also provides Vipshop access to Tencent’s Weixin Wallet and JD.com’s mobile application and the main page of its Weixin Discovery shopping entry.
“The strength of Vipshop’s flash sale and apparel businesses, as well as its outstanding management team, create clear and strong synergies with us,” said Richard Liu, Chairman and CEO of JD.com. “This partnership will further extend the strong inroads that we have made with female shoppers, and will expand the breadth and reach of our fashion business.”
“We already see substantial demand from our users to discover, discuss and purchase branded apparel in our applications, and we believe that connecting our users more deeply to products on Vipshop’s platform will enrich their online experiences while benefiting Vipshop,” said Martin Lau, President of Tencent Holdings.
Vipshop Holdings Ltd – ADR (NYSE: VIPS): Deal Is a Win-Win Situation for All Three Parties
For retailer JD.com, which has an enviable logistics and supply network, and owns most of the inventory it sells (unlike Ali Baba which acts as a bridge between buyers and sellers), the deal presents an opportunity to enhance its offerings of apparel and boost its female clientele. That gives it a leg up in its ongoing competition with Ali Baba, and ultimately may result in a complete acquisition of Vipshop.
Image: JD.com offices
Ali Baba is also a competitor to reckon with for Tencent, which is an Internet giant in China with leadership in online messaging via its WeChat communication platform, and gaming. The Wechat platform has nearly a billion users. However, of late it has made a thrust into retail, recently paying around 4.2 billion yuan ($635 million) for a 5 percent stake in Yonghui Superstores Co., which operates a chain of supermarkets. It has also been actively promoting its WeChat Pay, a rival to Ali Baba’s Alipay. The deal with Vipshop will take its retail ambitions further, and deeper into Ali Baba’s turf.
Image: TenCent HQ
“Tencent and JD need this assistance given Alibaba’s spectacular execution in 2017,” says Blue Lotus Capital Advisors Ltd. founder Eric Wen. “Tencent needs to go from the backstage to the frontstage and that’s what they’ve done. Tencent has acquired a stake in Yonghui and now Vipshop, this is something JD cannot pull off by itself.” It may be noted that Ali Baba announced last month its intention to acquire a 36.16% stake in Hong Kong-based Sun Art Retail for $ 2.88 billion in a bid to increase its reach in food and grocery retailing.
According to the Wall Street Journal, the TenCent-JD.com-Vipshop combine “directly challenges Ali Baba’s chokehold on the e-commerce industry.”
For Vipshop, the arrangement will provide a useful dollop of cash as well as the backing of two corporate giants in a highly competitive scenario where it is battling discounted prices by rival online giants, at a cost to its own margins. Meanwhile the company has been adding regional warehouses in an effort to boost its delivery infrastructure, as well as beefing up its proprietary last-mile delivery network. That should mesh well with JD.com’s supply network. The deal is also expected to enhance Vipshop’s supplier network, online traffic, and technological capabilities.
Investors have not been very impressed with VIPshop’s numbers on the last two quarters. Analyst Alex Yao lowered his price target on the share from $ 13 to $ 10, concerned by weakening user growth. CBCI analyst Vicky Wu cut a price target from $ 9.80 to $ 9.50, and downgraded the stock from buy to hold.
However, Monday’s deal prompted Daiwa analyst John Choi to upgrade Vipshop from hold to buy based on the view that it will help reverse the decline in new user growth as well as beneficially impact the top and bottom line during the period 2018-19. The analyst also bumped up its price estimation from $ 10 to $ 17.
Image of TenCent HQ:
Other images: Respective Company websites