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VIPS joins my hot China group

December 17, 2022

This is an excellent chart with a golden cross buy signal, a pattern buy signal, a double bottom and a Coppock indicator which is rising from negative. In my scoring system it is a 6/9 given the support from equally positive China-focused ETFs.

As can be seen this was a phenomenally hot stock between IPO and April 2015. Over that period it rose some 60-fold supported by explosive growth. The Coppock indicator was not rising because it was not calculated. You need around two years of trading before you can calculate a monthly Coppock. Using a little poetic licence, once you could make the calculations, the Coppock indicator fell between February 2014 and July 2016 (remember when Coppock is falling you can wait for a dead cross on the moving averages before actually selling and the dead cross came in June 2015). Coppock then rose or flatlined until April 2021. It fell from April 2021 to June 2022, becoming negative in the process, and is now rising strongly.

It has thus been helpful in telling investors when to be in or out of this stock and the current message, supported by my other indicators, is that they should be in.

Vipshop is an e-commerce business operating on the Chinese mainland. In 2017 it was listed as the world’s fastest growing retailer but has come off the boil since then. Below is a brief description of Vipshop’s business model.

Vipshop has focused on the discount market since its founding in 2008, where it buys excess inventory from major brands at low prices and sells it at a discount, similar to the traditional “outlets” business model. After finding quick success with that model, the company was listed in the U.S. just four years after its inception. A large number of imitators have sprung up over the years since then, including names such as Fclub, Jumei, Mogujie, and Juanpi. But most of those have either vanished or are struggling now.

Seeking Alpha, 28 November 2022

The company has made a dramatic switch of emphasis from prioritising growth to prioritising profitability. It is following two particular strategies to drive higher profits.

Instead of spending heavily to acquire more users, Vipshop will continue a strategy of seeking to milk more money from existing ones by turning them into “super VIP” members. Such users enjoy benefits such as free return shipping with an annual payment, and the company said they usually spend more on its platform. For the third quarter, those users grew by 21pc and contributed 40pc of the company’s online net gross merchandise volume (GMV).

As part of its more modest growth strategy, the company is also seeking to diversify its product offerings, which are currently focused on apparel and related products. Other categories Vipshop is pursuing include cosmetics, electronics, and children’s goods, though it didn’t provide specific data on those categories in its latest results.

Seeking Alpha, 28 November 2022

In the latest quarterly reporting period revenue fell but net income rose by 55pc to renmimbi 1.6bn ($230m). The main reason for this was a fall in marketing costs from RMB1.2bn to RMB572m. This my seem like a short-sighted strategy but that may not be the case. The company can focus on profitability and once that is strong it can resume marketing in a more focused way to drive growth. The super VIP strategy, focusing on the most productive customers, seems to be working well.

In answer to an analyst’s question the company sounded positive on growth prospects at the latest analysts’ meeting.

But on the bright side, we have seen our customer trend has been improving month by month and has been moving towards –close to being flattish or even having some growth. So, we are actually on the right track in terms of customer numbers. So, we expect in the coming months, GMV (see above) should stay relatively stable. For the next year, we still will focus on customer growth as long as we have the right customers’ platform. And with the pandemic challenges going away over time, we are pretty optimistic about our GMV and customer growth for next year.

Q3 2022, 22 November 2022

A promising pointer to a good share price performance is the share buyback programme.

On March 31, 2022, the Company announced a share repurchase program authorized by its board of directors under which the Company may repurchase up to US$1bn of its ADSs or Class A ordinary shares for a 24-month period. As of June 30, 2022, the Company had repurchased US$177.1m of its ADSs under the program.

Q3 2022, 22 November 2022

I am adding Vipshop to the little group of Chinese shares I follow which look bullish.

Strategy

I found an interesting comment on Google, the search engine not the company, when I was searching for prospects for the Chinese economy.

Global GDP will increase by just 1.7pc next year, the slowest pace of growth in 40 years. 

Capital Economics, Q4 2022 Global Economic Outlook

If you count back 40 years you get to 1982 and what happened in that year, a global recession and the beginning of a multiyear bull market. I know because I was there.

With the second oil crisis as a turning-point, the world economy slipped into a recession phase. In 1982, the economies of the advanced nations continued to be stagnant, and particularly in the United States and other major developed nations the recession became more pronounced.

Quite found on the Internet

A key event leading to the recession was the 1979 energy crisis, mostly caused by the Iranian Revolution which caused a disruption to the global oil supply, which saw oil prices rising sharply in 1979 and early 1980.  The sharp rise in oil prices pushed the already high rates of inflation in several major advanced countries to new double-digit highs, with countries such as the United StatesCanadaWest GermanyItaly, the United Kingdom and Japan tightening their monetary policies by increasing interest rates in order to control the inflation.

Wikipedia on the early 1980s recession

The quote above could be applied almost word for word to the current situation with war in Ukraine substituted for the Iranian revolution. Within this China looks well placed partly because it is emerging from the over-zealous lockdown policies of Xi Jinping who has made himself so powerful that like Putin he gets the blame for everything.

With this change coming sooner than EIU [The Economic Intelligence Unit] had anticipated, we are revising up our forecast for China’s real GDP growth to 5.2pc in 2023 (from 4.7pc) and 4.8pc in 2024 (from 4.5pc). Why does it matter? China’s economic growth profile in 2023 will be characterised by a weaker first six months and a stronger second half.

EIU, 15 December 2022

Morgan Stanley is even more positive.

Morgan Stanley raised its forecast for China’s gross domestic product in 2023 to 5.4pc from its previous outlook of 5pc.

Morgan Stanley, 14 December 2022

The implication is that while the world economy is slowing down the Chinese economy is speeding up which may help explain the outperformance by Chinese shares.

The importance of monetary policy

When I joined the Investor’s Chronicle in the 1970s my editor was Andreas Whitman Smith. He had a theory that all bull and bear markets were caused by central bank policies. When they were tightening policy and interest rates were climbing share prices fell. New bull markets began when they started to ease policy. I think this is a good way to think and gives us a broad indication of what to look for to launch the next bull market. We will have Coppock for the charts and monetary policy and to some extent fiscal policy as well for the fundamentals.

There is also an electoral cycle with elections expected in both the US (November 2024) and the UK (January 2025) governments will want to be bearing good news in the form of handout budgets and falling interest rates.

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