 Good day fellow investors. Now VIP shop holdings is another Chinese growth stock but it's an excellent example. What happens to a hot growth stock when the sentiment shifts and that's why it's extremely important to look at this company which I will put at the end of the video you will see it will be almost become a value stock which is another perspective on investing. So a little bit for everyone here. Let's analyze VIP shop holdings. So VIP shop is online discount retailer that buys in bulk what JD and other things cannot sell the brands and then they sell them through their network at the extreme discount to such buyers. The company went public at $0.55 in 2012 so extremely low and the stock took off in 2013 and reached the high of 29 in 2015 only to drop to 8th in December of 2017. Spiked again in January of 2018 to reach a high of 19 and now just seven months later is trading at multi-year lows at 6. When a stock is trading that volatile it means that the market doesn't know what to think about it because there are or not enough information or the information changes that quick because then somebody gets excited about the potential but then it doesn't deliver and then you see ups and downs ups and downs and that's normal for a growth stock when it's delivering great when the growth is growing then every model really pushes the sky's the limit when the growth slows down the growth starts contracting then those earnings models fall from the sky they crash from the sky and stock prices are trading then at what 20% of what they were trading just a few years ago. According to the company discount retailing is only online the future in China because there are not so many outlets and companies really don't have where to push their excess non-salt inventory. WipShop is the preferred discount channel for popular brands they have been really growing in numbers in brands and brand partners so that's the positive for the company they have economies of scale they have first mover advantage they are the leader in the market so that's another positive but the growth has been solid they have started growing at 130% per year then it dropped to 64, 40, 24 and now I think they are still growing fast but 18% was the last growth in revenue so that's slowing down slowing down and slowing down and that's something the market doesn't really like active customer growth is even lower at 6% for the last reported quarter further apart from slower growth margins have been contracting so from an average margin of 25% it declined to the current 19.5 gross margin and the net margin shrank from 5 to the current 2.8 so the combination of contracting margins and slowing down revenues it's probably what killed the stock they are doing whatever they can to grow enlarge the customer base and enhance the quality enhance the capacity invest in financing giving loans to customers whatever in order to try to get to more growth because growth is everything in the stock market however that growth is very costly because they have negative cash flows so a lot of capital spending to sustain this level or to even sustain the 18% growth from the conference call the management has high hopes from the new deals with Tencent and JD to attract customers but that if you go back you've go through the questions of the conference call you see it's a little bit shaky because for example on JD they the JD customers stay on JD to buy from Vipshop so Vipshop doesn't even get the data from JD.com so that's one also from Tencent we don't know how that is implying and the ticket that the customers are buying through those two channels that has brought 24% of the customers in the last quarter is very very low so I don't know who is giving data here who is letting Vipshop access to what so that's a very shaky strategy to grow on further the management told the worst possible thing they can say in a conference call they say we might see some fluctuations in our margins but over the long term we are quite confident you never know when you're an analyst what does that mean what is the long term what is the short term what is fluctuation then on operating cash flow they think it will come back to its normal level or will start to go up in a few quarters so more a few quarters on waiting waiting and waiting the question here is will Vipshop be there in 10 years discount retailing it means that the buyers really look for discounts and they will look everywhere for those discounts to get what they want at the cheapest possible price and that's something that a lot of competition a very tough business a lot of investments a lot of marketing so the margins are really really low and you can never have a mode because there is no loyalty within those customers and that's their business so Vipshop is not an amazing business but it's starting to trade close to value which is something to take into account of course there is the positive risk that if growth starts to gain traction if they start to improve the cash flows unlikely but possible then the stock will jump back to 20 so that's a positive however on the margin of safety of the value side they have a network they have a distribution network they have invested a lot in property plant and equipment so that's something that's valuable let's see that from a value perspective the book value per share is 3.54 US dollars so that's already something that gives you some protection there is no long term that which is good there is no goodwill it's very low so at the price of around 3.5 this could really become a value player as the company can deliver 99% of its product through its own last mile network so the conclusion not a growth story anymore tough business to be in look at it from a value perspective at 3 dollars for a margin of safety if the company continues to grow at current levels we are close to fair value now if they grow at 18% per year over the next five years then we are fairly valued if they grow just at 5% over the next five years per year then we are fairly valued at around 3 which is again the margin of safety so at around 3 it really becomes a value play and also an analyst in the conference call asked if they're thinking about going private the management said no but what has the management to do there they will if they get a good offer if they see it's favorable for for them that might be option so if the stock goes down to 4 let's say and then the management gives you a buy out offer at 5.5 you are at a loss from this perspective and that's something that happens often with Chinese companies if the market loses faith then the management simply take advantages and buys what is there for very little money and that's something that really takes out the potential upside of such investments in the long term so at the premium perhaps some funds will start to circle around this company to see whether there is value I think the downside there is still downside 50% at that point in time if it hits that point in time because those acquisitions buy out take a little bit of time so it might be interesting to watch to see if it will hit 4 or 3 and then to really make it a value play really Benjamin Graham book value play to invest in and have potential upside huge if the growth comes back small if there is a buy out but limited downside because there is value there are cash flows there is a lot of clients and it is a relatively okay business thank you for watching hope you like this discussion on VIP shop very interesting company and it shows really what can happen to the Chinese stock if you are watching it from growth from a declining growth to a private buy out that really screws other foreign especially foreign investors thank you for watching looking forward to comments and I'll see you in the next video