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Vipshop Holdings Limited -- Moody's affirms Vipshop's Baa1 issuer rating; outlook stable

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Rating Action: Moody's affirms Vipshop's Baa1 issuer rating; outlook stable

Global Credit Research - 22 Dec 2020

Hong Kong, December 22, 2020 -- Moody's Investors Service has affirmed Vipshop Holdings Limited (Vipshop) Baa1 issuer rating. The rating outlook remains stable.

"The affirmation of the rating reflects Vipshop's ability to maintain a strong credit profile, despite coronavirus disruptions and ongoing competition in the online retail market," says Lina Choi, a Moody's Senior Vice President.

"We expect Vipshop will maintain its solid financial profile, with low leverage and solid net cash position in the next 12-18 months," adds Choi, who is Moody's Lead Analyst for Vipshop.

RATINGS RATIONALE

Vipshop's Baa1 issuer rating reflects the company's (1) leading position in the online discount apparel business; (2) strong financial position; and (3) prudent financial management.

However, the rating is constrained by (1) the low profit margin of its general merchandize product categories and (2) increased competition from larger platforms as the company expands its user base and scope of business.

The rating also considers the impact of financing unit which provides financing to suppliers and consumers. Since 2019, the company has gradually scaled down this business.

Since Vipshop began refocusing on its flash sale core business in late 2018, its number of active customers and total orders have continued to grow steadily. The ratio of repeat customers to total customers has remained high at around 80% for the last two years.

Its strategic partnership with third-party logistics operator S.F. Holding Co., Ltd. (A3 negative), which began in 2019, has facilitated Vipshop's delivery service , lowered its operating costs and improved operating efficiency.

These positive trends have supported Vipshop's revenue growth and operating margin through the coronavirus disruptions in 1H2020.

Demand for deeply discounted merchandize in China has risen since 2Q2020, driven by customers' heightened price sensitivity in a slowing economic growth environment. Vipshop's core flash sale business is inherently resilient to economic cycles, and the company's sales have recovered after a brief period of depressed sales.

In 3Q2020, Vipshop reported a revenue growth of 18% to RMB23.2 billion from 3Q2019, supported by a 35.6% growth in the number of total active customers as Vipshop optimizes its product offerings and refocuses on its core high-margin apparel-related categories.

Moody's expects Vipshop will continue to grow its revenue by single-digit percentage annually in 2021 and 2022.

Vipshop's operating margin benefited from lower fulfillment costs due to its partnership with S.F. Holding Co., Ltd., increasing to 4.9% for the 12 months ended 30 September 2020 from 3.7% for the same period in 2019.

Moody's expects Vipshop's operating margin will further improve to around 5.0%-5.5% in the coming 12-18 months, as its growing revenue scale lowers fulfillment and marketing costs per unit.

Vipshop's leverage, as measured by debt/EBITDA, has improved to 0.6x for the 12 months ended 30 September 2020 from 2.1x at 30 September 2018, driven primarily by the repayment of its convertible bond in March 2019.

Moody's expects the company's leverage will stay well below 1.0x in the next 12-18 months, supported by steady growth in earnings and operating cash flow. The company's net cash position will increase further to over RMB8.0 billion in next 12-18 months from RMB3.7 billion in 2019.

Vipshop's liquidity remains excellent, supported by cash and cash equivalents of RMB8.9 billion and short-term investments of RMB4.9 billion as of September 2020. We expect the company will generate operating cash flow of RMB 5-6 billion in the coming 12 months. These are more than sufficient to cover its outstanding maturing debt of RMB1.3 billion and the expected capital spending of RMB3.0 billion in the next 12 months.

The rating also considers the following environmental, social and governance (ESG) factors.

In terms of governance risks, Vipshop's voting right is concentrated in cofounder Eric Shen and related individuals and entities, who in total represent 58.2% of the company's voting right as of 31 December 2019.

This concentration is partially mitigated by (1) the fact that Vipshop is a listed and regulated entity on the New York Stock Exchange; (2) that Tencent Holdings Limited (A1 stable) and JD.com, Inc. (Baa1 stable) are strategic shareholders with a combined stake of 17.1% , while Tencent has one of nine seats on the Board; and (3) Vipshop's track record of adopting a prudent financial policy that provides buffers amid market volatilities.

Vipshop's issuer rating is not affected by subordination to claims at the operating company level. This is because the holding company: 1) owns key licenses to operate its business, and 2) benefits from contractual cash flow upstreams from its operating companies, which mitigate structural subordination risk.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Vipshop's conservative financial management and Moody's expectation that the company will maintain a solid net cash position.

Upward rating pressure will emerge if the company can significantly increase its product diversification and grow business scale, while maintaining a strong financial profile and solid net cash position at the same time.

Downward rating pressure could arise if Vipshop (1) fails to fend off competition and experiences a substantial decline in its market share or substantial disruptions in its discount apparel retail business, which could limit its revenue growth and cash flow generation; (2) deviates from its prudent financial policy and grows its user base, scope of business or financing unit at the expense of its currently strong financial profile; or (3) engages in aggressive acquisitions that strain its balance-sheet liquidity or weaken its overall risk profile.

Specifically, Moody's could downgrade the issuer rating if (1) the company's debt/EBITDA rises above 2.0x; (2) it fails to achieve positive FCF on a sustained basis; or (3) its finance unit experiences a liquidity crunch and requires substantial capital injections.

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Vipshop Holdings Limited is an online discount retailer for brands in China. The company offers branded apparel, home products, cosmetics and other consumer goods at significant discounts from retail prices. It was founded in August 2008 and listed on the New York Stock Exchange in 2012.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Lina Choi Senior Vice President Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077

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