Hedge Funds Focus on Vipshop in Shift Away From China E-Commerceby and
Collective holdings of JD.com, Alibaba cut less than Vipshop
George Soros and Tiger Global have increased positions
Hedge funds reduced their holdings of China’s biggest e-commerce companies during the third quarter, with Vipshop Holdings Ltd. being cut the most, as investors pulled out of the country’s assets amid the worst market rout since the 2008 financial crisis.
They also reduced their collective holdings of Alibaba Group Holding Ltd., the country’s biggest online retailer, to the lowest level since the company went public in September 2014, data compiled by Bloomberg show. While hedge-fund investment in JD.com Inc. dropped from a record high during the prior three months, they still ended the quarter owning 14 times more shares than a year earlier.
Vipshop, the most volatile U.S.-traded Chinese stock, is little changed since the end of the third quarter after reporting weaker-than-forecast net revenue in the third quarter. Alibaba and JD.com have each rallied more than 30 percent from this year’s lows, helping lead a 26 percent advance in the Bloomberg China-US Equity Index since the end of September.
“People think the market might be saturated as there will be more competition between Vipshop and the non-flash sales models such as JD.com and Alibaba,” Junheng Li, the founder of JL Warren Capital, a China-focused research firm, said by phone from New York. “You’ll have revenue decelerating and costs going up, so you’ll have margins squeezed.”
Vipshop uses the same business model as T.J. Maxx and Ross Stores Inc. of selling excess inventory at cheaper prices. By contrast, JD.com emulates Amazon.com Inc.’s approach to selling and delivering goods directly to customers, enabling the company to control quality and shipping. Alibaba mimics how San Jose, California-based EBay Inc. operates.
Vipshop is shifting its sales model from selling previous seasons’ overstocked items to more current fashion products, according to Li. It is still a good e-commerce company and a potential acquisition target for companies such as JD.com to take over, she said.
China’s transformation into a consumer-driven economy has prompted investors to shift their focus to Internet and technology companies. While e-commerce providers are poised to benefit, Vipshop has struggled to stand out in an increasingly competitive field. The country’s third-biggest online retailer by market capitalization may face difficulties in attracting new customers as the market matures and competition increases, UBS Group AG analyst Erica Poon said.
Price swings in Vipshop’s ADRs are at the widest on record, with 15-day historical volatility at 172 percent, data compiled by Bloomberg show. Trading volumes in November also reached the highest levels ever. The company announced plans last week for a $300 million share buyback over two years, spurring a rebound from the lowest since February 2014.
Vipshop’s ADRs sell for 23 times projected 12-month earnings, compared with an average multiple of 72 among global peers, according to data compiled by Bloomberg. They slid 1 percent to $16.71 in New York on Tuesday. Alibaba dropped 0.6 percent to $80.86. JD.com declined 1.1 percent to $30.35. The Bloomberg China-US Equity Index retreated 0.8 percent to 123.24.
Hedge funds cut Vipshop holdings by 17 percent in the third quarter from the previous one. That was compared with 6 percent and 7 percent of reductions for JD.com and Alibaba in the same period respectively, according to data compiled by Bloomberg.
Investors had pulled money out of e-commerce shares as part of a broader emerging markets sell-off that has pushed the Bloomberg index of U.S.-traded Chinese stocks down more than 30 percent from June to September.
While overall hedge fund investment in Vipshop dropped during the third quarter, some funds have been adding to their positions. Soros Fund Management LLC increased its holdings by 25 percent to 5.9 million shares during the three months ended in September. Chase Coleman’s Tiger Global Management has more than doubled its stake since October to 49.5 million shares, becoming the second-biggest shareholder, data compiled by Bloomberg show.
“Longer term, we remain optimistic about discount retailing market and continue to believe Vipshop’s strategic value in the space, Henry Guo, a managing director and analyst at Summit Research Partners LLC who covers Chinese companies, said in a research note. “With less than 15 million active users as of September, Vipshop has significant growth potential.”
The company is also standing by its strategy.
“We do not pay much attention to how hedge funds trade our stocks but we are focused on continuously driving growth of our business,” Vipshop said in an e-mailed reply to questions.
Robert Christie, a U.S.-based spokesman at Alibaba, and Josh Gartner of JD.com declined to comment on hedge funds’ trading in the shares.