We believe Vipshop is de-rating due to the rising uncertainty on its margin profile amidcompetition. In light of the company’s increasing readiness to reward consumers, werevise down our 2017-19E operating margin assumptions to 4.2%-4.5% (from previously6.0%-6.3%) and lower our net profit forecasts by 11%-14%. However, we think that a morepersonalized product portfolio and the full launch of membership program, together withstronger bargaining power with suppliers, should help Vipshop increase user stickinessand recoup margins especially in the long run. Meanwhile, we still think it would besensible for Vipshop to team up with traffic partners like JD.com (JD US, BUY, TPUS$51.00). It is industry trend to form strategic alliance and leverage the advantages ofpartners for win-win results. Rolling over to 2018E EPS on 16.5x P/E (-1SD below itsaverage, vs previously on par), we set new TP at US$15.50 (from US$17.00), still offering52% upside. Remain BUY. Downside risks: slower user gain and larger margin squeeze.    2Q17 missed on slimmer gross margin. Overall, non-GAAP net profit grew by 7% YoYto RMB728m, as 30% revenue growth and 0.3-ppt improvement in operating leveragewere dragged by 2.2-ppt contraction in gross margin. Total revenue increased by 30%YoY to RMB17.5bn (at the higher end of management guidance), driven by ordergrowth (+23%) and growing ticket size (+6%). However, gross margin narrowed to a5-year low of 22.0%, attributable to heavier-than-expected promotions for marketshare gain especially in June. Fulfillment cost (non-GAAP) trended up by 0.8-ppt YoYand 0.4-ppt QoQ to 9.3% of revenue, due to the expansion of last-mile delivery forexternal parties. Meanwhile, marketing expense was under good control at 4.2% ofrevenue (vs 4.9%/4.5% in 2Q16/1Q17). Non-GAAP operating margin and net marginwere 4.2% and 5.1% in 2Q17, vs around 5% and 6% since 2014, respectively. JunendedTTM operating cash and capex stood at RMB1.9bn and RMB2.8bn, respectively.    3Q17E and 4Q17E margin outlook. For 3Q17E with few large-scale promotion events,we expect 29% revenue growth (vs management guidance of 26%-30%), 5.3% non-GAAP operating margin, and 4.4% net margin. For the promotional-heavy 4Q17E, weproject 4.5% operating margin (down 1.6-ppt YoY) and 3.8% net margin (down 1.3-ppt) with 29% revenue growth. Meanwhile, growing ticket size building on categoryexpansion, better personalization, and enhanced fulfillment service may help restoreinvestor confidence in Vipshop, in our view.    Trading idea. BUY on dips. We project Vipshop to deliver a non-GAAP net profit CAGRof 20% on a 25% revenue CAGR across 2016-19E. Downside risks: weaker traffic gainand deeper margin decline amid competition with larger online players.

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