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May. 12, 2015 5:00 AM ET
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About:
Vipshop Holdings (VIPS) by: Mithra Forensic Research Subscribers to
SA PRO had an early look at this article. Learn more about PRO
Disclosure: The author is short VIPS. (More...)The author wrote this
article themselves, and it expresses their own opinions. The author
is not receiving compensation for it (other than from Seeking Alpha).
The author has no business relationship with any company whose stock
is mentioned in this article.
Summary
TABLE OF CONTENTS
Executive summary
(click to enlarge)
Since listing on the NYSE in 2012, Vipshop Holdings Limited has been
a stellar equity performer, posting astounding revenue and gross
profit growth year after year.
As the two slides below highlight2, over the period 2011 to 2014,
Vipshop experienced growth in revenues and orders of 1,562% and 1,370%
respectively.
(click to enlarge)
(click to enlarge)
a. SEC filings for each company; Longtop for 2007-2011, China Media
Express for 2008-2010, Deer Cons. Products for 2009-2011, and VIPS
for 2012-2014
In 2013, VIPS' M-score of -2.37 placed it on the cusp of being
labeled a manipulator. However, VIPS' 2014 M-score indicates that the
firm is highly likely to be engaging in financial manipulation. In
fact, VIPS' M-score for 2014 exceeds M-scores for two recent highprofile Asian frauds, Longtop Financial and China MediaExpress.
Indicators within the M-score model point to specific accounts that
should be investigated for evidence of manipulation. For VIPS,
indices on Sales growth, Receivables growth, Asset Quality and
The impact of the above schemes in 2014 would have allowed VIPS to
grow its reported gross profit to $938.3M:
(click to enlarge)
(click to enlarge)
'To the best of our knowledge Vipshop is one of the very few
B2C e-commerce companies in China, as well as globally, that
operates on a consignment model -afforded by Vipshop's unique
and leading position as a preferred inventory clearing solution
for brands. Approximately 10% of Vipshop's inventory is
purchased from suppliers, which are usually stronger brands
such as Nike and Adidas. For the sale of the remaining 90% of
inventory, Vipshop gets paid by the customer almost immediately,
while it typically pays the supplier in 1-1.5 months following
the sale. As a result Vipshop bears minimal inventory risk.'15
Nonetheless, here we have VIPS earning 'commissions' from a nonmarketplace supplier (which VIPS correctly accounts for on a net
basis). Commission arrangements are a strong indicator for reporting
revenues on a net basis. We believe that most, if not all of VIPS'
agreements involved fixed-fee or commission structures and argue for
net revenue reporting.
Our read of this ASU suggests that the ASU will have a significant
impact on VIPS' financial results.
Despite the company's own admission, the features of its business
model, and its failure to exhibit key determinants necessary for
gross reporting, VIPS continues to report revenues on a Gross basis.
Were VIPS forced to restate its financial statements and report on a
net revenue basis as an agent/consignee per GAAP guidance, VIPS would
be required to report only those revenues that relate to its
commissions.
Net revenue reporting at VIPS would result in the company reporting
as sales those figures that are currently shown on the gross profit
line: $154.4M, $407.8M and $938.3M for the years 2011, 2012 and 2013
respectively. We believe that VIPS is reporting on a gross basis in
order to enhance its reported revenue and hence increase its equity
valuation. Revenues of $938.8M applied against the price-to-sales
* Impairments of $12.2M and $33.9M are included in COS for 2012 and
2013 respectively; information for 2014 was not available at time of
publication.
Using the mid-point of management's estimate of 10%-15% of inventory
having been purchased, we can see that at no point should the ending
inventory balances have exceeded $85M, $195M, and $427M in the years
2012, 2013 and 2014 respectively. Yet, the ending inventory balances
for each year exceeded the maximum expected amounts. Moreover,
quarterly inventory figures for 2014 suggest that purchased inventory
in 1Q, 2Q and 3Q 2014 accounted for nearly 40% of ending inventory.
Based upon this analysis and VIPS management's assertions, we
conclude that VIPS is inflating its ending inventory values. VIPS has
commingled inventory-held-on-consignment with purchased and ownedinventory in violation of GAAP, essentially claiming inventory that
it does not control or have title to as its own.
The inflated ending iInventory figures provide VIPS with the benefit
of an inflated gross profit. By increasing the reported ending
inventory figure, VIPS manages to report a lower cost of sales and
hence higher gross profit:
Had VIPS correctly accounted for inventory, the company would have
reported gross margins of 13.8%, 19.6% and 20.9%, in 2012, 2013 and
2014 respectively. Instead VIPS reported gross margins of 22.3%, 24.0%
and 24.9%. VIPS recently revised its statement about the percentage
of inventory purchased; in the 2014 20-F, VIPs states that it pays
for 10-30%, but as the numbers above suggest, even this updated and
revised figure is inaccurate given levels observed in the first 3
quarters of 2014.
Inventory manipulation accounted for $76M ($151M - $75M) of the delta
between 2013 and 2014 reported gross profits.
(click to enlarge)
fair price particularly if you compare the P/S ratio to VIPS' sameday valuation of 2.37 x sales, as reported by Barron's.
However, as part of its disclosure, VIPS provides information on
Lefeng's revenues which is at odds with what market commenters
reported, based upon 'management' sources. As opposed to $147M in
sales, Lefeng had less than $65.1M in sales in the year preceding
acquisition. In its SEC 20-F filing21, VIPS reported that government
notification requirements for M&A transactions between Chinese
companies are triggered when both of the companies involved in a
transaction have revenues in excess of $65.1M. According to VIPS,
revenues from Lefeng are lower than the $65.1M threshold and are thus
exempted from the reporting requirement:
'On February 14, 2014, the Group acquired a 75% equity interest
of Lefeng.com from Ovation Entertainment Limited ("Ovation").
Lefeng.com owns and operates the online retail business
conducted through lefeng.com, an online retail website
specialized in selling cosmetics and fashion products in
China.'
On page 13 of the 20-F, VIPS explains risks to the Group's
operations by stating that "the retail industry, including the
online retail sector in general and the flash sales business in
particular, is highly sensitive to general economic changes.
Online purchases tend to decline significantly during
recessionary periods and substantially all of our total net
revenue is derived from online retail sales in China.'
The two companies had losses totaling $117M in 2014 with Lefeng
accounting for $66M and Ovation accounting for $50.8M.
The annualized losses from both companies attributable to VIPS
in 2014 totaled $61.3M.
Total losses for both companies represent about 62% of the
combined $188M VIPS invested in 2014.
Data from Standard Chartered had indicated that in 2013, Lefeng
had a net loss of RMB400 or ($24M); the loss in 2014 was
therefore 2.8 times greater than the 2013 estimated figures.22
(click to enlarge)
(click to enlarge)
(click to enlarge)
(click to enlarge)
While 1,600,000 square meters of capacity does not seem like a great
stretch, the figures rank VIPS as having the largest warehouse
capacity among Chinese e-commerce companies.
(click to enlarge)
(click to enlarge)
Source: SEC filings for Jumei, Dangdang, JD.com and VIPS for 20122014.
(click to enlarge)
It is our view that VIPS likely used excess spend of $573M and routed
it to RPTs. Those RPTs helped VIPS generate fake sales. The existence
of several unusual and growing 'Other receivables' is a clear red
flag to us and supports our view that RPTs are behind the huge growth
in gross profit and sales reported in 2014.
on HTM is less than that achieved on a 3-month term deposit for 2012,
2013 and adjusted 2014.
Why would HTM investments be earning significantly less than loans or
even term deposits of similar maturity? We believe that the HTM
account reflects balances on loans that have been extended to related
parties. Those RPTs may well be VIPS' founders or companies owned by
VIPS' founders, as this has been a common theme of prior Asian frauds.
(click to enlarge)
(click to enlarge)
It is our view that VIPS depends upon the capital markets for cash
since the balances reported in cash and HTM may not be accessible or
may have been transferred to RPTs. If this is the case, VIPS is very
much following in the path of many Asian companies that have engaged
(click to enlarge)
We suspect that VIPS does not pay its vendors more quickly because it
does not have the cash on hand to do so. We believe that the company
may be relying upon the capital markets to fund its business and
dress up its financial statements.
2 Vipshop Holdings Limited, Investor Presentation, February 2015
3 Vipshop Holdings Limited, Investor Presentation, February 2015
4 CNBC
5 Forbes
6 Seekingalpha
7 BNP Research
8 ND.EDU
9 Mehood Beneish, "The Detection of Earnings Manipulation," Financial
Analyst's Journal, September/October 1999: 24-36.
10 20-F
11 Dealbook
12 GrantThornton
13 Securities & Exchange Commission Filings Vipshop Holdings Limited,
Forms 20-F 4/25/14
14 Q4 2013 Earnings Call Transcript
15 BNP Paribas, Vipshop, Compelling Story, June 25, 2014, page 6
16 SEC Form 20-F 4/24/14
17 http://legal-dictionary.thefreedictionary.com/consignment
18 Wiley GAAP 2015: Interpretation and Application of Generally
Accepted Accounting Principles, by Joanne M. Flood
19 SEC Form 20-F 4/24/14, p46
20 Q4 2013 Earnings Call Transcript
21 Securities & Exchange Commission Filings Vipshop Holdings Limited,
Forms 20-F 4/25/14 and 6K 2/17/15
22 China Internet: E-commerce in Transformation, Standard Chartered
Research, p82.
23 SEC Filing
24 China Accounting Blog
25 Q1 2014 Earnings Call Transcript
26 SEC Filing
27 China Internet: E-commerce in Transformation, Standard Chartered
Research, p83
28 Standard Chartered Research
29 Q2 2014 Earnings Call Transcript
30 Q3 2014 Earnings Call Transcript
31 Q4 2014 Earnings Call Transcript
32 20-F
33 AVCJ.Com
34 20-F
35 20-F
36 20-F
37 20-F
Nice first article. I looked at VIPS right after the IPO a few
years ago noting the sell-off and the massive Sequoia stake.
That was at $4 (pre-split). Since then it has moved up almost
10,000%. Luckily I never shorted it but certainly thought about
it on the way up as I didn't like it enough to buy it at $200M
valuation and now being worth $15B it has entered the realm of
silliness. Many have lost their shirts getting in front of it.
If I recall, Whitney Tilson has been short this for at least a
year. I don't know if he still is. But likely what you are
pointing out is part of the reason why. On a fundamental level
the business model of flash sales has for sure seen its best
days and has peaked.
12 May, 03:14 PMReplyLike2
J-dawg
, contributor
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Assuming all that you pointed out in this very detailed article
is true, what would be the real value of VIPS had it reported
the allegedly false statements according to GAAP?
12 May, 05:37 PMReplyLike3
J-dawg
, contributor
Yes but how will the bottom line net income be affected? VIPS
is actually profitable => most people on the street value this
thing at a two year forward p/e basis (2017 p/e) for now, sure
revenue is reduced after accounting adjustment, but how does
that affect bottom line profitability?
12 May, 11:41 PMReplyLike1
stockplaza
, contributor
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Mithra - if you're short like Tilson was a year ago (he learned
his mistake and covered), be prepared to cover at much higher
prices.
Just re-listing VIPS in China market will double the market cap
of VIPS IMO overnight due to valuation difference in these
markets.
stockplaza
, contributor
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userbob - all the data on this author, his 15 days old UPS
Store as address registered domain, lack of any other reports
are huge red flags. As you said, this author is a fraud and may
be committing financial crime with baseless accusations.
By the way, Gross vs. Net is exactly what the SEC told Groupon
to address before its IPO--see the reference in the article
above.
Summary:
1. This comment and the rude one you sent almost immediately
when the article appeared on SA Pro, suggests you are the one
we need to worry about. You are probably connected to or
represent VIPS in some way.
stockplaza
, contributor
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userbob
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userbob
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bamboo grass
, contributor
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To Mithra:
Are there clear next steps in the investigation to prove or
disprove your claims?
moahmo
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abdullah999
, contributor
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Yeah they are a fraud, however, I have seen their stock price
go from under $1 to $30. So frustrating to see fraudsters get
rich off the average retail investor...
13 May, 08:10 AMReplyLike2
bbare3452
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zoeshamu
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oilyolin1
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stockplaza
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eduso
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wolverine1987
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Why don't you address his points rather than who he is? Can you?
14 May, 12:27 PMReplyLike0
stockplaza
, contributor
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Nobody says ENRON OR SATYAM does not exist. You cannot use that
broad brush on any company you want.
userbob
, contributor
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It looks like the shady author of this article is fraud and has
a short position.
Vipshop is currently taking action on this issue.
13 May, 03:25 PMReplyLike1
stockplaza
, contributor
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bbare3452
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Jtechkid
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Greenwich research put a short report like this and said they
were hedge fund smart guys and this was around 30$ 2-3 years
ago(look it up in SA) and stock went basicly straight to
250$ and split. The funny thing you never heard from that firm
again? just vanished-you get the point.
13 May, 10:08 AMReplyLike3
14114522
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rpo2003
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rpo2003
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http://yhoo.it/1e1swg8
stockplaza
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Klaus88
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Long Short
, contributor
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A few comments:
Why do you use ending accounts payable to calculate days
payables and not average payable? This makes quite a bit of
difference, as it reduces the days payables to 94 days, which
is comparable to Amazon at 91 days. Mathematically speaking,
the faster you grow, the greater the disparity between using
average and ending balances.
jackahh
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stockplaza
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PKChopExpress
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Author,
Could you please provide support for you contention that there
was $573 diverted to related parties that was likely reported
as Gross Profit? How did you arrive at the amount, the belief
that it was funneled through RPTs and that is flows directly to
gross margin. I don't mean the math of how you bridge $573mm of
gross margin $ to $2.3b of revenues using a 24.9% rate. I mean,
what is the evidence that makes you believe this is what
happened. Thanks
13 May, 12:01 PMReplyLike2
stockplaza
, contributor
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I can't wait to see Mithra and Petrie taken to the woodshed for
slaughter house soon!
13 May, 12:23 PMReplyLike2
GrowthGeek
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zoeshamu
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stockplaza
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cjsmit77
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GrowthGeek
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badeconomy
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daythought
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pgtrula
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kind of fishy that all the people who agree have only 1 or 2
post...
14 May, 05:18 PMReplyLike2
valueseeker61
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Other news from Baidu search, VIPShop was also awarded the top
mobile app among top Chinese e-commerce companies, and is the
first e-commerce company to push ads through WeChat friends
circle. WeChat is the most popular mobile text and voice app in
China.
All those news from Baidu indicates that sales of VIPShop are
accelerating, as their flash sale business model is a perfect
match to the exponential increase of mobile users in China.
Hence, VIPShop needs more warehouses of its own for cutting
cost in long term instead of leasing them.
13 May, 04:10 PMReplyLike4
julian1401
, contributor
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how you feel about the current earnings released today? looks
like market doesn't agree with your position, interested to
hear your comments once you have digested the 100% beats across
the board
13 May, 05:25 PMReplyLike1
julian1401
, contributor
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hello?
13 May, 05:58 PMReplyLike0
GrowthGeek
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stockplaza
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clrodrick
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aliway
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spatel0169a
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Maybe their next one should be called 'Rip Van Winkle forensic
research'!
http://bit.ly/1Fls5cF
13 May, 08:26 PMReplyLike1
julian1401
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r.winstonc
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Well done Mithra, not just anyone can complete a report of this
caliber and I suggest you ignore the retail investor
cheerleaders trying to take a piece out of you.
While I don't necessarily see issues with ALL the areas you
highlighted, there's good substance here. On the other hand,
their response was a pile of corporate garbage.
vjrao
, contributor
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As for me, there are too many unknowns here, so I will stay far
far away from VIPS.
moahmo
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Klaus88
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