Friday, February 3, 2012

3 cases for DANG

Coined as "Amazon of China", the Chinese B2C company, Dangdang (DANG) that was barely $5 at the start of the year, soared by 70% to as high as $8.50 before it retreated to $7+ toward the end of January. There were many non-DANG factors that contributed to a great run, namely, the revival of Chinese-concept stocks that were beaten up in most of 2011, the return of chasing "growth" as governments print money and European debt crisis was tentatively brushed aside, and last but not least, the euphoria surrounding the historic IPO of social media giant, Facebook. All these buzzes aside, DANG has some merits to itself. These may not merit a 70% run in less than a month but they may merit a much higher valuation in 12 months than what it is now.

1. Significant Upside of the Ecommerce market in China

The growth of the ecommerce market is of lightning speed. The ecommerce market in China is expected to reach 2 trillion RMB ($310 billion ) by 2015. A rising tide lifts all boats. Currently DANG’s market share is somewhere between 4-9% (depending on the source of data). Take the worst case scenario that Dang does not grow the market share at all from now on . The market share even goes down some to 3%, it gives a sale of $9 billion, about 18 times more than DANG’s revenue in 2011.

DANG stands to benefit and grow together with such a big wave in China’s ecommerce even if it performs somewhere between mediocrity and average.

2. The Peer Effect-Jingdong's IPO

One of the largest B2C player in China, Jingdong ( IPO is expected to be above $ 5 billion. Jingdong's market share of ecommerce is somewhere between 18 to 32% depending on the classification and source. Its recent private equity deals indicated that the company was valued at $10 billion. DANG’s current market cap is $579 million. If it doubles, it will still be far below Jingdong.

There are two possible effects on DANG after Jingdong’s IPO: 1. Jingdong’s high profile IPO, if successful, is likely to remind investors of the great potential of China’s ecommerce market again 2. Jingdong’s IPO is likely to take investors away from DANG as Jingdong’s market share in Ecommerce far exceeds that of DANG. With only a few Chinese B2C ADR listed in the US exchange and the current low stock price of DANG, I am leaning toward the first possibility.

3. Product Diversity and Logistic Improvement
One of the biggest obstacles facing Chinese E-commerce is the lacking in logistic and distribution system. E-commerce players find it hard pressed to guaratee quality and consistency in delivery. Customers are often frustrated with the quality and consistency of such service. B2B giant, Alibaba, the parent company of Taobao and B2C leader, Jingdong are both devoted to massive amount of capital in the improvement of logistic system.

DANG is focused on expanding product diversity and improving logistic system, e-book, baby, beauty, home décor,etc. With its dominance in book market, it can leverage its knowledge of reading pattern of its customer base and direct customers to products that may be of their interests. Of no lesser importance is a large amount of cash at hand . DANG has $246 million to put into the above implementation.

The recent rally of Chinese concepts, especially internet related stocks, has put DANG at risk of an immediate pull back (which may have already taken place to a large extent) but it is definitely a stock worth a place in your watch list in 2012.

Disclaimer: I am long  DANG in my personal account as of 2/2/2012. However, I may have distributed the information to friends, family and affiliates prior to the post. My friends, family and business affiliates may have positions in stocks I mention.

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