J Capital Research continues to sing the same tune on Vipshop Holdings Ltd (VIPS): investors beware.
On May 13, the Hong Kong-based firm issued a report on Vipshop Holdings Ltd dropping its price target on the stock to zero, contending company has massively overstated its revenue, profits and assets in SEC filings. And on June 2, it released yet another report on VIPS elaborating its case further.
“We believe that VIPShop is overstating its revenue and diverting capital investment into companies that have not been reported to the investors and in some cases are privately owned by members of the management team,” writes Anne Stevenson-Yang, research director of J Capital Research, in the report.
VIPShop – JCap’s Takeaway
J Capital Research has uncovered numerous issues in its exhaustive research, detailed more below. But for Stevenson-Yang, the main concern for investors, put simply, should be that so much is undisclosed.
“If you held shares in this company, then it’s just crazy that they have dozens of undisclosed subsidiaries, they have a company that they appear to own that’s not owned by shareholders but apparently uses shareholders’ money. It has 20,000 people, and it’s never been disclosed,” she said. “The lack of disclosure around the business is a huge red flag.”
As to how this could happen, Stevenson-Yang’s explanation is straightforward – the U.S. does not (and cannot) really regulate VIPShop accordingly:
They fall into this black hole, because the Chinese regulators believe that since it’s U.S. investors, it’s really not their business. They have other things that affect Chinese investors. If they’re U.S.-listed companies and U.S. investors who are involved in fraud, it’s none of their business. And U.S. regulators say, “Well, we can’t even make a phone call to China. We’re not allowed to send an email if we know the recipient is in China, even if we know that email sits on the Google server, we’re not allowed to send that email. So how could we possibly do any discovery in China?”
VIPShop – Conflicting Financials
J Capital Research lays out a long list of allegations in its latest report in reiterating its view that the company is fraudulent.
The firm points to numerous versions of VIPShop’s Chinese filings, which render it difficult to get the real story on its financial picture.
The company appears to have altered filings – albeit perhaps only to make them public – on May 20th after the first wave of allegations appeared. Moreover, regulatory changes in China made on March 1 eliminated the requirement that companies provide audited financial statements to the Administration of Industry and Commerce (AIC), compounding the complexity of the situation even further.
“Several alternative versions of the company’s statutory financial statements have come to light through various channels. . . . None of the alternative records now emerging, including the company’s own press release, supports VIPShop’s claim to the SEC that 2014 revenue amounted to $3.7 billion,” Stevenson-Yang writes.
We have by now seen many alternative sets of financial data for the same companies, most of them contradictory. We chose to focus on the disclosed subsidiaries and to access AIC reports via the legal channel that has been reliable in the past. After exhaustive due diligence, including interviews with AICs, tax offices, lawyers, agents, and auditors, we are genuinely un-able to determine which reports best represent the financial results of the companies.
VIPShop – Mystery Subsidiaries and Investments
J Capital Research claims to have uncovered a suspicious VIPS subsidiary in Zhuhai, Guangdong, for which the company indicates $927 million in revenue in 2014. When analysts visited the location in May, they found a small, eight-story building with a rural market and housing for migrants and local workers.
The firm says local officials said they had not seen anyone from VIPShop at the location and provides evidence that the site has in fact been registered to several “phantom companies” in the past. While it acknowledges it could be a tax haven, it also says its structure is puzzling.
Perhaps more troubling is J Capital Research’s discoveries regarding VIPShop’s logistics. The company says it now has 70% of its deliveries handled by companies in which it holds equity; however, across dozens of driver interviews, none claimed to work for a service owned by VIPShop.
In its investigation, the firm came upon Pinjun Express, a logistics company with 20,000 employees. It is owned by VIPShop but has not been disclosed to investors. How? VIPS is structured as a Variable Interest Entity (VIE) and can consolidate into its SEC statements results of companies shareholders do not own.
In fact, J Capital Research says it has found numerous examples of this type:
We have found dozens of undisclosed companies on the Mainland, some belonging to VIPS subsidiaries. The capital contributed to these companies amounts to at least USD 160 mln, according to public records. There are additionally 13 undisclosed companies registered in Hong Kong with names similar to VIPShop and of which Eric Shen is the sole director. Ownership is unknown. We believe that these shell companies are taking in capital, ostensibly to invest in logistics, but our interviews with truck drivers and brand partners to VIPShop have found scant evidence of owned logistics companies carrying VIPS products.
Other Analysts Remain Bullish on VIPShop
Of course, not everyone is on board with J Capital Research’s take on VIPShop. In fact, a number of big-name firms remain bullish.
Analysts at Stifel initiated coverage on VIPS on May 26, giving the stock a buy rating with a price target of $32. And on May 28, Jeffries reiterated its buy rating and $35 price target.
In a June 2 note, Morgan Stanley analysts reiterated their overweight rating on the stock and increased their price target to $33.
The firm, which hosted a large group panel with VIPShop’s CFO and organized a field trip to the company’s Tianjin distribution center, acknowledged the “negative news” surrounding VIPS:
While some investors expect negative allegations regarding the company to continue to be an overhand on the stock in the near term, overall investors remain positive on VIPShop’s management team’s execution capability and record. We would view any further pull-backs as an opportunity to add positions.
VIPShop representatives did not respond to request for comment on this article.