Dangdang: Zacks’ Bull of the Day Play

E-Commerce China Dangdang (DANG) is a leading business-to-consumer e-commerce company in China.  They have focused on selling books online since their inception and are now the largest book retailer in China. With a growing customer base, they have expanded into other products including fashion and apparel, baby, children and maternity and home and lifestyle products.

In addition to offering products on its website, Dangdang also operates an online marketplace program, which allows third-party merchants to sell their products. Dangdang had its IPO in 2010. As of now, they resemble Amazon in its early years.

Second Quarter Results

Dangdang reported its Q2 results on August 14. Total net revenues for the quarter were $316.1 million, up 31.3% from the same period in 2013. Net Income for the quarter was $4.6 million, or 1.5% of total net revenues, compared with a loss a year ago. Results were better than street estimates.

Dangdang expects about 30% year-over-year growth in net revenues for the third quarter.

Rising Estimates

Analysts have been raising their estimates for the company. Zacks Consensus Estimates for the current and the next year are now $0.18 per share and $0.42 per share, up from $0.07 per share and $0.34 per share respectively, 60 days ago.

Rising estimates sent the stock back to Zacks Rank # 1 (Strong Buy). Dangdang has beaten estimates in all of the last four quarters, with an average quarterly surprise of 99%.

Booming E-Commerce Market in China

With a fast expanding middle class and rising incomes, the Chinese e-commerce market looks set to grow exponentially in the coming years. According to a McKinsey report “the Chinese middle class, those earning from $9,000 to $34,000 a year, is poised to balloon over the next 10 years. More than 75 percent of China’s urban consumers will fall into that demographic by 2022”.

Further, China has the largest number of Internet users in the world—more than 600 million– about twice the population in the US. China is also the world’s largest mobile phone market and smartphone sales which accounted for 82% of all mobile phone sales last year are still growing.

It is thus no surprise that online shopping, particularly through mobile phones is seeing explosive growth in China. For Dangdang, mobile orders were 17% of total orders in the second quarter 2014 and rose to 22% in June.

Per KPMG, “by 2015, e-commerce transactions in China are projected to hit USD 540 billion, or approximately 10 percent of total retail transactions, and by 2020, China’s e-commerce market is forecasted to be larger than those of the US, Britain, Japan, Germany, and France combined.

This report further states that “in 2012, mobile transactions totaled $7.8 billion, representing 3.7% of all e-commerce transactions in China. However, by 2015 mobile commerce in China is forecasted to more than quintuple, to $41.4 billion”. Growing confidence in China’s online payment systems further fuels this exponential growth.

Alibaba IPO in Focus

Earlier this year, my colleague Kevin Cook featured Dangdang as the “Bull of the day”, He wrote
“If Wall Street makes the Alibaba IPO a success, it will be a big validation for lots of Chinese companies. And for DANG investors specifically, it could be a real boost. A cash-rich Alibaba may look to expand its e-commerce empire with further partnerships and acquisitions”.

The Bottom Line

With rising margins and profitable product lines in a fast-expanding market, Dangdang looks poised for solid growth in the coming quarters.

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