John H. Burbank III is the chief investment officer of Passport Capital LLC, the global investment firm he founded in 2000. The firm now manages a portfolio worth more than $3.5 billion. The San Francisco-based firm employs top-down macroeconomic to achieve risk-adjusted returns. Vipshop (VIPS, Financial) is one of the top ten holdings of Passport Capital. As of December 31, 2014, the firm was holding 9,522,311 shares of Vipshop.
In his latest investor letter, John Burbank (Trades, Portfolio) explained his investment thesis on Vipshop. Below is the excerpt from his investor letter:
"Vipshop ("VIPS") is the leading online discount retailer in China. The company provides popular branded apparel and other products at significant discounts from retail prices for mass consumption.
Apparel is the largest online ecommerce category in China, and we think VIPS represent an attractive way to gain exposure to this rapidly growing market. According to a Bain & Co. report, Chinese consumers spent approximately RMB 1.3 trillion on online purchases in 2012, which represents a growth rate of over 20% per year since 2009. Bain & Co. expects Chinese ecommerce to reach RMB 3.3 trillion by 2015, which equates to a 32% annualized growth rate from 2012 to 2015. It was estimated by the Mckinsey Global Institute that in 2013, China eclipsed the U.S. in dollar-value of eCommerce transactions.
Many apparel brands in China have large inventories due to complex, multi-tiered distribution channels and very high gross margins. This, paired with the fact that large brands typically are able to sell volume quickly to raise cash, attracts many brands to move inventory through VIPS's website.
In turn, Chinese consumers are drawn to the site due to deep discounts to the regular retail prices of authentic products and popular name brands. VIPS is able to deliver discounts due to their lower-cost business model that is not reliant on physical storefront presence. Additionally, VIPS reaches a large consumer base outside of major Chinese cities, as the vast majority of China's consumers are pricesensitive and seek opportunities to access products at a discount. VIPS was the first mover in its space in China and has established itself as a category leader, creating a distribution chain that we believe allows them to ship and deliver products more efficiently and, ultimately, faster than its competitors.
We have been impressed with VIPS's management team, having grown revenues at a 273% CAGR between 2010 and 2013. Over the same time period, they have also taken gross margins from 9.8% to 24%, operating margins from -26% to 3.1% and FCF from -$8 million to $415 million."
