Vipshop(US:VIPS)2022-04-27 20:08PART I ITEM 3. KEY INFORMATION This section details Vipshop's holding company structure, its reliance on contractual arrangements with consolidated affiliated entities (VIEs) in China, and the associated risks, alongside selected consolidated financial data and a comprehensive breakdown of risk factors Holding Company Structure and China Operations Vipshop Holdings Limited operates in China through PRC subsidiaries and consolidated affiliated entities (VIEs) due to foreign investment restrictions, facing risks from its VIE structure, PRC government oversight, and potential delisting under the U.S. HFCAA - Vipshop operates in China through a VIE structure to comply with PRC laws restricting foreign investment in internet-related businesses, with revenues from these consolidated affiliated entities being 3.9%, 2.3%, and 2.6% of total net revenues in 2019, 2020, and 2021, respectively14 - The company faces risks from the Holding Foreign Companies Accountable Act (HFCA Act), as its auditor is located in a jurisdiction where the PCAOB cannot conduct inspections, potentially leading to the prohibition of its ADSs from trading in the U.S. as early as 202420179 - The ability to transfer funds from PRC subsidiaries to the holding company is restricted, with total restricted net assets subject to statutory reserves and other limitations amounting to RMB 12.15 billion (US$1.91 billion) as of December 31, 202124 Financial Information Relating to Our Consolidated Affiliated Entities This section provides condensed consolidating financial schedules for the parent company, its subsidiaries, and its consolidated affiliated entities (VIEs) for the fiscal years 2019, 2020, and 2021 Condensed Consolidating Income Statement Data for FY 2021 (RMB in thousands) | | Parent Company | Subsidiaries | Consolidated Affiliated Entities | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenues | — | 114,813,941 | 7,424,952 | (5,179,215) | 117,059,678 | | Net income | 4,681,073 | 4,307,382 | 390,703 | (4,686,284) | 4,692,874 | Condensed Consolidating Balance Sheet Data as of Dec 31, 2021 (RMB in thousands) | | Parent Company | Subsidiaries | Consolidated Affiliated Entities | Eliminations | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | 32,716,936 | 56,891,065 | 8,026,874 | (35,347,334) | 62,287,541 | | Total liabilities | (84,038) | (31,058,536) | (3,759,653) | 6,443,002 | (28,459,225) | Selected Consolidated Financial Data The company presents selected consolidated financial data for the five years ended December 31, 2021, showing revenue growth, profitability, and asset increases Selected Consolidated Statements of Income Data (RMB in thousands) | Indicator | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total net revenues | 92,994,418 | 101,858,489 | 117,059,678 | | Gross profit | 20,680,228 | 21,285,308 | 23,106,557 | | Income from operations | 4,773,374 | 5,860,086 | 5,582,422 | | Net income attributable to our shareholders | 4,016,832 | 5,906,957 | 4,681,073 | Selected Consolidated Balance Sheets Data (RMB in thousands) | Indicator | As of Dec 31, 2020 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Total assets | 58,940,814 | 62,287,541 | | Total liabilities | 29,555,025 | 28,459,225 | | Total shareholders' equity | 29,385,789 | 33,828,316 | D. Risk Factors This section outlines significant risks to the company's business, covering operations, corporate structure, conducting business in China, and risks related to its securities - Key business risks include the inability to manage growth, failure to offer products at attractive prices, competition from other e-commerce platforms, potential harm to the brand's reputation, and the adverse effects of the COVID-19 pandemic on consumer spending and logistics434961 - The company's reliance on a VIE structure is a major risk, as PRC government interpretation of laws on foreign investment could deem the structure non-compliant, leading to severe penalties, and the enforceability of contractual arrangements is not as effective as direct ownership4446151 - Significant risks of operating in China include changes in economic and political conditions, an uncertain legal system, and significant government oversight, with the inability of the PCAOB to inspect the company's auditor potentially leading to delisting from U.S. exchanges under the HFCAA47 - The dual-class voting structure gives co-founder, chairman, and CEO Mr. Eric Ya Shen considerable influence, holding approximately 57.9% of the aggregate voting power as of March 31, 2022, which limits the ability of other shareholders to influence corporate matters48251 ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Vipshop's business, detailing its history, corporate structure, business model, integrated online and offline platforms, brand partner relationships, logistics, marketing, technology infrastructure, and the complex regulatory landscape in China A. History and Development of the Company Vipshop Holdings Limited, a Cayman Islands holding company, was established in August 2010 to facilitate foreign investment into its operations, which began in China in 2008, conducting business through PRC subsidiaries and consolidated affiliated entities (VIEs) to comply with Chinese regulations - The company was founded in August 2008, with the Cayman Islands holding company, Vipshop Holdings Limited, incorporated in August 2010 to facilitate foreign investment259 - Due to PRC restrictions on foreign ownership of internet businesses, the company's online platform is operated by its consolidated affiliated entities (VIEs), primarily Vipshop E-Commerce, which holds the necessary licenses261 B. Business Overview Vipshop operates as a leading online discount retailer in China, utilizing a "flash sales" model, with RMB 191.5 billion GMV and 93.9 million active customers in 2021, supported by an integrated online and offline platform and strategic logistics partnerships Key Operating Metrics (2019-2021) | Metric | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | GMV (RMB in billions) | 148.2 | 165.0 | 191.5 | | Active Customers (in millions) | 69.0 | 83.9 | 93.9 | | Total Orders (in millions) | 566.3 | 692.4 | 786.6 | | Brand Partners | 18,000+ | 21,000+ | 25,000+ | - The company's business model is centered on "flash sales," offering curated, popular branded products at deep discounts for limited periods265268 - Operations are supported by an integrated online platform (Vipshop App, vip.com, WeChat Mini-Program) and offline initiatives, including the acquired Shan Shan Outlets, with the online platform generating 93% of the company's GMV in 2021271277281 - In November 2019, the company terminated its in-house delivery service and entered a strategic cooperation with SF Holding to optimize logistics efficiency and reduce fulfillment expenses67305 C. Organizational Structure Vipshop Holdings Limited, a Cayman Islands holding company, controls its PRC operating entities through a series of contractual arrangements (VIE structure) to comply with PRC restrictions on foreign ownership in the internet sector - The company utilizes a VIE structure, with key operating licenses held by Guangzhou Vipshop E-Commerce Co., Ltd., which is owned 66.7% by Eric Ya Shen and 33.3% by Arthur Xiaobo Hong457464 - Control over the VIEs is maintained through a set of contractual arrangements, including Equity Interest Pledge Agreements, Exclusive Option Agreements, Powers of Attorney, and Exclusive Business Cooperation Agreements460465466467 - In 2021, the company's directly owned subsidiaries contributed approximately 97.4% of total consolidated net revenues, excluding intercompany service fees from the VIEs462 D. Property, Plants and Equipment As of December 31, 2021, Vipshop's primary property includes its new headquarters in Guangzhou, approximately 3.3 million square meters of owned warehouse space, and 1.1 million square meters of retail property for Shan Shan Outlets Property Summary as of Dec 31, 2021 (in square meters) | Property Type | Owned | Leased | | :--- | :--- | :--- | | Office Space | 190,550 | 16,489 | | Logistics Centers | 3,303,357 | 56,648 | | Shan Shan Outlets | 1,102,035 | 8,025 | | Other Offline Retail | — | 439,362 | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides management's discussion and analysis of Vipshop's financial performance, covering results of operations, segment performance, liquidity, capital resources, and critical accounting estimates A. Operating Results In fiscal year 2021, Vipshop's total net revenues increased by 14.9% to RMB 117.1 billion, driven by a rise in active customers to 93.9 million, though net income attributable to shareholders fell to RMB 4.7 billion due to a lower gross margin and increased operating expenses Key Performance Indicators (2020 vs. 2021) | Metric | 2020 | 2021 | | :--- | :--- | :--- | | Total Net Revenues (RMB B) | 101.86 | 117.06 | | Active Customers (M) | 83.9 | 93.9 | | Total Orders (M) | 692.4 | 786.6 | | Net Income (RMB B) | 5.92 | 4.69 | - The increase in 2021 net revenues was primarily driven by growth in the number of active customers and total orders515 - Gross margin decreased from 20.9% in 2020 to 19.7% in 2021, mainly due to a strategy of reinvesting in customer experience and changes in product portfolio518 - Operating expenses as a percentage of total net revenues decreased from 15.9% in 2020 to 15.7% in 2021488 B. Liquidity and Capital Resources As of December 31, 2021, Vipshop held RMB 17.17 billion in cash, cash equivalents, and restricted cash, with net cash from operating activities at RMB 6.74 billion, and material cash requirements including operating leases, debt obligations, and investment commitments Summary of Cash Flows (RMB in thousands) | Cash Flow Activity | 2020 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | 11,820,444 | 6,744,644 | | Net cash used in investing activities | (6,695,043) | (2,326,489) | | Net cash used in financing activities | (20,839) | (58,788) | - The company's cash, cash equivalents, and restricted cash increased to RMB 17.17 billion (US$2.69 billion) as of December 31, 2021541 - Capital expenditures for property, equipment, and land use rights amounted to RMB 3.58 billion (US$561.6 million) in 2021, primarily for the construction and expansion of warehouses and logistics infrastructure559 Contractual Obligations as of Dec 31, 2021 (RMB in thousands) | Obligation Type | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | 1,488,103 | 297,498 | 571,175 | 182,767 | 436,663 | | Short-term debt obligations | 2,125,124 | 2,125,124 | — | — | — | | Capital expenditures commitment | 765,700 | 618,704 | 140,329 | 6,667 | — | E. Critical Accounting Estimates The company's critical accounting estimates involve significant judgment and assumptions in areas such as revenue recognition, inventory write-downs, valuation of goodwill and assets from business acquisitions, and income tax calculations - Revenue from online sales is recognized when goods are accepted by customers, with a one-day change in the estimated in-transit period impacting 2021 total net revenues by approximately RMB 492.8 million (US$77.3 million)585 - Inventory is valued at the lower of cost or net realizable value, with inventory write-downs being approximately 0.5%, 0.7%, and 0.04% of the cost of sales for 2019, 2020, and 2021, respectively588 - Other critical estimates include the valuation of goodwill and acquired assets in business combinations, and the assessment of deferred tax assets and liabilities, which requires estimating future financial performance589591592 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation practices, and workforce, including biographical information for key directors and executive officers, stock incentive plans, employee numbers, and share ownership highlighting co-founder voting control A. Directors and Senior Management The company is led by co-founder Eric Ya Shen, who serves as Chairman and CEO, and co-founder Arthur Xiaobo Hong, who is Vice Chairman and COO, with a board including representatives from major shareholder Tencent and independent directors - The leadership team is headed by co-founders Eric Ya Shen (Chairman & CEO) and Arthur Xiaobo Hong (Vice Chairman & COO)596598599 - The board of directors consists of ten members, including Martin Chi Ping Lau, President of Tencent, and several independent directors596597600 B. Compensation For the fiscal year 2021, Vipshop paid an aggregate of RMB 12.7 million (US$2.0 million) in cash to its executive officers and RMB 2.6 million (US$0.4 million) to its non-executive directors, utilizing three stock incentive plans to attract and retain talent - In FY2021, aggregate cash compensation was RMB 12.7 million for executive officers and RMB 2.6 million for non-executive directors617 - The company has three active stock incentive plans: the 2011 Plan, 2012 Plan, and 2014 Plan, which allow for the granting of options, restricted shares, and other awards618627636 C. Board Practices The board of directors consists of ten members and has established three primary committees: the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee, each composed of independent directors and adhering to NYSE and SEC requirements - The board has three committees: Audit, Compensation, and Nominating and Corporate Governance, each with its own charter and composed of independent directors648 - The Audit Committee is chaired by Ms. Kathleen Chien, who qualifies as an "audit committee financial expert"649 D. Employees As of December 31, 2021, Vipshop had 8,013 full-time employees, a decrease from 20,442 in 2019, reflecting initiatives to streamline operations and outsource certain functions, with the largest groups in products and technology support, merchandising, and warehouse management Full-Time Employees by Function as of Dec 31, 2021 | Function | Number of Employees | | :--- | :--- | | Merchandising | 1,223 | | Products and technology support | 1,655 | | Warehouse management | 1,166 | | Offline stores | 1,168 | | Shan Shan Outlets | 1,275 | | Administration and management | 820 | | Other | 706 | | Total | 8,013 | E. Share Ownership As of March 31, 2022, co-founder and CEO Eric Ya Shen beneficially owned 12.9% of total ordinary shares, representing 57.9% of the aggregate voting power due to the dual-class structure, with other major shareholders including Tencent, JD.com, and Harris Associates L.P Principal Shareholders as of March 31, 2022 | Shareholder | Beneficial Ownership % | Voting Power % | | :--- | :--- | :--- | | Eric Ya Shen | 12.9% | 57.9% | | Arthur Xiaobo Hong | 7.6% | N/A | | Tencent Mobility Limited | 9.8% | N/A | | JD Entities | 6.5% | N/A | | Harris Associates L.P. | 5.9% | N/A | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's transactions with related parties, including contractual arrangements with its VIEs controlled by co-founders, business cooperation agreements with major shareholders Tencent and JD.com, and purchases of goods from director- or major shareholder-controlled companies - The company maintains contractual arrangements with its VIEs, which are owned by co-founders Eric Ya Shen and Arthur Xiaobo Hong674 - Vipshop has strategic cooperation agreements with major shareholders Tencent and JD.com, granting it traffic-driving entry points on their respective platforms, such as Weixin Wallet and the JD.com mobile app675676 - In 2021, the company purchased RMB 303.5 million (US$47.6 million) in products from companies controlled by its directors or major shareholders677 ITEM 8. FINANCIAL INFORMATION This section confirms the consolidated financial statements are appended, notes no material adverse legal proceedings, and states Vipshop's policy of not paying cash dividends in the foreseeable future, intending to retain earnings for business expansion - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business681 - Vipshop has no present plan to pay cash dividends and intends to retain future earnings to operate and expand the business682 ITEM 10. ADDITIONAL INFORMATION This section provides details on the company's corporate governance and legal framework, outlining its dual-class share structure, material contracts, exchange controls, and a detailed analysis of taxation in the Cayman Islands, PRC, and for U.S. investors, including the significant risk of being classified as a Passive Foreign Investment Company (PFIC) - The company has a dual-class share structure where each Class A ordinary share has one vote, while each Class B ordinary share has ten votes, with Class B shares convertible into Class A shares, but not vice-versa690692 - The company is subject to PRC foreign exchange controls, which may limit its ability to transfer funds out of China, including for dividend payments747 - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. investors, with the determination depending on factors like the market price of its ADSs and the composition of its assets and income252762764 PART II ITEM 15. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021, a conclusion attested to by the independent registered public accounting firm, Deloitte Touche Tohmatsu - As of December 31, 2021, management concluded that the company's disclosure controls and procedures were effective797 - Management assessed the internal control over financial reporting and concluded it was effective as of December 31, 2021, with this assessment attested to by the independent auditor, Deloitte Touche Tohmatsu800801802 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The company has been actively repurchasing its shares, fully utilizing a US$500 million program authorized in March 2021, and subsequently authorizing an additional US$1 billion share repurchase program on March 31, 2022 - A US$500 million share repurchase program authorized in March 2021 was fully utilized as of the report date811 - On March 31, 2022, the board authorized a new 24-month share repurchase program for up to US$1 billion812 PART III ITEM 18. FINANCIAL STATEMENTS This section contains the complete audited consolidated financial statements for Vipshop Holdings Limited for the fiscal years ended December 31, 2019, 2020, and 2021, prepared in accordance with U.S. GAAP, including the unqualified opinion from Deloitte Touche Tohmatsu and detailed notes - The independent auditor, Deloitte Touche Tohmatsu, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021823824 - The critical audit matter identified by the auditor was the estimation of inventory write-downs, which involves significant management judgment regarding factors like inventory aging, historical trends, and forecasted demand828830 Consolidated Balance Sheets As of December 31, 2021, Vipshop's total assets were RMB 62.29 billion, with total liabilities decreasing to RMB 28.46 billion and total shareholders' equity increasing to RMB 33.83 billion Consolidated Balance Sheet Summary (RMB in thousands) | | As of Dec 31, 2020 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | 31,172,982 | 32,841,945 | | Total assets | 58,940,814 | 62,287,541 | | Total current liabilities | 26,568,948 | 25,771,017 | | Total liabilities | 29,555,025 | 28,459,225 | | Total shareholders' equity | 29,385,789 | 33,828,316 | Consolidated Statements of Income and Comprehensive Income For the year ended December 31, 2021, total net revenues were RMB 117.06 billion, with gross profit rising to RMB 23.11 billion, but net income attributable to shareholders decreased to RMB 4.68 billion due to increased operating expenses Consolidated Income Statement Summary (RMB in thousands) | | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total net revenues | 92,994,418 | 101,858,489 | 117,059,678 | | Gross profit | 20,680,228 | 21,285,308 | 23,106,557 | | Income from operations | 4,773,374 | 5,860,086 | 5,582,422 | | Net income attributable to shareholders | 4,016,832 | 5,906,957 | 4,681,073 | Consolidated Statements of Cash Flows For the year ended December 31, 2021, net cash generated from operating activities was RMB 6.74 billion, with net cash used in investing activities at RMB 2.33 billion, and the company's cash, cash equivalents, and restricted cash increasing to RMB 17.17 billion Consolidated Cash Flow Summary (RMB in thousands) | | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 12,290,183 | 11,820,444 | 6,744,644 | | Net cash used in investing activities | (8,240,560) | (6,695,043) | (2,326,489) | | Net cash used in financing activities | (6,256,700) | (20,839) | (58,788) | | Cash, cash equivalents and restricted cash at end of year | 7,719,285 | 12,811,321 | 17,171,269 |