|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
%
|
|
|
|
(in thousands, except percentages, number of shares, and per share and per ADS data)
|
|
Selected Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
22,685,111
|
|
|
98.1
|
|
|
39,409,961
|
|
|
98.0
|
|
|
55,281,900
|
|
|
97.7
|
|
|
71,171,653
|
|
|
97.6
|
|
|
81,510,275
|
|
|
11,855,178
|
|
|
96.4
|
|
Other revenues
|
|
|
444,202
|
|
|
1.9
|
|
|
793,251
|
|
|
2.0
|
|
|
1,309,402
|
|
|
2.3
|
|
|
1,740,660
|
|
|
2.4
|
|
|
3,013,673
|
|
|
438,321
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
23,129,313
|
|
|
100.0
|
|
|
40,203,212
|
|
|
100.0
|
|
|
56,591,302
|
|
|
100.0
|
|
|
72,912,313
|
|
|
100.0
|
|
|
84,523,948
|
|
|
12,293,499
|
|
|
100.0
|
|
Cost of revenues
(1)
|
|
|
(17,378,044
|
)
|
|
(75.1
|
)
|
|
(30,306,723
|
)
|
|
(75.4
|
)
|
|
(42,994,688
|
)
|
|
(76.0
|
)
|
|
(56,618,471
|
)
|
|
(77.7
|
)
|
|
(67,454,981
|
)
|
|
(9,810,920
|
)
|
|
(79.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,751,269
|
|
|
24.9
|
|
|
9,896,489
|
|
|
24.6
|
|
|
13,596,614
|
|
|
24.0
|
|
|
16,293,842
|
|
|
22.3
|
|
|
17,068,967
|
|
|
2,482,579
|
|
|
20.2
|
|
Operating expenses
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
(3)
|
|
|
(2,268,949
|
)
|
|
(9.8
|
)
|
|
(3,667,031
|
)
|
|
(9.1
|
)
|
|
(4,904,526
|
)
|
|
(8.7
|
)
|
|
(6,899,654
|
)
|
|
(9.5
|
)
|
|
(7,489,393
|
)
|
|
(1,089,287
|
)
|
|
(8.8
|
)
|
Marketing expenses
|
|
|
(1,164,149
|
)
|
|
(5.0
|
)
|
|
(2,089,348
|
)
|
|
(5.2
|
)
|
|
(2,837,680
|
)
|
|
(5.0
|
)
|
|
(2,978,621
|
)
|
|
(4.1
|
)
|
|
(3,240,450
|
)
|
|
(471,304
|
)
|
|
(3.8
|
)
|
Technology and content expenses
|
|
|
(670,998
|
)
|
|
(2.9
|
)
|
|
(1,076,520
|
)
|
|
(2.7
|
)
|
|
(1,563,582
|
)
|
|
(2.8
|
)
|
|
(1,808,452
|
)
|
|
(2.5
|
)
|
|
(2,000,894
|
)
|
|
(291,018
|
)
|
|
(2.4
|
)
|
General and administrative expenses
|
|
|
(967,463
|
)
|
|
(4.2
|
)
|
|
(1,301,472
|
)
|
|
(3.2
|
)
|
|
(1,941,146
|
)
|
|
(3.4
|
)
|
|
(2,447,724
|
)
|
|
(3.3
|
)
|
|
(2,674,179
|
)
|
|
(388,943
|
)
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(5,071,559
|
)
|
|
(21.9
|
)
|
|
(8,134,371
|
)
|
|
(20.2
|
)
|
|
(11,246,934
|
)
|
|
(19.9
|
)
|
|
(14,134,451
|
)
|
|
(19.4
|
)
|
|
(15,404,916
|
)
|
|
(2,240,552
|
)
|
|
(18.2
|
)
|
Other operating income
|
|
|
153,977
|
|
|
0.6
|
|
|
308,431
|
|
|
0.8
|
|
|
358,029
|
|
|
0.6
|
|
|
531,055
|
|
|
0.8
|
|
|
757,062
|
|
|
110,110
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
833,687
|
|
|
3.6
|
|
|
2,070,549
|
|
|
5.2
|
|
|
2,707,709
|
|
|
4.8
|
|
|
2,690,446
|
|
|
3.7
|
|
|
2,421,113
|
|
|
352,137
|
|
|
2.9
|
|
Income before income taxes and share of loss of equity method investees
|
|
|
1,060,341
|
|
|
4.6
|
|
|
2,050,520
|
|
|
5.1
|
|
|
2,666,084
|
|
|
4.7
|
|
|
2,540,853
|
|
|
3.5
|
|
|
2,747,075
|
|
|
399,546
|
|
|
3.3
|
|
Income tax expenses
|
|
|
(245,032
|
)
|
|
(1.0
|
)
|
|
(457,745
|
)
|
|
(1.1
|
)
|
|
(601,828
|
)
|
|
(1.1
|
)
|
|
(626,140
|
)
|
|
(0.9
|
)
|
|
(566,604
|
)
|
|
(82,409
|
)
|
|
(0.7
|
)
|
Share of loss of equity method investees
|
|
|
(62,716
|
)
|
|
(0.3
|
)
|
|
(84,063
|
)
|
|
(0.2
|
)
|
|
(71,489
|
)
|
|
(0.1
|
)
|
|
(22,280
|
)
|
|
(0.0
|
)
|
|
(46,999
|
)
|
|
(6,836
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
752,593
|
|
|
3.3
|
|
|
1,508,712
|
|
|
3.8
|
|
|
1,992,767
|
|
|
3.5
|
|
|
1,892,433
|
|
|
2.6
|
|
|
2,133,472
|
|
|
310,301
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss/(income) attributable to non-controlling interests
|
|
|
88,693
|
|
|
0.3
|
|
|
80,953
|
|
|
0.2
|
|
|
44,050
|
|
|
0.1
|
|
|
57,222
|
|
|
0.1
|
|
|
(4,685
|
)
|
|
(681
|
)
|
|
(0.0
|
)
|
Net income attributable to our shareholders
|
|
|
841,286
|
|
|
3.6
|
|
|
1,589,665
|
|
|
4.0
|
|
|
2,036,817
|
|
|
3.6
|
|
|
1,949,655
|
|
|
2.7
|
|
|
2,128,787
|
|
|
309,620
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A and Class B ordinary shares
(4)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
113,310,682
|
|
|
|
|
|
115,736,092
|
|
|
|
|
|
115,958,088
|
|
|
|
|
|
117,554,229
|
|
|
|
|
|
132,266,157
|
|
|
132,266,157
|
|
|
|
|
Diluted
|
|
|
120,227,584
|
|
|
|
|
|
120,168,063
|
|
|
|
|
|
125,817,183
|
|
|
|
|
|
125,715,833
|
|
|
|
|
|
140,083,610
|
|
|
140,083,610
|
|
|
|
|
Net earnings per Class A and Class B ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to our shareholdersBasic
|
|
|
7.42
|
|
|
|
|
|
13.74
|
|
|
|
|
|
17.57
|
|
|
|
|
|
16.59
|
|
|
|
|
|
16.09
|
|
|
2.34
|
|
|
|
|
Net income attributable to our shareholdersDiluted
|
|
|
7.00
|
|
|
|
|
|
13.23
|
|
|
|
|
|
16.86
|
|
|
|
|
|
15.94
|
|
|
|
|
|
15.61
|
|
|
2.27
|
|
|
|
|
Net earnings per ADS
(5)
(1 Class A ordinary share equals 5 ADSs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.48
|
|
|
|
|
|
2.75
|
|
|
|
|
|
3.51
|
|
|
|
|
|
3.32
|
|
|
|
|
|
3.22
|
|
|
0.47
|
|
|
|
|
Diluted
|
|
|
1.40
|
|
|
|
|
|
2.65
|
|
|
|
|
|
3.37
|
|
|
|
|
|
3.19
|
|
|
|
|
|
3.12
|
|
|
0.45
|
|
|
|
|
Notes:
-
(1)
-
Excludes
shipping and handling expenses, and includes inventory write-down that amounted to RMB218.1 million, RMB293.9 million,
RMB303.2 million, RMB206.7 million, and RMB440.8 million (US$64.1 million) for the years ended December 31, 2014, 2015, 2016, 2017, and 2018, respectively.
3
Table of Contents
-
(2)
-
Include
share-based compensation expenses as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
|
RMB'000
|
|
RMB'000
|
|
RMB'000
|
|
RMB'000
|
|
RMB'000
|
|
US$'000
|
|
Allocation of Share-based Compensation Expenses:
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment expenses
|
|
|
(10,822
|
)
|
|
(18,665
|
)
|
|
(38,428
|
)
|
|
(73,235
|
)
|
|
(73,151
|
)
|
|
(10,639
|
)
|
Marketing expenses
|
|
|
(17,293
|
)
|
|
(19,938
|
)
|
|
(38,459
|
)
|
|
(40,364
|
)
|
|
(41,063
|
)
|
|
(5,972
|
)
|
Technology and content expenses
|
|
|
(103,160
|
)
|
|
(126,274
|
)
|
|
(183,122
|
)
|
|
(206,073
|
)
|
|
(203,594
|
)
|
|
(29,612
|
)
|
General and administrative expenses
|
|
|
(94,219
|
)
|
|
(138,064
|
)
|
|
(215,644
|
)
|
|
(347,426
|
)
|
|
(353,402
|
)
|
|
(51,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(225,494
|
)
|
|
(302,941
|
)
|
|
(475,653
|
)
|
|
(667,098
|
)
|
|
(671,210
|
)
|
|
(97,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
The
share-based compensation expenses for 2014 included RMB225.5 million share-based compensation expenses in connection with share options and non-vested
shares granted to our executive officers, independent directors, employees, and consultants. The unrecognized share-based compensation expenses relating to share options and non-vested shares were
RMB29.4 million and RMB598.2 million, and were expected to be recognized over a weighted average period of 1.34 years and 3.20 years on a straight-line basis as of
December 31, 2014, respectively. The share-based compensation expenses for 2015 included RMB302.9 million share-based compensation expenses in connection with share options and
non-vested shares granted to our executive officers, independent directors, and employees. The unrecognized share-based compensation expenses relating to share options and non-vested shares were
RMB6.9 million and RMB914.0 million, and were expected to be recognized over a weighted average period of 1.02 years and 2.97 years on a straight-line basis as of
December 31, 2015, respectively. The share-based compensation expenses for 2016 included RMB475.7 million share-based compensation expenses in connection with share options and
non-vested shares granted to our executive officers, independent directors, and employees. The unrecognized share-based compensation expenses relating to share options and non-vested shares were
RMB243 thousand and RMB1.24 billion, and were expected to be recognized over a weighted average period of 0.25 years and 4 years on a straight-line basis as of
December 31, 2016, respectively. The share-based compensation expenses for 2017 included RMB667.1 million share-based compensation expenses in connection with share options and
non-vested shares granted to our executive officers, independent directors, and employees. The unrecognized share-based compensation expenses relating to share options and non-vested shares were
RMB162.9 million and RMB1.43 billion, and were expected to be recognized over a weighted average period of 3 years and 2.72 years on a straight-line basis as of
December 31, 2017, respectively. The share-based compensation expenses for 2018 included RMB671.2 million (US$97.6 million) share-based compensation expenses in connection with
share options and non-vested shares granted to our executive officers, independent directors, and employees. The unrecognized share-based compensation expenses relating to share options and non-vested
shares were RMB131.4 (US$19.1 million) and RMB1.20 billion (US$175.0 million), and were expected to be recognized over a weighted average period of 2 years and
2.32 years on a straight-line basis as of December 31, 2018, respectively. See "Item 5.A. Operating and Financial Review and ProspectsOperating
ResultsCritical Accounting PoliciesShare-based compensation" for details.
-
(3)
-
Include
shipping and handling expenses, which amounted to RMB1.17 billion, RMB1.71 billion, RMB2.58 billion, RMB3.83 billion, and
RMB4.50 billion (US$654.3 million) for the years ended December 31, 2014, 2015, 2016, 2017, and 2018, respectively.
-
(4)
-
Authorized
share capital was re-classified and re-designated into Class A ordinary shares and Class B ordinary shares, with each Class A
ordinary share being entitled to one vote and each Class B ordinary share being entitled to ten votes on all matters that are subject to shareholder vote.
-
(5)
-
Each
ADS represents 0.2 Class A ordinary shares, effective November 3, 2014. The computation of net earnings per ADS has been adjusted for all periods
presented to reflect this change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
|
RMB'000
|
|
RMB'000
|
|
RMB'000
|
|
RMB'000
|
|
RMB'000
|
|
US$'000
|
|
Summary Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
|
4,791,151
|
|
|
3,324,384
|
|
|
4,109,577
|
|
|
10,221,992
|
|
|
10,038,472
|
|
|
1,460,035
|
|
Total current assets
|
|
|
13,220,454
|
|
|
12,153,276
|
|
|
14,580,872
|
|
|
25,916,138
|
|
|
27,325,637
|
|
|
3,974,350
|
|
Total assets
|
|
|
16,951,041
|
|
|
20,035,522
|
|
|
25,094,453
|
|
|
37,982,820
|
|
|
43,562,663
|
|
|
6,335,927
|
|
Total liabilities
|
|
|
14,252,973
|
|
|
16,422,255
|
|
|
19,312,649
|
|
|
23,732,244
|
|
|
26,351,870
|
|
|
3,832,719
|
|
Total shareholders' equity
|
|
|
2,698,068
|
|
|
3,613,267
|
|
|
5,781,804
|
|
|
14,250,576
|
|
|
17,210,793
|
|
|
2,503,208
|
|
-
B.
-
Capitalization and Indebtedness
Not
applicable.
4
Table of Contents
-
C.
-
Reasons for the Offer and Use of Proceeds
Not applicable.
-
D.
-
Risk Factors
Risks Relating to Our Business and Industry
If we are unable to manage our growth or execute our strategies effectively, our business and prospects may
be materially and adversely affected.
We have experienced a period of growth and expansion that has demanded, and will continue to demand, significant financial and managerial
resources. We plan to further increase our sales through enhancing our brand recognition, growing our customer base, and increasing customer spending on our Vipshop Online Platform.
We
intend to continue investing in our warehousing capacity to support our long-term growth. To further improve our nationwide fulfillment capabilities, we have expanded our warehouses
in strategic locations in China to strengthen our regional logistics hubs. Moreover, we have leased warehouses outside China. However, we cannot assure you that we will be able to execute our
expansion plan as expected. Our rapid expansion requires us to continue to effectively manage our relationships with brand partners and third-party delivery companies to ensure efficient and timely
delivery of our products. To continue our business growth, we will also need to allocate significant managerial and financial resources in retaining, training, managing, and motivating our workforce.
We
also seek to broaden our product and service offerings through third-party sellers offering their own products and services on our Vipshop Online Platform. The products and services
offered by such third-party sellers may differ in category, quality, and value in comparison to those offered directly by us. Such expansion may require us to work with different groups of brand
partners and introduce new product and service categories to address the needs of different kinds of customers. We have limited or no experience in some of these newer product and service offerings,
such as online sales under third-party proprietary cosmetics brands, and our expansion into these new product and service categories may not achieve broad customer acceptance. These offerings may
present new and difficult technological or operational challenges, and we may be subject to claims if customers experience service disruptions or failure or other quality issues with these third-party
sellers. In addition, our profitability, if any, in our newer product and service categories may be lower than in our older categories, which may adversely affect our overall profitability and results
of operations. Moreover, we cannot assure you that we will be able to recoup our investments in introducing these new product categories.
Furthermore,
we have further developed and expanded new business initiatives in Internet finance. We intend to stay focused on consumer financing and supplier financing services that we
offer to our customers. See "Item 3.D. Key InformationRisk FactorsRisks Relating to Our Business and IndustryWe have limited experience in operating an
Internet finance business, and increasing exposure to credit risks or significant deterioration in the asset quality of our Internet finance business may materially and adversely affect our business,
financial condition, and results of operations." and "Item 4.B. Information on the CompanyBusiness OverviewOur Product and Service OfferingsOther
Services."
All
of these endeavors involve risks. We cannot assure you that we will successfully execute these expansion plans and strategies. We may fail to acquire financial or managerial
resources needed for our business growth in a timely and cost-efficient manner, or at all. We cannot assure you that we will be able to manage our growth effectively, and any failure to do so may
materially and adversely affect our business and prospects.
5
Table of Contents
If we are unable to offer branded products at attractive prices to meet customer needs and preferences, or if
our reputation for selling authentic, high-quality products suffers, we may lose customers and our business, financial condition, and results of operations may be materially and adversely affected.
Our future growth depends on our ability to continue to attract new customers as well as to increase the spending and repeat purchase rate of
existing customers. Constantly changing consumer preferences have historically affected, and will continue to affect, the online retail industry. Consequently, we must stay abreast of emerging
lifestyle and consumer preferences and anticipate product trends that will appeal to existing and potential customers. As we implement our strategy to offer personalized Vipshop Online Platform
focusing on deep curation and targeted offerings desired by our customers, we expect to face additional challenges in the selection of products and services. Our ability to offer individually-tailored
merchandise is dependent on our IT systems, including our big data and business intelligence system, to collect and provide accurate and reliable information on consumer interests. In addition, we
focus on offering only authentic products on our platform, as perception by our existing or prospective customers that any of our products are not authentic, or are of inferior quality, could cause
our reputation to suffer. This is particularly important for cosmetics and maternal and baby products. While our representatives generally check the products that we sell to confirm their
authenticity, quality, and proper labeling, we cannot assure you that our suppliers have provided us with authentic products or that all products that we sell are of the quality satisfactory to our
customers. If our customers cannot find desirable products within our product portfolio at attractive prices, or if our reputation for selling authentic, high-quality product suffers, our customers
may lose interest in our platform and thus may visit our platform less frequently or even stop visiting our platform, which in turn may materially and adversely affect our business, financial
condition, and results of operations.
Our business and results of operations may be materially and adversely affected if we are unable to maintain
our customer experience or provide high-quality customer service.
The success of our business largely depends on our ability to provide superior customer experience and high-quality customer service, which in
turn depends on a variety of factors, such as our ability to continue to provide reliable and user-friendly Vipshop Online Platform for our customers to browse and purchase our products, reliable and
timely delivery of our products, and superior after-sales services. Our sales may decrease if our platform services are severely interrupted or otherwise fail to meet our customer demands. Should we
or third-party delivery companies fail to provide our product delivery and return services in a convenient or reliable manner, or if our customers are not satisfied with our product quality, our
reputation and customer loyalty could be adversely affected. In addition, we also depend on our call center and online customer service representatives to provide live assistance to our customers. If
our call center or online customer service representatives fail to satisfy the individual needs of customers, our reputation and customer loyalty could be adversely affected and we may lose potential
or existing customers and experience a decrease in sales. As a result, if we are unable to continue to maintain our customer experience and provide high-quality customer service, we may not be able to
retain existing customers or attract new customers, which could materially and adversely affect our business, financial condition, and results of operations.
Any harm to our brands or failure to maintain our reputation may materially and adversely affect our business
and growth prospects.
We believe that the recognition and reputation of our brands among our customers and brand partners have significantly contributed to the growth
of our business. Maintaining and enhancing the recognition and reputation of our brands are critical to our business and competitiveness. Many factors, some of which are beyond our control, are
important to maintaining and enhancing our brands and, if
6
Table of Contents
not
properly managed, may negatively impact our brands and reputation. These factors include our ability to:
-
-
provide satisfactory user experience as consumer preferences evolve and as we expand into new product categories;
-
-
increase brand awareness among existing and potential customers through various marketing and promotional activities;
-
-
maintain the popularity, attractiveness, and quality of the products we offer;
-
-
maintain the efficiency, reliability, and quality of our fulfillment services; and
-
-
preserve our reputation and goodwill in the event of any negative media publicity on Internet security, product quality, or authenticity issues
affecting us or other online retail businesses in China.
A
public perception that non-authentic or counterfeit goods are sold on our Vipshop Online Platform, even if factually incorrect, could damage our reputation, reduce our ability to
attract new customers or retain our existing customers, and diminish the value of our brands. If we are unable to maintain our reputation, enhance our brand recognition, or increase positive awareness
of our platform, products, and services, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely affected.
If we fail to manage our relationships with, or otherwise fail to procure products at favorable terms from,
our existing brand partners, or if we fail to attract new brand partners, our business and growth prospects may suffer.
We source our products from both domestic and international brand partners. As of December 31, 2016, 2017, and 2018, we worked with over
10,000, 13,000, and 17,000 brand partners,
respectively. We depend significantly on our ability to source products from brand partners on favorable pricing terms, typically at a substantial discount to the original sales price. However, our
agreements do not ensure the long-term availability of merchandise or the continuation of any particular pricing practices. Our contracts with our brand suppliers typically do not restrict our brand
partners from selling products to other buyers. We cannot assure you that our current brand partners will continue to sell products to us on commercially acceptable terms, or at all. In the event that
we are not able to purchase merchandise on favorable pricing terms, our revenues, profit margin, and earnings may be materially and adversely affected. Our brand partners primarily include brand
owners, and to a lesser extent, brand distributors and resellers. If any brand distributor or reseller fails to obtain or maintain appropriate authorization from the relevant brand owner to sell
certain products to us, such brand distributor or reseller may cease selling such products to us at any time, which may adversely affect our business and revenues. Furthermore, although we, as an
online distributor, are not directly responsible to obtain customs clearance or other relevant permits for the sale of products imported by our brand partners, we are required under the relevant PRC
laws to check whether our brand partners who have imported such products have obtained the requisite import-related permits or filings and whether the products have passed the quality inspection
before they are sold and distributed in the China market. If any of our brand partners fails to pay the required import tariffs, fails to obtain clearance from the customs or inspection and quarantine
bureaus, or fails to meet the product labeling or other mandatory specification requirements, and sells such imported products to us, we may be subject to fines, suspension of business, and
confiscation of unlawfully sold products and the proceeds from such sales, depending on the nature and gravity of such liabilities.
If
our brand partners cease to provide us with favorable payment terms or return policies, our working capital needs may increase, resulting in negative impact on our cash flows from
operating activities, and our operations may be materially and adversely affected. As part of our growth strategy,
7
Table of Contents
we
plan to further expand our brand and product offerings and thus need to continue establishing relationships with new brand partners to ensure our access to a steady supply of products on favorable
commercial terms. Furthermore, our relationships with some brand partners, particularly international brand partners of apparel products in China, may be adversely affected as a result of our sale of
branded products that are directly procured from overseas markets. If we are unable to develop and maintain good relationships with brand partners that would allow us to obtain sufficient amount and
variety of quality merchandise on acceptable commercial terms, it may inhibit our ability to offer sufficient products sought by our customers or to offer these products at prices acceptable to them.
Negative developments in our relationships with brand partners could materially and adversely affect our business and growth prospects.
We rely on our invested and in-house last mile delivery capabilities and third-party delivery companies for
our product delivery, and if we or these third-party delivery companies fail to provide reliable delivery services, our business and reputation may be materially and adversely affected.
Leveraging our continued and committed investment in quality delivery companies and build-out of in-house delivery capabilities and warehousing
systems with almost nationwide coverage over the years, we now rely primarily on our invested and in-house last mile delivery capabilities and, to a lesser extent, on third-party delivery companies to
fulfill our product delivery demand. In 2018, our invested and in-house last mile delivery capabilities handled over 95% of our total orders. Nevertheless, we still maintain cooperation arrangements
with a number of third-party delivery companies to supplement our invested and in-house delivery capabilities to deliver our products. Interruptions to or failures in delivery services could prevent
the timely or proper delivery of our products. These interruptions may be due to events that are beyond our control or the control of these third-party delivery companies, such as inclement weather,
natural disasters, transportation interruptions, or labor unrest or shortage. Moreover, if these third-party delivery companies fail to comply with applicable rules and regulations in China,
reputation of our delivery services may be materially and adversely affected. We may not be able to find alternative delivery companies to provide delivery services in a timely and reliable manner, or
at all, to replace such third-party delivery companies to the extent necessary. As competition intensifies in the future, we expect that we will be required to further shorten delivery time, which
could place increasing pressure on our delivery network. Delivery of our products could also be affected or interrupted by merger, acquisition, insolvency, or government shut-down of our invested and
in-house last mile delivery capabilities or the third-party delivery companies we engage to make deliveries, especially those local couriers with relatively small business scales. Furthermore, we may
face additional challenges in managing our relationship with third-party delivery companies as a result of maintaining our own in-house delivery operations and capacities.
If
our products are not delivered in proper condition or on a timely basis, our business and reputation could suffer. Although we pay delivery companies subsequent to their fulfilment of
delivery obligation on a monthly basis, such subsequent payment may not adequately incentivize their timely and proper delivery of goods. Although we typically require delivery companies, especially
local couriers, to make cash deposits or guarantee payments securing their due performance of duties as part of our engagement with them, such security deposit may not be sufficient to recover the
losses that we sustain as a result of their failure to perform.
If we do not compete effectively against existing or new competitors, we may lose market share and customers.
The online discount retail market is rapidly evolving and competitive. Our primary competitors include major B2C e-commerce companies in China
that sell a broad range of products and services
8
Table of Contents
online,
such as Alibaba and Pinduoduo, and other online discount retail companies in China. We compete with others based on a number of factors, including:
-
-
ability to identify products in demand among consumers and source these products on favorable terms from brand suppliers;
-
-
pricing;
-
-
breadth and quality of product offerings;
-
-
platform features;
-
-
customer service and fulfillment capabilities; and
-
-
reputation among consumers and brands.
Some
of our current and potential competitors may have significantly greater resources, longer operating histories, larger customer bases, and greater brand recognition. As the online
discount retail market in China is expected to grow, many new competitors and some existing B2C e-commerce
companies may enter into this market. In addition, other online retailers may be acquired by, receive investment from, or enter into strategic relationships with, well-established and well-financed
companies or investors, which would help enhance their competitive positions. Some of our competitors may be able to secure more favorable terms from brand partners, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory policies, and devote substantially more resources to their platform and system development than us. In addition,
emerging technologies and continuing innovation in mobile Internet may increase the competition in the online retail industry. Increasing competition may negatively affect our business development,
online retail, and brand recognition, which may in turn affect our market share and operating margins. We cannot assure you that we will be able to compete effectively against our competitors, and
competitive pressure may materially and adversely affect our business, prospects, financial condition, and results of operations.
In
addition, we seek to expand into the offline retail business as a supplement to our growth strategy. We cannot guarantee that we will be able to compete successfully with existing
offline competitors, including, among others, traditional offline malls that have accumulated considerable customer base and offline stores of other reputable online retailers. We may lack experience
in offline store management and may hold insufficient offline operational capabilities. We may not be able to locate desirable sites for our stores. Operating offline stores requires considerable
capital and personnel, and we may not be able to generate profits from our offline business to cover the relevant cost within a short period of time. The occurrence of any of the above may adversely
affect our business, prospects, financial condition, and results of operations.
We had incurred net losses and experienced negative cash flow from operating activities in historical periods
and may incur net losses in the future.
We had incurred net losses in historical periods. Although we have achieved net profit since the fourth quarter of 2012, we cannot assure you
that we can continue to generate net profits or maintain positive cash flow from operating activities in the future. Our ability to be profitable depends on our ability to grow our business and
increase our total net revenues, to optimize our product category mix, to negotiate favorable terms with our suppliers, and to control our costs and operating expenses. Although we have experienced
significant revenue growth since our inception, such growth may not be sustainable and we may incur net losses in future periods or fail to maintain positive cash flow from operating activities. We
have incurred in the past and expect to continue to incur in future periods share-based compensation expenses and we expect our costs and other operating expenses to continue to increase as we expand
our business, either of which will reduce our net income and may result in future losses. If our costs and operating expenses continue to increase without a commensurate
9
Table of Contents
increase
in our revenue, our business, financial condition, and results of operations will be adversely affected, and we may need additional capital to fund our ongoing operations.
We may suffer losses if we are unable to effectively manage our inventory.
Due to the nature of the flash sales business, we need to manage a large volume of inventory turnover. We depend on our forecasts of demand and
popularity for various kinds of products to make decisions regarding product purchases. Our customers may not order products at our expected levels. In addition, any unfavorable market or industry
conditions or change in consumer trends and preferences may limit our ability to accurately forecast the inventory levels to meet customer demand.
We
generally have the right to return unsold items for most of our products to our brand partners. In order to secure more favorable commercial terms, we may need to continue to enter
into supply arrangements without unconditional return clauses or with more restrictive return policies. We may also need to take inventory in certain key product categories in order to achieve higher
gross margin and obtain better commercial terms. Furthermore, because products imported to China for our cross-border business are generally not returnable, our inventory may contain an increasing
portion of unreturnable products as our cross-border business continues to grow.
We
recorded RMB303.2 million, RMB206.7 million, and RMB440.8 million (US$64.1 million) in inventory write-down in the years ended December 31, 2016,
2017, and 2018, respectively. Such write-downs primarily reflected the estimated net realizable value of damaged or obsolete inventory.
If
we fail to manage our inventory effectively in the future, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and write-down, which could
materially and adversely affect our business, financial condition, and results of operations. In addition, if we are unable to sell products or if we are required to lower sale prices in order to
reduce inventory level or to pay higher prices to our brand partners in order to secure the right to return products to our brand partners, our profit margins might be negatively affected. High
inventory levels may also require us to commit substantial capital resources, preventing us from using that capital for other important purposes. If we do not accurately predict product demand, our
business, financial condition, and results of operations may be materially and adversely affected.
If we are subject to higher than expected product return rates, our business, financial condition, and
results of operations may be materially and adversely affected.
Purchases of apparel, fashion accessories, and other items over the Internet may be subject to higher return rates than merchandise sold at
physical stores. In order to accommodate our customers and to overcome any hesitance that they may have in shopping with us, we currently implement a unified seven-day product return policy for
purchases via our Vipshop Online Platform and refund our customers if they refuse to accept the delivery, which also constitutes a product return. Our product return rates remained stable from 2013 to
2017, and slightly increased in 2018 due to the repositioning of our business focus towards the apparel category and the implementation of our new Super VIP Membership program, which offers free
shipping and free return for its paid members. If we are unable to efficiently manage our product return rates within an appropriate range relative to our sales volume, or if our product return rates
increase or are higher than expected, our revenues and costs can be negatively impacted. In addition, as we cannot return some products to our brand partners pursuant to our contracts with them, if
return rates for such products increase significantly, we may experience an increase in our inventory balance, inventory impairment, and fulfillment costs, which may materially and adversely affect
our working capital. As a result, our business, financial condition, and results of operations may be materially and adversely affected.
10
Table of Contents
We rely on online retail of apparel products for a significant portion of our total net revenues.
Historically, online retail sales of apparel products accounted for a significant portion of our total net revenues. We expect that sales of
these products will continue to grow and represent a significant portion of our total net revenues in the near future. We have increased our offerings to include other product categories, including
fashion products, cosmetics, home goods, maternal and baby products, accessories, wellness products, consumer electronic products, and other lifestyle products, as well as Internet finance offerings
(including consumer financing and supplier financing services). However, we do not expect the sales of these new products and services to increase to a level that would reduce our dependence on our
current line of products and services. Any failure in maintaining or increasing the number of our online retail customers or our sales volumes could result in our inability to retain or capture a
sufficient share of the markets that we are targeting. Any event that results in a reduction in our sales of apparel products could materially and adversely affect our ability to maintain or increase
our current level of revenue, our profitability and business prospects.
We have been expanding our logistics network. If we are not able to manage such expansion successfully, our
growth potential, results of operations, and business could be materially and adversely affected.
Our logistics network, currently consisting of regional logistics hubs located in Zhaoqing of Guangdong Province in Southern China, Kunshan of
Jiangsu Province in Eastern China, Jianyang of Sichuan Province in Southwestern China, Tianjin in Northern China, Ezhou of Hubei Province in Central China, and Shenyang of Liaoning Province in
Northeastern China, as well as local distribution centers, is essential to our business growth. We intend to continue using our available cash and financing options to expand our logistics network to
accommodate increasing volumes of customer orders, enhance customer services, provide better coverage across China, invest in IT system and mobile channel, and other general purposes. However, we
cannot assure you that our plans to operate our own logistics centers and delivery operations will be successful. The expansion of our logistics network will put pressure on our managerial, financial,
operational, and other resources. We cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plan. Nor can we assure you
that we will be able to recruit qualified managerial and operational personnel to support our expansion plan. If we are unable to secure new facilities for the expansion of our logistics operations,
or to effectively control expansion-related expenses, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
Uncertainties regarding the growth and sustained profitability of the online retail market in China, and in
particular, the development of the online flash sales business model, could adversely affect our business, prospects, financial condition, and results of operations.
Substantially all of our total net revenue is generated through an online retail business model, and in particular, an online flash sales
business model. While online retail businesses have existed in China since the 1990s, only a limited number of these companies became profitable. The flash sales business model originated in Europe in
2001 and then spread to the United States and later to China. The long term viability and prospects of the online retail industry, particularly companies utilizing an online flash sales business
model, and B2C e-commerce business generally in China, remain subject to significant uncertainty. Our business, financial condition, and results of operations will depend on numerous factors affecting
the development of the online flash sales business and, more broadly, the online retail and e-commerce businesses in China, which may be beyond our control. These factors include the general economic
conditions in China, the growth of Internet usage, the confidence in and level of e-commerce and online spending, the emergence of alternative retail channels or business models, the success of
marketing and brand building efforts by e-commerce and flash sales companies, and the
11
Table of Contents
development
of payment, logistics, after-sale, and other services associated with e-commerce and flash sales.
The proper functioning of our IT systems is essential to our business. Any failure to maintain the
satisfactory performance, security, and integrity of our Vipshop Online Platform and systems will materially and adversely affect our business, reputation, financial condition, and results of
operations.
Our IT systems mainly include technology infrastructure supporting the user interface of our Vipshop Online Platform, as well as our customer
service, enterprise resource planning, warehouse and logistics management, product information management, business intelligence, and administration management systems. The satisfactory performance,
reliability, and availability of our IT systems are critical to our success, our ability to attract and retain customers, and our ability to maintain a satisfactory customer experience and level of
customer service.
Our
servers may be vulnerable to computer viruses, user traffic boom that exceeds the capacity of our servers, physical or electronic break-ins, and other disruptions, which could lead
to system interruptions, website slowdown or unavailability, delays in transaction processing, loss of data, or the inability to accept and fulfill customer orders. We can provide no assurance that we
will not experience such unexpected interruptions. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any third-party intrusions,
viruses or hacker attacks, information or data theft, or other similar activities. Any such future occurrences could damage our reputation and result in a material decrease in our revenue. We did not
have material system failure in 2018.
Additionally,
we intend to continue using our available cash and financing options to upgrade and improve our IT systems and cybersecurity to support our business growth. For the year
ended December 31, 2018, we spent RMB244.5 million (US$35.6 million) to maintain our IT and cybersecurity protections. However, we cannot assure you that we will be successful in
executing these system upgrades and improvement strategies. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully
integrated with the existing systems on a timely basis, or at all. If our existing or future IT systems do not function properly, it could cause system disruptions and slow response times, affecting
data transmission, which in turn, could materially and adversely affect our business, financial condition and results of operations.
If we fail to successfully adopt new technologies or adapt our Vipshop Online Platform and systems to
changing customer needs or emerging industry standards, our business, financial condition, and results of operations may be materially and adversely affected.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality, and features of our Vipshop Online Platform.
The online retail industry is characterized by rapid technological evolution, changes in end user requirements and preferences, frequent introductions of new products and services embodying new
technologies, and the emergence of new industry standards and practices that could render our existing proprietary technologies and systems obsolete. Our success will depend, in part, on our ability
to identify, develop, acquire, or license leading technologies useful in our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated
and varied needs of our existing and prospective customers, and respond to technological advances and emerging industry standards and practices, such as mobile Internet, on a cost-effective and timely
basis. The development of mobile applications, websites, and other proprietary technology entails significant technical and business risks. We can provide no assurance that we will be able to use new
technologies effectively or adapt our platform, proprietary technologies, and transaction-processing systems to meet customer requirements or emerging industry standards. If we are unable to
accurately project the need for such system expansion or upgrade or to adapt our systems in a cost-effective and timely manner in response to changing market conditions or customer
12
Table of Contents
requirements,
whether for technical, legal, financial, or other reasons, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
We have limited experience in operating an Internet finance business, and increasing exposure to credit risks
or significant deterioration in the asset quality of our Internet finance business may materially and adversely affect our business, financial condition, and results of operation.
Over the past few years, we have participated in the emerging Internet finance sector in China. We have launched consumer financing and supplier
financing services. Operating in this highly-regulated and fast-changing business sector involves new risks and challenges. Our lack of familiarity with the Internet finance sector may make it
difficult for us to anticipate the demands and preferences in the market and develop financial service products that meet our customers' requirements and preferences. We may not be able to
successfully identify new product and service opportunities or develop and introduce these opportunities to our customers in a timely and cost-effective manner, or our customers may be disappointed in
quality of our services.
The
development of our Internet finance business is capital intensive. For certain financial service products, we have committed and will continue to commit our own capital, which had
and may continue to have a negative impact on our cash flow. To supplement such capital requirement, one of our subsidiaries operating our Internet finance business offered asset-backed securities, or
ABSs, listed on Shanghai Stock Exchange in China, and also offered asset-backed notes, or ABNs, listed on Shanghai Clearing House in China. As of December 31, 2018, the aggregate carrying
amount of these ABSs and ABNs was RMB969.0 million (US$140.9 million). Although we plan to continue to use any future ABS and ABN offerings in China to alleviate the dependence of our
Internet finance business on our own cash flow, we may require additional cash resources due to further developments or changing business conditions and there can be no assurance that we will continue
to complete additional ABS or ABN offerings in China or obtain access to other financing options in appropriate amounts or on acceptable terms, or at all.
Additionally,
our accounts receivable increased over 2018 due to the credit we extended for our financial service products, in turn increasing our exposure to bad debts. Although default
rate remained low since we launched these services, the risk of nonpayment of loans is inherent in the financing business and we are subject to credit risk resulting from defaults in payment for loans
by our customers and suppliers. Credit risks may be exacerbated in microcredit and consumer financing because there will be relatively limited information available about the credit histories of
consumers. We cannot assure you that our monitoring of credit risk issues and our efforts to mitigate credit risks through our credit assessment and risk management policies are or will be sufficient
to result in lower delinquencies. Furthermore, our ability to manage the quality of our loan portfolio and the associated credit risks will have significant impact on the results of operations of our
Internet finance business. Deterioration in the overall quality of loan portfolio and the increasing exposure to credit risks may occur due to a variety of reasons, including factors beyond our
control, such as a slowdown in the growth of the global or Chinese economies or a liquidity or credit crisis in the global or Chinese finance sectors, which may materially and adversely affect our
businesses, operations or liquidity of our suppliers and consumers or their ability to repay or roll over their debt. Any significant deterioration in the asset quality of our Internet finance
business and significant increase in associated credit risks may materially and adversely affect our business, financial condition and results of operations.
Our wide variety of accepted payment methods subject us to third-party payment processing-related risks.
We accept payments using a variety of methods, including our Vipshop Payment service, cash on delivery, and payment through third-party online
payment services, such as Tenpay. For certain payment methods, including credit and debit cards processed via our Vipshop Payment service, we pay interchange and other fees, which may increase over
time and raise our operating costs and lower our
13
Table of Contents
profit
margins. We may also be subject to fraud, customer data leakage, and other illegal activities in connection with the various payment methods we offer, including online payment and cash on
delivery options. Although we depend less and less on third parties to provide payment processing services due to our customers' increasing use of Vipshop Payment, we continue to offer the various
payment methods for the convenience and flexibility of our customers. For example, although we offer the cash on delivery payment option primarily on our in-house last mile capabilities, we still
engage some third-party delivery companies for our cash on delivery payment option. If the service quality of these third-party delivery companies deteriorates, certain customers who prefer their
services may become dissatisfied with us in general. We may also be subject to various rules, regulations, and requirements, regulatory or otherwise, governing electronic fund transfers and online
payment, which could change or be reinterpreted to make it difficult or impossible for us to comply with. If we fail to comply with these rules or requirements, we may be subject to fines and higher
transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic fund transfers, or facilitate other types of online payments, and our business,
financial condition, and results of operations could be materially and adversely affected.
The security of operations of our own and other third-party online payment services may materially and
adversely affect our business.
Currently, we accept payments through our own Vipshop Payment service and other third-party online payment services, such as Tenpay. In 2018,
approximately 93% of our total orders were collected through online payment services, and our Vipshop Payment service was used to process a significant portion of our total orders. We expect that an
increasing amount of our sales will be conducted over the Internet as a result of the growing use of online payment services. In all these online payment transactions, secured transmission of
confidential information such as customers' credit card numbers and personal information over public networks is essential to maintain consumer confidence.
We
do not have control over the security measures of our third-party online payment vendors, and security breaches of the online payment services that we use could expose us to
litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment
services that we use. If a well-publicized Internet or mobile network security breach were to occur, users concerned about the security of their online financial transactions might become reluctant to
purchase on our Vipshop Online Platform even if the publicized breach did not involve the online payment services or other methods used by us. In addition, there may be billing software errors that
would damage customer confidence in these online payment services. If any of the above with respect to any third-party online payment vendors were to occur and damage our reputation or the perceived
security of the online payment services we use, we might lose customers and customers might be discouraged from purchasing on our platform, which may adversely affect our business.
Our growth and profitability depend on the level of consumer confidence and spending in China.
Our business, financial condition, and results of operations are sensitive to changes in overall economic and political conditions that affect
consumer spending in China. The retail industry, including the online retail sector in general and the flash sales business in particular, is highly sensitive to general economic changes. Online
purchases tend to decline significantly during recessionary periods and substantially all of our total net revenue is derived from online retail sales in China. Many factors outside of our control,
including inflation and deflation, interest rates, volatility of equity and debt securities markets, taxation rates, employment and other government policies can adversely affect consumer confidence
and spending. The domestic and international political environments, including military conflicts and political turmoil or social instability, may also adversely affect consumer
14
Table of Contents
confidence
and reduce spending, which could in turn materially and adversely affect our business, financial condition, and results of operations.
We may incur liability for counterfeit or unauthorized products sold or information posted on our platforms.
We have been and may continue to be subject to allegations that some of the items sold on our platforms are counterfeit or unauthorized from the
relevant brand owners. As of December 31, 2016, 2017, and 2018, we worked with over 10,000, 13,000, and 17,000 brand partners, respectively, via our Vipshop Online Platform. We cannot assure
you that measures we have adopted in the course of sourcing such products to ensure their authenticity or authorization and to minimize potential liability of infringing third parties' rights will be
effective. Any inadvertent sales of counterfeit, non-authentic or unauthorized items, or public perception of such incidents, could harm our reputation, impair our ability to attract and retain
customers, and cause us to incur additional costs to respond to any incident of this nature. If counterfeit products, unauthorized products, or products, images, logos or any other information that
otherwise infringe third parties' rights are sold or posted on our platform, we could also face infringement claims. We have occasionally received claim letters alleging our infringement of
third-party rights. In December 2015, we received various consumer complaints about non-authentic Maotai liquor purchased during our annual promotion and confirmed that one of our vendors supplied
non-authentic Maotai liquor sold on our platform. We discontinued cooperation with the vendor and voluntarily paid over RMB40 million to compensate the customers who had purchased such
non-authentic Maotai liquor. We cannot assure you that in the future, we will not be required to allocate significant resources and incur material expenses regarding such claims. We may need to pay
substantial amount of compensation to settle similar claims without involving in any legal proceedings, and could be required to pay substantial damages or to refrain from the sale of relevant
products in the event that a claimant prevails in any proceedings against us. Forms of potential liabilities under PRC law if we negligently participated or assisted in infringing activities
associated with counterfeit goods include injunctions to cease infringing activities, rectification, compensation, and administrative penalties. Moreover, our reputation could be negatively affected
due to the negative publicity of any infringement claim against us. Any third-party claims may materially and adversely affect our business, prospects, financial condition, and results of operations.
Failure to protect confidential information of our customers and our network against security breaches could
damage our reputation and brand and substantially harm our business and results of operations.
A significant challenge to e-commerce and communications is the secure transmission of confidential information over public networks. Currently,
almost all product orders and, in some cases, payments for products we offer, are made through our Vipshop Online Platform and systems. In such transactions, maintaining security on our platform and
systems for the transmission of confidential or private information, such as customers' personal information, payment-related information, and transaction information, is essential to maintain
consumer confidence in our platform and systems.
We
have adopted rigorous security policies and measures, including use of encryption technology, to protect our proprietary data and customer information. However, advances in technology
and hacker skills, new discoveries in the field of cryptography, or other events or developments could result in a compromise or breach of the technology that we use to protect confidential
information. We may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private
information we hold as a result of our customers' visits on our platform. Such individuals or entities obtaining our customers' confidential or private information may further engage in various other
illegal activities using such information. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through
which some of our customers may elect to make payment for purchases on our platform. Furthermore, our third-party delivery companies may also violate their confidentiality obligations and disclose or
use information about our customers illegally. Although we do not believe that we will be held responsible for any such illegal activities, any negative publicity on our platform's safety or privacy
protection mechanism and policy could materially and adversely affect our public image and reputation.
15
Table of Contents
In addition, the methods used by hackers and others to engage in illegal online activities are increasingly sophisticated and constantly evolving. Significant
capital, managerial, and other resources may be required to ensure and enhance information security or to address the issues caused by such security failure. Any perception by the public that
e-commerce and transactions, or the privacy of user information, are becoming increasingly unsafe or vulnerable to attack could inhibit the growth of online retail and other online services generally,
which may also in turn reduce the number of orders we receive and materially and adversely affect our business, financial condition and results of operations.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our
business and competitive position.
We regard our trademarks, service marks, domain names, trade secrets, proprietary technologies, and other intellectual property as critical to
our business. We rely on a combination of intellectual property laws and contractual arrangements, including confidentiality agreements and license agreements with our employees, brand partners and
others, to protect our
proprietary rights. As of December 31, 2018, we owned 1,401 registered trademarks, 149 copyrights (including copyrights with respect to 115 software products developed by us relating to various
aspects of our operations), and 301 registered domain names that are material to our business, including vip.com and vipshop.com. See "Item 4.B. Information on the CompanyBusiness
OverviewIntellectual Property."
It
is often difficult to register, maintain, and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and
may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality agreements and license agreements may be breached by counterparties, and there may not be
adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Policing
any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that
we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no
assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in
protecting or enforcing our intellectual property rights could materially and adversely affect our business, financial condition and results of operations.
Future strategic alliances or acquisitions may materially and adversely affect our business, financial
condition, and results of operations.
We may pursue selected strategic alliances and potential strategic acquisitions that are complementary to our business and operations, including
opportunities that can help us promote our brand to new customers and brands, expand our product and service offerings and improve our technology infrastructure. We may also pursue strategic
initiatives with brands and platforms in international markets.
Strategic
alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance or default by
counterparties, and increasing expenses in establishing these new alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor the actions
of our partners. To the extent a strategic partner suffers any negative publicity as a result of its business operations, our reputation may be negatively affected by virtue of our association with
such party.
In
addition, although we have no current acquisition plans, we may consider entering into strategic acquisition of other companies, businesses, assets or technologies that are
complementary to our
16
Table of Contents
business
and operations as part of our growth strategy. For example, in 2014, we acquired, through a series of transactions, a majority stake in Lefeng.com Limited, or Lefeng, an online retail website
specialized in selling cosmetics and fashion products in China, from its parent Ovation Entertainment Limited, or Ovation, to strengthen our cosmetics and fashion product expertise. In February 2015,
January 2016, and May 2016, we acquired an aggregate of 97.0% of equity interest in Feiyuan Logistics Co., Ltd., or Feiyuan, for a total consideration of approximately
RMB255.7 million, to boost our warehousing, transportation, and distribution capabilities in southeast China. In September 2016, we acquired 100% of equity interest in Zhejiang Ebatong
Technology Co., Ltd., which is a third-party payment service provider, for a total consideration of RMB428.3 million. Zhejiang Ebatong Technology Co., Ltd. changed
its name to Zhejiang Vipshop Payment Co., Ltd. following the completion of acquisition, and developed our Internet payment channel. In December 2017, subsidiaries of Tencent Holdings
Limited, or Tencent, and JD.com, Inc., or JD.com, invested in us with an aggregate investment amount of US$862.3 million in cash. A Tencent subsidiary and JD.com also entered into
strategic cooperation framework agreement and business cooperation framework agreement with us, respectively. Under these agreements, Tencent granted us an access interface on Weixin Wallet, and
JD.com granted us access interfaces on JD.com's mobile application and JD.com's Weixin Discovery shopping application, to utilize the traffic from such platforms. In March 2018, we agreed to invest up
to US$250 million in a private equity fund focusing on technology-enabled consumer, retail, and related business.
Strategic
acquisitions and subsequent integrations of newly acquired businesses would require significant managerial and financial resources and could result in a diversion of resources
from our existing business, which in turn could adversely affect our growth and business operations. The costs of identifying and consummating acquisitions may be significant. We may also incur
significant expenses in obtaining approvals from shareholders and relevant government authorities in China and elsewhere in the world. Our failure to consummate acquisitions could also require us to
pay certain pre-negotiated fees and expenses. Acquired businesses or assets may not generate expected financial results and may have historically incurred and continue to incur losses. In addition,
acquisitions could also require the use of substantial amount of cash, issuance of equity or debt securities, incurrence of significant goodwill and related impairment charges, amortization expenses
for intangible assets and exposure to potential unknown liabilities of the acquired businesses or assets, including liabilities as the result of historical actions of the acquired businesses. The cost
and duration of integrating newly acquired businesses could also materially exceed our expectations. Any such negative developments could materially and adversely affect our business, financial
condition, and results of operations.
Any interruption in the operation of our regional logistics hubs or data centers for an extended period may
materially and adversely affect our business.
Our ability to process and fulfill orders accurately and to provide high-quality customer service depends on the efficient and uninterrupted
operation of our current regional logistics hubs and our self-owned servers located in data centers operated by major PRC Internet datacenter
providers. Our regional logistics hubs and data centers may be vulnerable to damage caused by fire, flood, power loss, telecommunications failure, break-ins, earthquake, human errors, and other
events. We have developed a disaster tolerant system which includes real-time data mirroring, daily off-line data back-up and redundancy and load balancing. However, we do not carry business
interruption insurance. The occurrence of any of the foregoing risks could materially and adversely affect our business, prospects, financial condition, and results of operations.
We may be subject to product liability claims if people or properties are harmed by the products we sell.
We sell products manufactured by third parties, some of which may be defectively designed or manufactured. As a result, sales of such products
could expose us to product liability claims relating to
17
Table of Contents
personal
injury or property damage and may require product recalls or other actions. Third parties subject to such injury or damage may bring claims or legal proceedings against us as a product
retailer or as a marketplace service provider. Currently, we maintain third-party liability insurance and product liability insurance in relation to products we sell for any product liability claims
based on property damage or personal injury. We also maintain public liability insurance. However, any material product liability claim beyond our coverage or litigation could materially and adversely
affect our business, financial condition, and results of operations. Even unsuccessful claims could result in the use of funds and managerial efforts in defending them and could negatively impact on
our reputation.
We have limited insurance coverage, which could expose us to significant costs and business disruption.
Risks associated with our business and operations include, but are not limited to, damage to properties due to fire, explosions and other
accidents, business interruption due to power shortages or network failure, product liability claims, transportation damages, losses of key personnel, and risks posed by natural disasters including
storms, floods, and earthquakes, any of which may result in significant costs or business disruption. We have maintained insurance coverage we consider necessary and sufficient for our business, and
customary for the industry in which we operate, including all risk property insurance covering our equipment, facilities, inventories, and other properties and public liability insurance covering
certain premises liability. However, insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance. We cannot assure you
that our insurance coverage is sufficient to prevent us from any loss to
be sustained or that we will be able to successfully claim our losses under our current insurance policies on a timely basis, or at all. If we incur any loss that is not covered by our insurance
policies, or the compensated amount is significantly less than our actual loss, our business, financial condition, and results of operations could be materially and adversely affected.
Our business depends on the continuing efforts of our management. If we lose their services, our business may
be severely disrupted.
Our business operations depend on the continuing efforts of our management, particularly the executive officers named in "Item 6.A.
Directors, Senior Management and EmployeesDirectors and Senior Management" in this annual report. If one or more of our management were unable or unwilling to continue their employment
with us, we might not be able to replace them in a timely manner, or at all. We may incur additional expenses to recruit and retain qualified replacements. Our business may be severely disrupted and
our financial condition and results of operations may be materially and adversely affected. In addition, our management may join a competitor or form a competing company. We can provide no
assurance that we will be able to successfully enforce our contractual rights included in the employment agreements we have entered into with our management team, particularly in China, where all
these individuals reside. As a result, our business may be negatively affected due to the loss of one or more members of our management.
If we are unable to attract, train, and retain qualified personnel, our business may be materially and
adversely affected.
We intend to hire and retain additional qualified employees to support our business operations and planned expansion. Our future success
depends, to a significant extent, on our ability to attract, train, and retain qualified personnel, particularly management, technical, marketing, and other operational personnel with expertise in the
online retail industry. Our experienced mid-level managers are instrumental in implementing our business strategies, executing our business plans and supporting our business operations and growth.
Since our industry is characterized by high demand and intense competition for talent, we cannot assure you that we will be able to attract or retain qualified staff or other highly skilled employees
that we will need to achieve our strategic objectives. In addition, our
18
Table of Contents
ability
to train and integrate new employees into our operations may also be limited and may not meet the demand for our business growth on a timely fashion, or at all. If we are unable to attract,
train, and retain qualified personnel, our business may be materially and adversely affected.
Failure to renew our current leases or locate desirable alternatives for our facilities could materially and
adversely affect our business.
We lease various properties for offices, logistics centers, offline stores, data centers, and customer service centers. We may not be able to
successfully extend or renew such leases and may therefore be forced to relocate our affected operations. This could disrupt our operations and result in significant relocation expenses, which could
materially and adversely affect our business, financial condition, and results of operations. In addition, we compete with other businesses for premises at certain locations or of desirable sizes. As
a result, even though we could extend or renew our leases, rental payments may significantly increase as a result of the high demand for the leased properties. In addition, we may not be able to
locate desirable alternative sites for our facilities as our business continues to grow and such failure in relocating our affected operations could affect our business and operations.
Our use of leased properties could be challenged by third parties, which may cause interruptions to our
business operations.
Some of our landlords do not have proper ownership certificates for the properties we lease, or have other restrictions on their ownership of
the properties. In particular, we have eight offices in Guangzhou as of the date of this report. Some of them are located on land allocated by local government, and the landlord has not obtained the
relevant government approvals for leasing the premises. In addition, some of our leased properties were mortgaged by the owners to third parties before we entered into lease agreements with them, and
if such owners fail to perform their obligations secured by such properties and the mortgage is enforced by the third parties, we may be unable to continue to lease such properties and may be forced
to relocate. Furthermore, a few of our leasehold interests in leased properties have not been registered with relevant PRC government authorities as required by PRC laws. According to PRC laws, rules
and regulations, failure to register a lease agreement will not affect its effectiveness between the landlord and the tenant. However, the landlord and the tenant may be subject to administrative
fines of up to RMB10,000 each for such failure to register the lease. As of the date of this annual report, we are not aware of any claims or actions being contemplated or initiated by government
authorities or any third parties with respect to our leasehold interests in or use of such properties. Currently, we are constructing our new office building in Guangzhou and plan to move into the new
office building upon its anticipated completion
in 2020. However, we cannot assure you that our use of the leased properties before we move into our new office building will not be challenged by the government authorities or third parties alleging
ownership of such properties. In the event that our use of properties is successfully challenged, we may be forced to relocate the affected operations. We can provide no assurance that we will be able
to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties' challenges on our use of
such properties. As a result, our business, financial condition, and results of operations may be materially and adversely affected.
If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately
report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or SEC, as required under
Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring a public company to include a report of management on the effectiveness of such company's internal control over
financial reporting in its annual report on Form 20-F. In addition,
19
Table of Contents
an
independent registered public accounting firm for a public company must issue an attestation report on the effectiveness of our internal control over financial reporting for the year ended
December 31, 2018, as included in this annual report. As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by SEC, our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2018 using criteria established in Internal ControlIntegrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of
December 31, 2018. In addition, our independent registered public accounting firm attested the effectiveness of our internal control and reported that our internal control over financial
reporting was effective as of December 31, 2018. If we fail to achieve and maintain an effective internal control environment for our financial reporting, we may not be able to conclude on an
ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. We may therefore need to incur additional costs and use additional
management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and other requirements going forward. Moreover, effective internal control over
financial reporting is necessary for us to produce reliable financial reports. As a result, any failure to maintain effective internal control over financial reporting could result in the loss of
investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs. Additionally, ineffective internal control over financial
reporting could expose us to increased risk of fraud or misuse of corporate assets and subject
us to potential delisting from the stock exchange on which we list, regulatory investigations, and civil or criminal sanctions.
Our business, financial condition, and results of operations, as well as our ability to obtain financing, may
be adversely affected by the downturn in the global or Chinese economy.
The global macroeconomic environment is facing challenges. The Chinese economy has shown slower growth since 2012 compared to the previous
decade and the trend may continue. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities
of some of the world's leading economies, including the United States and China. There have been concerns on the relationship among China and other Asian countries, which may result in or intensify
potential conflicts in relation to territorial disputes. There have also been concerns on the relationship between China and the United States, including those resulting from the ongoing trade dispute
between the two countries. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in market volatility. It is unclear whether these
challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.
Economic
conditions in China are sensitive to global economic conditions. Our business and operations are primarily based in China and substantially all of our revenues are derived from
our operations in China. Accordingly, our financial results have been, and are expected to continue to be, affected by the economy and online retail industry in China. While the economy in China has
grown significantly over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing. Recent changes in U.S. trade
policies, including new tariffs on imports from China generally, and reactions by a number of markets including China in response to these U.S. actions, may have a material adverse effect on global
economic conditions and the stability of global financial markets, and they may significantly reduce global trade and, in particular, trade between China and the United States. The online retail
industry is particularly sensitive to economic downturns, and the macroeconomic environment in China may affect our business and prospects. A prolonged slowdown in the global or Chinese economy may
lead to a reduced level of online purchasing activities, which could materially and adversely affect our business, financial condition, and results of operations.
20
Table of Contents
Moreover,
a slowdown in the global or Chinese economy or the recurrence of any financial disruptions may materially and adversely impact financings available to us. The weakness in the
economy could erode investors' confidence, which constitutes the basis of the credit markets. There is considerable
uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world's leading economies,
including China. The recent financial turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial
institutions on commercially reasonable terms, or at all. Any prolonged slowdown in the global or Chinese economy may negatively impact our business, results of operations, and financial condition,
and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
Our results of operations are subject to quarterly fluctuations due to a number of factors that could
adversely affect our business and the trading price of our ADSs.
We experience seasonality in our business, reflecting a combination of seasonal fluctuations in Internet usage and traditional retail
seasonality patterns. For example, we generally experience less user traffic and purchase orders during national holidays in China, particularly during the Chinese New Year holiday season in the first
quarter of each year. Furthermore, sales in the traditional retail industry are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters. Due to the
foregoing factors, our financial condition and results of operations for future quarters may continue to fluctuate and our historical quarterly results may not be comparable to future quarters. As a
result, the trading price of our ADSs may fluctuate from time to time due to seasonality.
Risks Relating to Our Corporate Structure and Restrictions on Our Industry
Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC
laws and regulations relating to online commerce and provision of Internet content in China. If the PRC government finds that the structure we have adopted for our business operations does not comply
with PRC laws and regulations, we could be subject to severe penalties, including shut-down of our Vipshop Online Platform.
Foreign ownership of Internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government
regulates Internet access, provision of online information, and operation of online commerce through strict business licensing requirements and other government regulations. These laws and regulations
also include limitations on foreign
ownership in PRC companies that provide value-added telecommunication services, including commercial Internet content services and online data processing and transaction processing (operating
e-commerce) services. Specifically, foreign investors are not allowed to own more than 50% of the equity interests in any entity operating value-added telecommunication services (except for operating
e-commerce), including commercial Internet content provision business. The PRC Ministry of Industry and Information Technology, or MIIT, issued the Circular on Strengthening the Administration of
Foreign Investment in and Operation of Value-added Telecommunications Business, or the MIIT Circular, in July 2006. The MIIT Circular reiterated the regulations on foreign investment in
telecommunications businesses, which require foreign investors to set up foreign-invested enterprises, or FIEs, and obtain value-added telecommunication business operating licenses, or VATS Licenses,
to operate any value-added telecommunications business in China. Because commercial Internet content provision is a value-added telecommunication business, FIEs that plan to engage in Internet content
provision business must obtain VATS Licenses for Internet content provision business, or the ICP Licenses. Operators of domestic call centers are required to obtain VATS Licenses for operating
domestic call center services. Meanwhile, the operators of online platforms that provide access to third-party merchants for sales of their products are also required to obtain VATS Licenses for
online data processing and transaction
21
Table of Contents
processing
(operating e-commerce) services, or the EDI Licenses. Under the MIIT Circular, a PRC domestic company that holds a VATS License, including the ICP License or EDI License, is prohibited from
leasing, transferring, or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites, or facilities, to foreign investors that
operate value-added telecommunications business illegally in China.
We
are a Cayman Islands company, and our PRC subsidiary, namely Vipshop (China) Co., Ltd., or Vipshop China, is a wholly foreign-owned enterprise, or WFOE, under PRC law.
To comply with PRC laws and regulations, we conduct our operations in China, including the operations of our Vipshop Online Platform, through contractual arrangements entered into by our respective
consolidated affiliated entities, namely, Guangzhou Vipshop E-Commerce Co., Ltd., or Vipshop E-Commerce, Guangzhou Vipshop Information Technology Co., Ltd., or Vipshop
Information, Pin Jun Tong Enterprise Management & Consulting Co., Ltd., or Pin Jun Tong, and Tianjin Pinjian E-Commerce Co., Ltd. (formerly known as "Shanghai
Pinjian E-Commerce Co., Ltd."), or Tianjin Pinjian. Because all shareholders of our consolidated affiliated entities are PRC citizens, our consolidated affiliated entities are considered
PRC domestic companies under PRC laws. As of the date of this annual report, Vipshop E-Commerce held an EDI License valid until December 2022, which is required for providing platform access to
third-party merchants for their sales of products to further develop our business; Vipshop Information held a VATS License valid until July 2020 for domestic call center services. For a detailed
description of these licenses and permits, see "Item 4.B. Information on the CompanyBusiness OverviewRegulation." Each of our consolidated affiliated entities is a PRC
limited liability company. As a result of these contractual arrangements, we exert control over our consolidated affiliated entities and consolidate their operating results in our financial statements
under U.S. GAAP. For a detailed description of these contractual arrangements, see "Item 4.C. Information on the CompanyOrganizational Structure."
In
the opinion of our PRC counsel, Han Kun Law Offices, our current ownership structure, the ownership structure of our PRC subsidiaries and our consolidated affiliated entities, each as
described in this annual report, are in compliance with existing PRC laws, rules, and regulations, and the contractual arrangements among (a) Vipshop China, (b) Vipshop E-Commerce, and
(c) shareholders of Vipshop E-Commerce as one set and the other three sets concerning our insignificant consolidated affiliated entities, each as described in this annual report, are not in
violation of any existing PRC laws, rules, and regulations. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations.
See also "Item 3.D. Key InformationRisk FactorsRisks Relating to Our Corporate Structure and Restrictions on Our IndustryOur business may be significantly
affected by the newly enacted PRC Foreign Investment Law." Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to or otherwise different from
that of our PRC counsel.
If
our ownership structure, contractual arrangements, and businesses of our company, our PRC subsidiaries, or our consolidated affiliated entities are found to be in violation of any
existing or future PRC laws or regulations, the relevant government authorities, including CSRC, would have broad discretion in dealing with such violation, including levying fines, confiscating our
income or the income of our PRC subsidiaries or our consolidated affiliated entities, revoking the business licenses or operating licenses of our PRC subsidiaries or our consolidated affiliated
entities, shutting down our servers or blocking our platform, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive
restructuring, restricting or prohibiting our use of proceeds from any securities offerings outside China to finance our business and operations in China, and taking other regulatory or enforcement
actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and
adversely affect our business, financial condition and results of operations.
22
Table of Contents
We rely on contractual arrangements with our consolidated affiliated entities and their respective
shareholders for the operation of our business, which may not be as effective as direct ownership. If our consolidated affiliated entities and their respective shareholders fail to perform their
obligations under these contractual arrangements, we may have to resort to arbitration or litigation to enforce our rights, which may be time-consuming, unpredictable, expensive, and damaging to our
operations and reputation.
Because of PRC restrictions on foreign ownership of Internet-based businesses in China, we depend on contractual arrangements with our
consolidated affiliated entities, in which we have no ownership interest, through our PRC subsidiaries to partially conduct our operations. These contractual arrangements, governed by PRC laws, are
intended to provide us with effective control over
our consolidated affiliated entities and allow us to obtain economic benefits from them. Although we have been advised by our PRC counsel, Han Kun Law Offices, that these contractual arrangements are
valid, binding, and enforceable under current PRC laws, these contractual arrangements may not be as effective in providing control as direct ownership. For example, our consolidated affiliated
entities and their respective shareholders could breach their contractual arrangements with us by, among other things, failing to operate our online retail business in an acceptable manner or taking
other actions that are detrimental to our interests. If we held controlling equity interest in our consolidated affiliated entities, we would be able to exercise our shareholder rights to effect
changes to its board of directors, which in turn could implement changes at the management and operational level of the consolidated affiliated entities. However, under the current contractual
arrangements, if our consolidated affiliated entities or their respective shareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs to
enforce such arrangements, and rely on legal remedies, including arbitration and litigation, under PRC law, which may not be sufficient or effective. In particular, the contractual arrangements
relating to Vipshop E-Commerce and the other three consolidated affiliated entities, namely Vipshop Information, Pin Jun Tong, and Tianjin Pinjian, provide that any dispute arising from these
arrangements will be resolved by arbitration, and any ruling of such arbitration will be final and binding. The legal framework and system in China, particularly those relating to arbitration
proceedings, is not as developed as other jurisdictions such as the United States. As a result, significant uncertainties relating to the enforcement of legal rights through arbitration, litigation,
and other legal proceedings remain in China, which could limit our ability to enforce these contractual arrangements and exert effective control over our consolidated affiliated entities. If we are
unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business and operations could be
severely disrupted, which could materially and adversely affect our results of operations and damage our reputation, and we may not be able to consolidate the financial results of our consolidated
affiliated entities into our consolidated financial statements in accordance with U.S. GAAP. See "Item 3.D. Key InformationRisk FactorsRisks Relating to Doing
Business in ChinaUncertainties with respect to the PRC legal system could adversely affect us."
The shareholders of our significant consolidated affiliated entity have potential conflict of interest with
us, which may adversely affect our business.
Each shareholder of Vipshop E-Commerce is a shareholder and director of our company. In addition, these shareholders' equity interest in our
company will be further diluted as a result of any future offering of equity securities. As a result, conflict of interest may arise as a result of the dual shareholding and governance structure.
Each
of these shareholders of Vipshop E-Commerce is also a director of our company, and has a duty of care and a duty of loyalty to our company and to our shareholders as a whole under
Cayman Islands law. Under the contractual arrangements with Vipshop E-Commerce and its shareholders, (i) we may replace any such individual as a shareholder of Vipshop E-Commerce at our
discretion, and (ii) each of these individuals has executed a power of attorney to appoint Vipshop China or its
23
Table of Contents
designated
third party to vote on their behalf and exercise shareholder rights of Vipshop E-Commerce. However, we cannot assure you that these individuals will act in the best interests of our company
should any conflict of interest arise, or that any conflict of interest will be resolved in our favor. These individuals may breach or cause Vipshop E-Commerce to breach the existing contractual
arrangements. If we cannot resolve any conflict of interest or disputes between us and any of these individuals, we would have to rely on legal proceedings, which may be expensive, time-consuming and
disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.
We may lose the ability to use and enjoy assets held by our consolidated affiliated entities that are
important to the operation of our business if either such entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with our consolidated affiliated entities, some of these entities hold certain assets that are important
to the operation of our business. If any of our consolidated affiliated entities goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be
unable to continue some or all of our business activities, which could adversely affect our business, financial condition and results of operations. If any of our consolidated affiliated entities
undergoes a voluntary or involuntary liquidation proceeding, the unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business,
which could materially and adversely affect our business, financial condition and results of operations.
Our business may be significantly affected by the newly enacted PRC Foreign Investment Law.
On March 15, 2019, the National People's Congress, or NPC, approved the PRC Foreign Investment Law, which will become effective on
January 1, 2020 and replace the trio of existing laws regulating foreign investment in China, namely, the PRC Wholly Foreign-Invested Enterprise Law, the PRC Sino-Foreign Cooperative Joint
Venture Enterprise Law, and the PRC Sino-Foreign Equity Joint Venture Enterprise Law, together with their implementation rules and ancillary regulations. The PRC Foreign Investment Law embodies an
expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal
requirements for both foreign and domestic investments. However, since it is newly enacted, there are substantial uncertainties relating to its interpretation and implementation. For example, the law
adds a catch-all clause to the definition of "foreign investment," which includes investments made by foreign investors in China through other means defined by other laws or administrative regulations
or provisions promulgated by the PRC State Council, without further elaboration on the scope of "other means." It is possible that future legislations promulgated by the
PRC State Council may provide for contractual arrangements as a form of foreign investment and subject to foreign investment restrictions. It is therefore uncertain whether our corporate structure may
be deemed as violating the foreign investment restrictions in China. Furthermore, if future legislations prescribed by the PRC State Council mandate further actions to be taken by companies with
respect to existing contractual arrangement, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. If we fail to take appropriate and timely
measures to comply with any of these or similar regulatory compliance requirements, our current corporate structure, corporate governance, and business operations could be materially and adversely
affected.
Our contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences
to us.
We might be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between our PRC subsidiaries and
our consolidated affiliated entities were not entered into on an arm's length basis and therefore constitute favorable transfer pricing arrangements. If this
24
Table of Contents
occurs,
the PRC tax authorities could request that our consolidated affiliated entities adjust its taxable income, if any, upward for PRC tax purposes. Such a pricing adjustment could adversely affect
us by increasing our consolidated affiliated entities' tax expenses without reducing our tax expenses, which could subject our consolidated affiliated entities to late payment fees and other penalties
for underpayment of taxes. The PRC Enterprise Income Tax Law, or the EIT Law, requires every enterprise in China to submit annual report of enterprise income tax, or EIT, together with a report on
transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are
inconsistent with arm's length principles. As a result, our contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.
If our PRC subsidiaries and consolidated affiliated entities fail to obtain and maintain the requisite
assets, licenses, and approvals required under PRC laws, our business, financial condition, and results of operations may be materially and adversely affected.
Foreign investment and the Internet industry in China are highly regulated by the PRC government, and numerous regulatory authorities of the
central PRC government are empowered
to issue and implement regulations governing various aspects of the Internet industry. See "Item 4.B. Information on the CompanyBusiness OverviewRegulation." Our PRC
subsidiaries and our consolidated affiliated entities are required to obtain and maintain certain assets relevant to their businesses as well as applicable licenses or approvals from different
regulatory authorities in order to provide their current services. These assets and licenses are essential to the operation of our business and are generally subject to annual review by the relevant
government authorities. Furthermore, our PRC subsidiaries and our consolidated affiliated entities may be required to obtain additional licenses. For instance, as we have launched various Internet
finance businesses, we are required to obtain and hold various licenses, permits, or approvals that are required for the provision of those Internet finance services, and we may be required to obtain
additional licenses, permits, or approvals in case we further expand our Internet finance businesses in the future. See "Item 4.B. Information on the CompanyBusiness
OverviewRegulationRegulation on Internet finance." However, we cannot assure you that we will obtain such licenses, permits, or approvals in a timely manner, or at all, due
to complex procedural requirements and policies. If we fail to obtain or maintain any of the required, assets, licenses, or approvals, our continued business operations in the Internet industry may
subject it to various penalties, such as confiscation of illegal net revenue, fines, and the discontinuation or restriction of our operations. Any such disruption in the business operations of our
consolidated affiliated entities will materially and adversely affect our business, financial condition, and results of operations.
Risks Relating to Doing Business in China
Changes in China's economic, political, or social conditions or government policies could materially and
adversely affect our business and operations.
Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations, and
prospects may be influenced to a significant degree by political, economic, and social conditions in China generally and by continued yet slowing economic growth in China as a whole.
The
Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of
foreign exchange, and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition,
the PRC
25
Table of Contents
government
continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China's economic growth
through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of
growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse
effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our
competitive position. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese
economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax
regulations. In addition, in the past the PRC government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause
decreased economic activity in China, which may adversely affect our business and operating results.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our PRC subsidiaries and our consolidated affiliated entities in China. Our operations in China are
governed by PRC laws and regulations. Our significant PRC subsidiary, Vipshop China, is an FIE subject to laws and regulations applicable to foreign investment in China and, in particular, laws
applicable to FIEs. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but
have limited precedential value.
In
1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past
three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently
enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve
uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate
the outcome of administrative
and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights
or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
Furthermore,
the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect.
As a result, we may not be aware of our violation of any of these policies and rules until some time after the violation. In addition, any administrative and court proceedings in China may be
protracted, resulting in substantial costs and diversion of resources and management attention.
26
Table of Contents
We may be adversely affected by the complexity, uncertainties, and changes in PRC regulation of
Internet-related businesses and companies.
The PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable laws and regulations. Issues, risks, and
uncertainties relating to PRC regulation of the Internet-related businesses include, but are not limited to, the following:
-
-
We only have contractual control over our Vipshop Online Platform and other platforms in China. We do not directly own our platform through our
subsidiaries due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including Internet content provision services. This may significantly
disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.
-
-
There are uncertainties relating to the regulation of the Internet-related businesses in China, including evolving requirements for licenses
and permits. Some of our licenses, permits, or operations may be subject to challenge by the PRC government, or we may fail to obtain licenses or permits that may be deemed necessary for our
operations or we may not be able to obtain or renew certain licenses or permits. If we fail to maintain any of these required licenses or permits, we may be subject to various penalties, including
fines and discontinuation of or restriction on our operations. Any such disruption in our business operations may have a material and adverse effect on our results of operations.
-
-
New laws and regulations may be promulgated to regulate Internet-related businesses in China, including online retail businesses and Internet
finance businesses. Additional licenses or permits may be required for or stricter supervision may be imposed on our Internet-related businesses. If our operations do not comply with these new laws
and regulations after they become effective, or if we fail to obtain any licenses or permits required under these new laws and regulations, we could be subject to penalties. We cannot assure you that
we will be able to obtain all licenses and permits required for Internet-related businesses in a timely manner, or at all.
The
interpretation and application of existing PRC laws, regulations, and policies and possible new laws, regulations, or policies relating to the Internet industry have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of Internet businesses in China, including our business. We cannot
assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses required under
any new laws or regulations. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertainty and complexity of China's regulation of
Internet-related businesses.
Regulation and censorship of information disseminated over the Internet in China may adversely affect our
business, and we may be liable for content that is displayed on our platforms.
China has enacted laws and regulations governing Internet access and the distribution of products, services, news, information, audio-video
programs, and other content through the Internet. The PRC government has prohibited the distribution of information through the Internet that it deems to be in violation of PRC laws and regulations.
If any of our Internet content were deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties,
including confiscation of income, fines, suspension of business, and revocation of required licenses, which could materially and adversely affect our business,
27
Table of Contents
financial
condition, and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or users of our platforms or for content we distribute that is
deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from operating our platform in
China.
The audit reports included in this annual report have been prepared by our independent registered public
accounting firm whose work may not be inspected fully by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual report filed with SEC, as auditors of
companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or PCAOB, is required by the laws of the United States to undergo
regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards.
Because
we have substantial operations within China and, without the approval of PRC authorities, PCAOB is currently unable to conduct inspections of the work of our independent
registered public accounting firm as it relates to those operations, our independent registered public accounting firm is not currently inspected fully by PCAOB. On December 7, 2018, SEC and
PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in
China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it
remains unclear what further actions SEC and PCAOB will take to address the problem. This lack of PCAOB inspections in China prevents PCAOB from regularly evaluating our independent registered public
accounting firm's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
Inspections
of other firms that PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as
part of the inspection process to improve future audit quality. The inability of PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of our
independent registered public accounting firm's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose
confidence in our reported financial information and procedures and the quality of our financial statements.
If the settlement reached between SEC and the "Big Four" China-based accounting firms, including the PRC
affiliate of our independent registered public accounting firm, concerning the manner in which SEC may seek access to audit work papers from audits in China of U.S.-listed companies, is not or cannot
be performed in a manner acceptable to authorities in China and the United States, we could be unable to timely file future financial statements in compliance with the requirements of the Securities
Exchange Act of 1934.
Starting in 2011 all PRC audit firms practicing before SEC, including the PRC affiliate of our independent registered public accounting firm and
those of the other "Big Four" networks, were affected by a conflict between U.S. and PRC laws. Specifically, SEC and PCAOB sought to obtain from the PRC accounting firms access to their audit work
papers and related documents from audits in China of the operations of certain U.S.-listed companies. The PRC accounting firms were, however, advised by their legal counsels and directed by the
relevant PRC authorities that under PRC law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to
be channeled through CSRC.
In
December 2012 SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the PRC affiliates of
the "Big Four" accounting firms, including the PRC affiliate of our independent registered public accounting firm.
28
Table of Contents
After
the first hearing in July 2013, an administrative law judge issued an initial decision in January 2014 in favor of SEC and proposed penalties on the PRC accounting firms including a temporary
suspension of their right to practice before SEC, which did not take effect pending review by SEC
Commissioner. On February 6, 2015, before a review by SEC Commissioner had taken place, the PRC accounting firms reached a settlement with SEC whereby the proceedings were stayed. Under the
settlement, SEC accepts that future requests by SEC for the production of documents will normally be made to CSRC. The PRC accounting firms will receive requests matching those under
Section 106 of the Sarbanes-Oxley Act of 2002, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production
via CSRC. If they fail to meet specified criteria, SEC retains authority to impose a variety of additional remedial measures on the PRC accounting firms depending on the nature of the failure.
Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm's performance of certain audit work, commencement of a new proceeding against a firm,
or in extreme cases the resumption of the recently-stayed proceeding against all four firms. SEC also reserves the right to resume those proceedings in circumstances where, notwithstanding the
accounting firms' compliance with the procedures in the settlement agreement, SEC does not receive a production of documents which it considers satisfactory (for example, due to action or inaction by
the PRC authorities).
If
SEC restarts the administrative proceedings, depending upon the final outcome, U.S.-listed companies with major PRC operations may find it difficult or impossible to retain auditors
in respect of their operations in China whose work could contribute to SEC filings, which could result in financial statements being determined to not be in compliance with the requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these accounting firms may cause
investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.
If
the PRC affiliate of our independent registered public accounting firm were denied, even temporarily, the ability to practice before SEC and we were unable to timely find another
registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange
Act. Such a determination could ultimately lead to the delisting of our ordinary shares from NYSE or deregistration from SEC, or both, which would substantially reduce or effectively terminate the
trading of our ADSs in the United States.
Fluctuations in exchange rates may materially and adversely affect your investment.
The value of Renminbi against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in political and
economic conditions in China and by China's foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of
China. The PRC government allowed Renminbi to appreciate by over 20% against U.S. dollars between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange
rate between Renminbi and U.S. dollars remained within a narrow band. As a consequence, Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with U.S.
dollars. Since June 2010, Renminbi has fluctuated against U.S. dollars, at times significantly and unpredictably. On November 30, 2015, the
Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with
effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollars, the Euros, the
Japanese yen and the British pounds. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a
29
Table of Contents
surging
U.S. dollar and persistent capital outflows of China. This depreciation halted in 2017, and the Renminbi appreciated approximately 7% against the U.S. dollars during this one-year period. With
the development of the foreign exchange market and progress toward interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the
exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollars in the future. It is difficult to predict how market
forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and U.S. dollars in the future.
All
of our total net revenues and most of our expenses are denominated in Renminbi. Any significant revaluation of Renminbi may materially and adversely affect our revenues, earnings and
financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of Renminbi against U.S. dollars would reduce the amount of Renminbi we would
receive if we need to convert U.S. dollars into Renminbi. Conversely, a significant depreciation of Renminbi against U.S. dollars may significantly reduce the U.S. dollar equivalent of our earnings,
which in turn could adversely affect the price of our ADSs.
Limited
hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. We did not enter into any hedging transactions to hedge our exposure to the
risks relating to fluctuations in exchange rates. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into
foreign currencies.
Governmental control of currency conversion may limit our ability to utilize our revenue effectively and
affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency
out of China. We receive
substantially all of our revenue in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash
and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade- and
service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural
requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends
to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currencies and remitted out of China to pay
capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and
consolidated affiliated entities to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a
currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system
prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of
our ADSs.
30
Table of Contents
We principally rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund our
cash and financing requirements, and any limitation on the ability of our PRC subsidiaries to make payments to us could materially and adversely affect our ability to conduct our business.
We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our
cash requirements, including for services of any debt we may incur. Our subsidiaries' ability to distribute dividends is based upon their distributable earnings which are mainly derived from the
payments for products and services from our consolidated affiliated entities. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their
accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries and our consolidated affiliated entities is required to
set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entities in China may further set
aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of its board of directors. These reserves are not distributable as cash dividends. If our PRC subsidiaries
incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC
subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be
beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or
prevent us from using the proceeds of our debt and equity offerings to make loans or additional capital contributions to our PRC subsidiaries in China.
Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by
or registration or filing with relevant government authorities in China. According to the relevant PRC regulations on FIEs, capital contributions to our PRC subsidiaries are subject to the approval of
or filing with the PRC Ministry of Commerce, or MOFCOM, or its local branches and registration with other government authorities in China. In addition, (i) any foreign loan procured by our PRC
subsidiaries is required to be registered or filed with SAFE or its local branches, and (ii) each of our PRC subsidiaries may not procure loans which exceed the difference between its
registered capital and its total investment amount and exceed certain limit based on its net assets pursuant to the Notice of the People's Bank of China on Matters Concerning the Macro-Prudential
Management of Fully Covered Cross-Border Financing, or the PBOC Notice No. 9. Any medium- or long-term loan to be provided by us to our consolidated affiliated entities must be approved by the
PRC National Development and Reform Commission, or NDRC, and SAFE or its local branches. We may not obtain these government approvals or complete such registrations on a timely basis, if at all, with
respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration, our ability to use the proceeds of our debt
and equity offerings and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. Furthermore, pursuant
to the PBOC Notice No. 9, after an one-year transition period following its promulgation, SAFE and the People's Bank of China, or PBOC, will determine the cross-border financing regulatory
regime for FIEs after evaluating the overall implementation of PBOC Notice No. 9. As of the date of this annual report, neither SAFE nor PBOC had promulgated and made public any legislations in
this regard. There are uncertainties relating to the future regime to be adopted and any limitation to be imposed on us when providing loans to our PRC subsidiaries. If a more stringent foreign debt
regulatory regime would be imposed, our ability to provide loans to our PRC subsidiaries or our consolidated affiliated entities may be significantly limited, and our business, financial condition,
and results of operations may be adversely affected.
31
Table of Contents
Under the current SAFE rules as of the date of this annual report, we are required to apply Renminbi funds converted from the net proceeds we received from our
public offerings of equity securities within the business scopes of our PRC subsidiaries. Although SAFE launched a nationwide reform of the administration of the settlement of the foreign exchange
capitals of FIEs in 2015 to allow FIEs to settle their foreign exchange capital at their discretion and further relaxed its rules in 2016 to allow FIEs (excluding financial institutions) to go through
foreign exchange settlement formalities for their foreign debts at their discretion, the current SAFE rules continue to prohibit FIEs from using Renminbi converted from their foreign exchange capitals
for expenditure beyond their business scopes as approved by the PRC government authorities. Moreover, the current SAFE rules continue to prohibit FIEs from using Renminbi converted from their
registered capitals to provide loans to persons other than affiliates unless otherwise permitted under its business scope. Any violations of such SAFE rules may result in severe monetary or other
penalties. There can be no assurance that SAFE would further relax its rules on the settlement of foreign exchange capitals of FIEs, and our ability to transfer to and use in China the net proceeds
from our public offerings of equity securities may continue to be significantly limited, which may adversely affect our business, financial condition, and results of operations. See "Item 4.B.
Information on the CompanyBusiness OverviewRegulationRegulations on Foreign Currency Exchange."
Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, established
additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that MOFCOM
be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain
thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the PRC State Council on August 3, 2008 and amended in September 2018, were
triggered. Moreover, the Anti-Monopoly Law, which was promulgated by the Standing Committee of NPC, on August 30, 2007 and became effective on August 1, 2008, requires that transactions
which are deemed concentrations and involve parties with specified turnover thresholds (for example, during the previous fiscal year, (i) the total global turnover of all operators
participating in the transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover
within China of all the operators participating in the concentration exceeded RMB2 billion and at least two of these operators each had a turnover of more than RMB400 million within
China) must be cleared by MOFCOM before they can be completed. We believe that the turnover of acquired business of Lefeng in 2013 is less than RMB400 million within China and have not sought
clearance from MOFCOM, but we cannot assure you that MOFCOM will not take a view contrary to ours. In addition, the Circular of the General Office of the State Council on the Establishment of Security
Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors that became effective on March 3, 2011, and the Rules on Implementation of Security Review System for
the Merger and Acquisition of Domestic Enterprises by Foreign Investors issued by MOFCOM that became effective on September 1, 2011, require acquisitions by foreign investors of PRC companies
engaged in military-related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential
strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any
required approval processes, including obtaining approval or clearance from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our
business or maintain our market share.
32
Table of Contents
PRC regulations relating to the establishment of offshore holding companies by PRC residents may subject our
PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to increase their
registered capital or distribute profits to us, or may otherwise adversely affect us.
On July 4, 2014, SAFE has promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore
Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for
Domestic Residents' Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE
Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with local branches of SAFE in connection with their direct or indirect offshore investment
activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
Under
SAFE Circular 37, PRC residents who make, or have made prior to the implementation of SAFE Circular 37, direct or indirect investments in offshore special purpose vehicles, or
SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed
registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to
update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of
such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making
additional capital contribution into its subsidiary in China. On February 28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on
Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investment and
outbound overseas direct investment, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and
accept registrations under the supervision of SAFE.
All
of our shareholders that we are aware of being subject to the SAFE regulations have completed all necessary registrations with the local SAFE branch or qualified banks as required by
SAFE Circular 37 by the end of 2018. We cannot assure you, however, that all of these individuals may continue to make required filings or updates on a timely manner, or at all. We can provide no
assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct or indirect interest in our company. Any failure or inability by such individuals
to comply with the SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiaries' ability to distribute dividends
to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make
distributions to you could be materially and adversely affected.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations,
and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a
more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our
financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we
33
Table of Contents
cannot
assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign
exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
Failure to comply with PRC regulations regarding the registration requirements for employee stock incentive
plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In December 2006, PBOC promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective
requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, SAFE issued implementing rules
for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen's
participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign
Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of
Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE in March 2007. Under
these rules, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other
procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another
qualified institution selected by such PRC subsidiary, to conduct SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must
also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In
addition, the PRC agent is required to amend SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas
entrusted institution or other material changes.
We
and our PRC resident employees who participate in the employee stock incentive plans, which we adopted in March 2011, March 2012, and July 2014, respectively, have been subject to
these regulations since our company became a publicly-listed company in the United States in March 2012. We have been assisting our PRC option grantees to complete the required registrations and
procedures on a quarterly basis. If we or our PRC option grantees fail to comply with these regulations, we or our PRC option grantees may be subject to fines and other legal or administrative
sanctions. See "Item 4.B. Information on the CompanyBusiness OverviewRegulationRegulations on Stock Incentive Plans."
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by
their non-PRC holding companies.
On February 3, 2015, SAT issued a Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by
Non-Tax Resident Enterprises, or SAT Public Notice 7. In December 2017, Article 13 and Paragraph 2 of Article 8 of SAT Public Notice 7 were abolished. Pursuant to SAT Public
Notice 7, as amended, in the event that a non-PRC resident enterprise indirectly transfers equities and other properties of a PRC resident enterprise to evade its obligation of paying EIT by
implementing arrangements that are not for reasonable commercial purpose, such indirect transfer shall be re-identified and recognized as a direct transfer of equities and other properties of the PRC
resident enterprise. Although SAT Public Notice 7 introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market, it brought
challenges to both offshore transferor and transferee (or other person who is obligated to pay
34
Table of Contents
for
the transfer) of taxable assets. Where a non-PRC resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an offshore holding company, which is an Indirect
Transfer, the non-PRC resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority.
Using a "substance over form" principle, the PRC tax authority may disregard the existence of the offshore holding company if it lacks a reasonable commercial purpose and was established for the
purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to EIT in China, and the transferee or other person who is obligated to pay
for the transfer is obligated to withhold applicable taxes currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be
subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of past and future private equity financing transactions, share exchange or other transactions involving transfer of
shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our company may be subject to
filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Public Notice
7. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Public Notice 7. As a result, we
may be required to expend valuable resources to comply with SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to
establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
Although
it appears that SAT Public Notice 7 is not intended to apply to purchase and sale of shares of publicly traded companies in the open market, SAT Public Notice 7 may be
determined by the tax authorities to be applicable to us in our acquisition of equity interests in companies such as Lefeng and Ovation, and our non-resident shareholders who acquired our shares
outside of the open market and subsequently sell our shares in our private financing transactions or in the open market if any of such transactions were determined by the tax authorities to lack
reasonable commercial purpose. As a result, we and our non-PRC resident investors may become at risk of being taxed under SAT Public Notice 7 and may be required to expend valuable resources to comply
with SAT Public Notice 7 or to establish that we should not be taxed under SAT Public Notice 7, which may have a material adverse effect on our financial condition and results of operations or such
non-resident shareholders' investments in us.
It is unclear whether we will be considered a PRC "resident enterprise" under the PRC Enterprise Income Tax
Law and, depending on the determination of our PRC "resident enterprise" status, our global income may be subject to the 25% PRC enterprise income tax, which could materially and adversely affect our
results of operations.
Under the EIT Law, which became effective in January 2008 and was amended on February 24, 2017 and December 29, 2018, and its
implementation rules, an enterprise established outside of the PRC with a "de facto management body" within the PRC is considered a PRC resident enterprise and will be subject to EIT at the rate of
25% on its global income. The implementation rules of the EIT Law define the term "de facto management bodies" as "establishments that carry out substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc., of an enterprise." On April 22, 2009, SAT issued the Notice Regarding the Determination of Chinese-Controlled
Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, which was partially amended by Announcement on Issues concerning the
Determination of Resident Enterprises Based on
35
Table of Contents
the
Standards of Actual Management Institutions issued by SAT on January 29, 2014, and further partially amended by Decision on Issuing the Lists of Invalid and Abolished Tax Departmental Rules
and Taxation Normative Documents issued by SAT on December 29, 2017. SAT Circular 82, as amended, provides certain specific criteria for determining whether the "de facto management body" of a
Chinese-controlled offshore-incorporated enterprise is located in China. Further, SAT Circular 82 states that certain Chinese-controlled enterprises will be classified as "resident enterprises" if the
following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making
bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders' meetings; and half or more of the senior management or directors having voting rights. In
addition, SAT issued the Bulletin on Promulgation of the Administrative Measures for Income Tax of Chinese-Controlled Offshore-Incorporated Resident Enterprises (Trial Implementation) on
July 27, 2011, effective from September 1, 2011 and partially amended on April 17, 2015, June 28, 2016, and June 15, 2018, or SAT Bulletin 45, providing more
guidance on the implementation of SAT Circular 82. SAT Bulletin 45 clarifies matters including resident status determination, post-determination administration and competent tax authorities. See
"Item 4.B. Information on the CompanyBusiness OverviewRegulationRegulations on TaxPRC Enterprise Income Tax Law and Individual Income Tax
Law." Although both SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or
foreigners, the determining criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect SAT's general position on how the "de facto management body" test should be applied in determining the
tax resident status of all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. In addition to the uncertainty regarding how the new resident enterprise
classification may apply, it is also possible that the rules may change in the future, possibly with retroactive effect. Although we do not believe that our legal entities organized outside of the PRC
constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be
subject to EIT at 25% on our global income as well as PRC EIT reporting obligations. If we are considered a PRC resident enterprise and earn income other than dividends from our PRC subsidiaries, a
25% EIT on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
Dividends and/or interest payable to our foreign investors and gains on the sale of our ADSs or ordinary
shares or notes by our foreign investors may become subject to taxes under PRC tax laws.
Under the EIT Law, as amended, and its implementation regulations issued by the PRC State Council, a 10% PRC withholding tax is applicable to
dividends and/or interest payable to investors that are non-PRC resident enterprises, which do not have an establishment or place of business in China or which have such establishment or place of
business but the dividends and/or interest are not effectively connected with such establishment or place of business, to the extent such dividends and/or interest are derived from sources within
China. Similarly, any gain realized on the transfer of ADSs or ordinary shares or notes by such investors is also subject to PRC tax at a rate of 10%, subject to any reduction or exemption set forth
in relevant tax treaties, if such gain is regarded as
PRC-sourced income. If we are deemed a PRC resident enterprise, dividends and/or interest paid on our ordinary shares or ADSs or notes, and any gain realized from the transfer of our ordinary shares
or ADSs or notes, would be treated as PRC-sourced income and would as a result be subject to PRC taxation. See "Item 4.B. Information on the CompanyBusiness
OverviewRegulationRegulations on TaxPRC Enterprise Income Tax Law and Individual Income Tax Law." Furthermore, if we are deemed a PRC resident enterprise,
dividends and/or interest payable to investors that are non-PRC individual investors and any gain realized on the transfer of ADSs or ordinary shares or notes by investors may be subject to PRC tax at
a rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is
36
Table of Contents
unclear
whether, if we are considered a PRC resident enterprise, holders of our ADSs or ordinary shares or notes would be able to claim the benefit of income tax treaties or agreements entered into
between China and other countries or areas (although we do not expect to withhold at treaty rates if any withholding is required). If dividends and/or interest payable to our non-PRC investors, or
gains from the transfer of our ordinary shares or ADSs or notes by such investors are subject to PRC tax, the value of your investment in our ordinary shares or ADSs or notes may be adversely
affected.
The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect
our business and our results of operations.
On June 29, 2007, the Standing Committee of NPC enacted the Labor Contract Law, which became effective on January 1, 2008 and was
amended on December 28, 2012. The Labor Contract Law introduces specific provisions related to fixed-term employment contracts, part-time employment, probation, consultation with labor union
and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement of labor laws and
regulations. According to the Labor Contract Law, an employer is obliged to sign a non-fixed-term labor contract with any employee who has worked for the employer for ten consecutive years. Further,
if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have a non-fixed term, with certain
exceptions. The employer must pay severance to an employee where a labor contract is terminated or expires, with certain exceptions. In addition, the government has continued to introduce various new
labor-related regulations after the effectiveness of the Labor Contract Law. Among other things, it is required that that annual leave ranging from five to 15 days be made available to
employees and that the employee be compensated for any untaken annual leave days in the amount of three times of the employee's daily salary, subject to certain exceptions. As a result of these new
regulations designed to enhance labor protection and increasing labor costs in China, our labor costs are expected to increase. In addition, as the interpretation and implementation of these new
regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur
significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.
Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations
may subject us to penalties.
Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social
insurance, housing funds and other welfare-oriented payment obligations. We have not made adequate employee benefit payments as required under applicable PRC labor laws, but we have recorded accruals
for the underpaid amounts in our consolidated financial statements. Our failure in making contributions to various employee benefit plans and in complying with applicable PRC labor-related laws may
subject us to late payment penalties. If we are subject to such penalties in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
An occurrence of a widespread health epidemic or other outbreaks could materially and adversely affect our
business, financial condition and results of operations.
Our business could be adversely affected by the effects of Influenza A virus subtype H1N1, or the H1N1 virus, Severe Acute Respiratory Syndrome,
or SARS, avian influenza or other epidemics or outbreaks on the economic and business climate. A prolonged outbreak of any of these illnesses or other adverse public health developments in China or
elsewhere in the world could have a material adverse effect on our business operations. Such outbreaks could significantly impact the online retail
37
Table of Contents
industry
and cause a temporary closure of the facilities we use for our operations. Such impact or closures would severely disrupt our operations and adversely affect our business, financial condition
and results of operations. Our operations could be disrupted if any of our employees or employees of our partners were suspected of having the H1N1 virus, SARS or avian influenza, since this could
require us or our partners to quarantine some or all of such employees or disinfect the facilities used for our operations and may deter our customers or potential customers from purchasing or
accepting our products. In addition, our business, financial condition and results of operations could be adversely affected to the extent that an outbreak harms the global or Chinese economy in
general, such as wars,
acts of terrorism, snowstorms, earthquakes, fire, floods, environmental accidents, power shortage or communication interruptions.
Risks Related to Our Ordinary Shares and ADSs
The market price for our ADSs has fluctuated and may be volatile.
Since we first listed our ADSs on the New York Stock Exchange, or NYSE, on March 23, 2012, the trading prices of our ADSs have been and
may continue to be subject to wide fluctuations. In 2018, the trading prices of our ADSs on NYSE have ranged from US$4.31 to US$19.14 per ADS, and the last reported trading price on April 17,
2019 was US$7.82 per ADS.
The
market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
-
-
actual or anticipated fluctuations in our quarterly results of operations and changes of our expected results;
-
-
announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital investments;
-
-
additions to or departures of our senior management personnel;
-
-
detrimental negative publicity about us, our competitors or our industry;
-
-
changes in financial estimates by securities research analysts;
-
-
regulatory developments affecting us, our brand partners or our industry;
-
-
changes in the economic performance or market valuations of other Internet, e-commerce or online retail companies in China;
-
-
changes in major business terms between our brand suppliers and us;
-
-
fluctuations of exchange rates between the Renminbi and the U.S. dollar;
-
-
release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and
-
-
sales or perceived potential sales of additional equity securities or ADSs.
In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of any particular
company. The securities of some China-based, U.S.-listed companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in
the trading prices of their securities. The trading performances of the securities of these companies after their offerings may affect the attitudes of investors toward China-based, U.S.-listed
companies, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. Furthermore, some negative news and perceptions about inadequate corporate
governance practices or fraudulent accounting, corporate structure including the use of variable interest entities or other
38
Table of Contents
matters
of other China-based, U.S.-listed companies have negatively affected the attitudes of investors towards China-based, U.S.-listed companies, including us, in general in the past, regardless of
whether we have engaged in any inappropriate activities, and any news or perceptions with a similar nature may continue to negatively affect us in the future. These market fluctuations may also
materially and adversely affect the market price of our ADSs.
Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of
our ADSs for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our
business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.
Our
board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of
future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us
from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely
depend entirely upon any future price appreciation of our ADSs. There is no assurance that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not
realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
Substantial future sales or perceived potential sales of our ADSs, ordinary shares, or other equity
securities in the public market could cause the price of our ADSs to decline.
Sales of our ADSs, ordinary shares or other equity securities in the public market, or the perception that these sales could occur, could cause
the market price of our ADSs to decline. As of the date of this annual report, we had 133,101,306 Class A and Class B ordinary shares outstanding, including 92,585,040 Class A
ordinary shares represented by ADSs. All ADSs representing our Class A ordinary shares are freely transferable by persons other than our "affiliates" without restriction or additional
registration under the Securities Act of 1933, as amended, or the Securities Act.
Certain
holders of our Class A ordinary shares have the right to cause us to register under the Securities Act the sale of their shares. Registration of these shares under the
Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of
these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting
materials in time to be able to exercise your right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attached
to ordinary shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attached to
ordinary shares represented by the ADSs. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. See "Item 10.B.
Additional InformationMemorandum and Articles of AssociationOrdinary SharesVoting Rights."
We
cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the ordinary shares underlying your ADSs, and it is possible that you, or
persons who hold their ADSs through brokers, dealers or other third parties, will as a result not have the opportunity to
39
Table of Contents
exercise
a right to vote. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. Although
you may directly exercise your right to vote by withdrawing the ordinary shares underlying your ADSs, you may not be able to do so, on a timely basis or at all, to allow you to vote with respect to
any specific matter.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your
holdings, and you may not receive cash dividends if it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights
available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is
available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered
under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause a registration statement, if filed, to be declared effective. There might not be an exemption from registration under the Securities Act available to us for our rights offering.
Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
The
depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after
deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it
is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the
mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time
when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the
books of the depositary are
closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or government body, or under any provision of the deposit agreement,
or for any other reason.
You may face difficulties in protecting your interests, and your ability to protect your rights through the
U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and substantially all of our directors and officers
reside outside the United States.
We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiaries and consolidated
affiliated entities. Substantially all of our directors and officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result,
it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been
infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and China may render you unable to enforce a judgment
against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the
40
Table of Contents
courts
of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Our
corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2018 Revision), or the Companies
Law, and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our
directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as from English common law, which provides persuasive, but not binding, authority in a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of
our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less
developed body of securities laws than the United States and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to
initiate a shareholder derivative action in U.S. federal courts.
As
a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would
shareholders of a corporation incorporated in a jurisdiction in the United States.
Our memorandum and articles of association contain anti-takeover provisions that could adversely affect the
rights of holders of our ordinary shares and ADSs.
Our currently effective amended and restated memorandum and articles of association contain certain provisions that could limit the ability of
third parties to acquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action
by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could have the effect of depriving our shareholders of the
opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
Our dual-class voting structure will limit your ability to influence corporate matters and could discourage
others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Our co-founder, chairman, and chief executive officer, Mr. Eric Ya Shen, has considerable influence over important corporate matters. Our
ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Each Class A ordinary share is entitled to one vote and each Class B ordinary share is
entitled to ten votes on all matters that are subject to shareholder vote. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof,
while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Due to the disparate voting powers associated with our two classes of ordinary
shares, as of March 31, 2019, Mr. Eric Ya Shen beneficially owned approximately 58.7% of the aggregate voting power of our company. As a result, Mr. Eric Ya Shen has considerable
influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions, and he may take actions that are not in the best interest of
us or our other shareholders. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other
change of control transactions, which could have the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the
prevailing market price.
41
Table of Contents
We may be classified as a passive foreign investment company for United States federal income tax purposes,
which could subject United States investors in the ADSs or Class A ordinary shares to significant adverse United States income tax consequences.
Depending upon the market price of our ADSs and the nature of our assets and income over time, we could be classified as a "passive foreign
investment company," or PFIC, for United States federal income tax purposes. Although the law in this regard is unclear, we treat our consolidated affiliated entities (and their subsidiaries) as being
owned by us for United States federal income tax purposes, not only because we control their management decisions but also because we are entitled to substantially all of the economic benefits
associated with these entities, and, as a result, we combine these entities' operating results in our consolidated financial statements. If it were determined, however, that we are not the owner of
any of our consolidated affiliated entities (or their subsidiaries) for United States federal income tax purposes, we would likely be treated as a PFIC for the current taxable year or any future
taxable year.
Assuming
that we are the owner of our consolidated affiliated entities (and their subsidiaries) for United States federal income tax purposes, and based upon our income and assets and
the market price of our ADSs, we do not believe that we were a PFIC for the taxable year ended December 31, 2018 and do not anticipate becoming a PFIC in the foreseeable future. While we do not
expect to become a PFIC, if, among other matters, our market capitalization declines, we may be a PFIC for the current or future taxable years. The determination of whether we are or will be a PFIC
will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets. Because there are uncertainties in the application of
the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, including ascertaining the fair market value of our assets on a quarterly basis and
the character of each item of income we earn, we can provide no assurance that we will not be a PFIC for the current taxable year or any future taxable year.
If
we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in "Item 10.E. Additional InformationTaxationUnited States Federal
Income Tax Considerations") would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could
derive from investing in a non-United States corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S.
Holder holds our ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or Class A
ordinary shares. For more information see "Item 10.E. Additional InformationTaxationUnited States Federal Income Tax ConsiderationsPassive Investment
Company Considerations."
As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in
relation to corporate governance matters. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As a non-U.S. company with ADSs listed on NYSE, we are subject to the NYSE corporate governance listing standards. However,
Section 303A.11 of the NYSE Listed Company Manual permits a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance
practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE rules. As we have chosen, and may from time to time to choose, to follow home country practice
exemptions with respect to certain corporate matters, such as the requirement of shareholders' approval for adoption of an equity incentive plan, our shareholders may be afforded less protection under
Cayman Islands law than they would under the NYSE rules applicable to U.S. domestic issuers. See "Item 16G. Corporate Governance."
42
Table of Contents
We incurred increased costs as a result of being a public company, and we cannot predict or estimate the
amount of additional future costs we may incur or the timing of such costs.
As a public company, we have incurred significant accounting, legal and other expenses that we did not incur when we were a private company,
including additional costs associated with our public company reporting obligations. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by SEC and NYSE, requires significantly
heightened corporate governance practices for public companies, including Section 404 relating to internal control over financial reporting. We ceased to be an "emerging growth company"
pursuant to the JOBS Act in 2014, since which we have incurred significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and
the other rules and regulations of SEC.
In
the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company's
securities. If we were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations, which could harm our
results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to
raise capital in the future. In addition, any adverse outcome of such cases, including any plaintiff's appeal of a judgment in these lawsuits,
could materially and adversely affect our business, financial condition, results of operation, cash flows and reputation. Furthermore, there can be no assurance that our insurance carriers will cover
all or part of the defense costs, or any liabilities that may arise from these matters. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact
that indemnification claims may have on our business, financial condition or results of operations. We were named as a defendant in two putative shareholder class action lawsuits filed in May and June
2015 respectively, which lawsuits were consolidated into one action and subsequently voluntarily dismissed without prejudice by the lead plaintiff on November 24, 2015. These putative
shareholder class action lawsuits are described in "Item 8.A. Financial InformationConsolidated Statements and Other Financial InformationLegal
ProceedingsLitigation."