A move below 5%; growth outlook blurred    Vipshop reported 2Q results with in-line revenue (+30% YoY) but a non-GAAPnet income miss (12% lower than DBe). Gross margin of 22% was 80bps lowerthan DBE and non-GAAP net margin 60bps lower than DBe. We attribute themargin miss to intensive competition in June. Operating cashflow turnednegative because of aggressive subsidies during the promotional season.Active users of 28.1m was 6% short of DBe, while order per customerimproved by 8.8% sequentially. 3Q revenue guidance of RMB14.9-15.4b was2-5% lower than DBe. We shave our FY17non-GAAP margin to 4.2%. MaintainHold over growth concerns.    Seeking to enhance customer experience; finance business spin-out    Vipshop continues to try to enhance user experience. The company added fourlocal warehouses to support its existing five regional warehouse centers andalso added warehouse space in Japan and Korea for cross-border trade. VIPSspent RMB674m in capex in 2Q. The company meanwhile is connected to over300suppliers’ inventory systems connected, carrying daily average SKUs of2.7m. Vipshop added a few international brands to broaden its productoffering. Vipshop officially launched the spin-off of internet finance business.The finance business has 4.4m users, representing 15.7% of total active users.    Moving across expense lines; margin likely difficult to maintain    We note an increase in fulfillment expense (9.4% of rev vs 8.9% in 1Q) mainlydue to the expansion of last mile delivery staff to support the logistics businessoutside of Vipshop. Marketing expense as % of revenue decreased to 4.3%given the budget shift to subsidies. The company has shifted some of itsbranding adverting budget to performance-driven ads. We however believethat margins may slip further given intensifying competition in the e-commercespace. We expect FY17non-GAAP net margin of 4.2%.    Cutting TP by 7% to US$11.7; Maintain Hold    We maintain our basic revenue forecasts for FY17/18/19, but cut non-GAAPnet margin by 40bps/40bps/30bps on competition concerns. We reduce non-GAAP net income by 9%/9%/9%. Our valuation is based on a 0.8x PEGunchanged) against an FY18-20E EPS CAGR. Risks: competition ebbs/flows,slower/faster traffic and sales growth, working capital changes, investmentplans.

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