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E-Commerce China Dangdang Inc. (NYSE:DANG)

Q3 2012 Earnings Conference Call

November 15, 2012 08:00 AM ET

Executives

Peggy Yu Yu - Co-Founder, Executive Chairwoman

Jun Zou - CFO

Maria Xin - Director, Investor Relations

Analysts

Philip Wan - Morgan Stanley Asia Limited

Jiong Shao - Macquarie

Evan Zhou - J.P. Morgan

Fawne Jiang - Brean Capital, LLC

Andrew Marok - Cowen & Company

Tian Hou - T. H. Capital, LLC

Andrew Marok - Cowen & Company

William Huang - Barclays

Andy Yeung - Oppenheimer & Co.

Gene Munster- Piper Jaffray

Chao Wang - Merrill Lynch

Ming Zhao - 86 Research

Elinor Leung - CLSA

Operator

Hello, ladies and gentlemen this is Erika. I’ll be the operator for this conference. I’d like to welcome everyone to the E-Commerce China Dangdang Third Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question-and-answer session. (Operator Instructions) Thank you.

Now I’d like to turn the call over to Ms. Maria Xin, Investor Relations Director of Dangdang. Please proceed.

Maria Xin

Thank you. Thank you and welcome to our third quarter 2012 earnings conference call. Joining me on the call today are Peggy Yu Yu, Executive Chairwoman and Jun Zou, Chief Financial Officer. For today’s agenda, management will discuss highlights for the third quarter 2012.

Before we continue, I refer you to our Safe Harbor statement in earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

I’d now like to turn the call over to our Executive Chairwoman, Peggy Yu Yu.

Peggy Yu Yu

Thank you, Maria. Good morning, good evening everyone. I’m pleased to report a solid quarter for Dangdang. Net revenue growth was 42% year-over-year and gross margin was 15.2%. For books and media, the sales grow 33% year-over-year. This strong growth momentum strengthened our market leader position and sustain a market share in book and media sector. For general merchandise, our earlier strategic decision in category mapping also worked out well. For the self-procurement business, the year-on-year growth slowdown from early quarter this year as we gave more Dangdang space to our marketplace programs.

We recognized commission based revenue only instead of general merchandise value from marketplace. Our marketplace general merchandise value grow at 150% year-on-year in the third quarter and now almost equal in size to that of our self-procurement general merchandise business.

In the third quarter, our gross margin was 15.2% compared to 13.8% in the same quarter last year despite the intense in competition in China’s commerce market. We were able to achieve this because of the successful implementation of our strategy while scaling up our destination categories and having more merchants to sell at Dangdang marketplace.

Dangdang strength is supported by strong business fundamentals and execution. We made progress in the following areas during the third quarter. In the third quarter we achieved better efficiency in warehousing and shipping compared to the first half of this year. We’ve added another warehouse in Tianjin with over 20,000 square meters, which started operation in the third quarter. We now have 21 warehouses located in the 11 cities, with total capacity of 370,000 square meters.

Warehouse utilization rates have further increased and average fulfillment cost per order has lowered in the third quarter in comparison with that of the first half. Meanwhile we continue to invest in customer experience. As planned, we now provide same-day-delivery in 21 cities. We offer next-day-delivery in 158 cities. In addition, we have newly introduced evening-delivery in 11 cities.

We have put extra efforts to improve our customer experience in the 50 core cities. In these cities we strive to offer optimal service levels, both in speed, in other aspects of delivery service. A final point on our business operation is that we shortened the inventory turnover days and the receivable days, while achieving the record quarterly revenue

In marketing and advertising, we planned Dangdang promotion activities intelligently in both timing and the theme. This allowed us to conduct high profile campaigns and attract customer efficient – and attract customers efficiently. With this disciplined marketing strategy, we achieved high return on marketing dollars spend and the low customer acquisition cost. In the third quarter we acquired 2.4 million new customers and our total active customers of the quarter were approximately 7 million.

Let me also update you on our partnership with other industry players. We opened a Dangdang operated channel on Tencent platform in June. Earlier this month, we trial launched Dangdang’s flagship on Tmall. Operating a Dangdang channel on other platform allow us to widely promote our leading categories and to enlarge Dangdang’s customer base. At the same time, we keep enhancing Dangdang’s open platform to invite other merchants who would help to sell through Dangdang.

Externally, we opened Dangdang stores at companies with good traffic and who hear about customer experience. Internally, we cross-sell products to customers of varied categories, promoting alliance between self-procured channel and the Dangdang marketplace. We believe that this open approach of Dangdang E-Commerce ecological system will benefit Dangdang customers the best.

To enhance customers’ online shopping experience, we added scores of additional features on both website and mobile applications. Examples include faster synchronization in the shopping cart, improvement of the replacement service, additional online payment method and mobile e-Commerce. Through this practices, we aim to raise the best possible service levels. One last thing I want to share with you is that Dangdang’s private-label products are making small, but strong progress. We will be very patient with our private-label segment.

I’d also like to share with you my thoughts on competition. I think our competitors for their most part grab market share by burning cash not justified by returns. Dangdang focuses on delivering great customer experience, powered by core competencies that sustain. Before and after Dangdang’s IPO there was a huge up capital flow, in flow of billions of U.S. dollars into B2C segment in China, setting at/or below cost became a easier way for some companies to pump up sales acquiring customers or providing services at/or half inflated operating expenses of the industry. By contrast, Dangdang stick to a long-term strategy of building core competencies of selection, pricing, and the service.

Indeed, we may have sacrificed short-term growth or margins, but we’re confident in winning in the long run from reliable industry sources, also other B2C companies having gross margins significantly less than Dangdang’s level in the respective categories. Dangdang also enjoys low cost of winning a e-Commerce company whether it is fulfillment or customer acquisition.

We keep working on operational improvement, technology innovation, strengthening supply chain management, and the efficient marketing campaign. I believe Dangdang’s strategy is a right one. I also believe that capital market will eventually appreciate this strong business and financial discipline that we stick to. This concludes the business section of our remarks.

Let me now turnover to Jun Zou, who has recently joined us as our CFO. You will hear from him with the financial review. Jun, all yours.

Jun Zou

Thank you, Peggy. And ladies and gentlemen, on this call, I’d like to discuss with you our third quarter results in more details. Our total net revenue reached RMB1.288 billion in the third quarter of 2012, a year-over-year increase of almost 42%. Media revenue was RMB850 million, which was up 33% on a year-over-year basis. General merchandise revenue was RMB397 million, a year-over-year increase of 56%.

Other revenues, which was mainly from marketplace advertising was RMB40 million, a year-on-year increase of 183%. Dangdang acquired 2.4 million new customers in the third quarter. We had about 7 million active customers in the third quarter, a year-on-year increase of 27%.

Total orders in the quarter were approximately 13.9 million. Average contribution per customer in the third quarter was RMB222 compared to RMB164 in the third quarter of last year. Gross margin was 15.2% in the third quarter, an increase from 13.8% in the third quarter of 2011 and 13.1% in the second quarter of this year. The increase was primarily due to our execution on a strategic category mapping to move certain categories to marketplace and economy of scale in our destination categories.

General merchandise revenue was 31% of total net revenues as compared to 28% in the corresponding period of last year. Again, I’d like to point out that this quarter we strategically shifted some general merchandise products to marketplace where we recognized commission based revenue instead of GMV. Therefore our gross rate in the general merchandise sector does not properly reflected the strong moment there.

Gross profit was RMB196 million, a year-on-year increase of 57% and a quarter-on-quarter increase of 24.3%. The fulfillment expenses, which include warehousing and shipping expenses were RMB186 million, an increase of 44% year-over-year. Fulfillment expenses were 14.4% of total revenue in the third quarter compared to 14.2% in the same period, in 2011. The increase was primarily due to our investment to enhance delivery and customer services this year.

With the opening of two new warehouses in Tianjin, we brought total warehouse capacity to 370,000 square meters at the end of the third quarter as compared to 350,000 square meters by second quarter of this year. We also increased cities where we provide next-day-delivery services from 150 to 158 and started evening-delivery services in 11 cities across China.

I’d like to note that even as we expand the fulfillment capacity on a sequential basis, we manage to lower fulfillment expense as a percentage of revenue from 15% in the second quarter of this year to 14.4% in the third quarter this year. Now marketing expenses were RMB45.8 million representing a 3.6% of total revenues compared to 4.4% in the third quarter of 2011. This reduction was primarily due to more efficient marketing campaigns in the quarter.

Technology and content expenses were RMB40.8 million, which were 3.2% of total revenue, compared to 2.3% in the third quarter of last year. The increase was primarily due to increased level of investment in headcount and technology to improve Dangdang’s customer shopping experience and the supply chain management.

General and administrative expenses were RMB33.1 million which represented 2.6% of total revenues compared to 2.3% in the corresponding quarter last year, which is primarily due to increased headcount and charge of POD services.

Share-based compensation expenses, which were allocated to related expense lines were RMB2.8 million in the third quarter compared to RMB2.3 million in the third quarter of last year, which was a 21% increase. Net loss was RMB100 million compared with a loss of RMB73 million in the third quarter in 2011, primarily due to the increased cost of revenue and increase in fulfillment and marketing expenses. But on a sequential basis, our net margin narrowed to negative – narrowed from negative 10.1% to negative 7.8% compared to same period last year.

Now moving to the balance sheet, as of September 30, 2012, our cash balance was RMB1.43 billion, almost unchanged from June 30th this year and slightly increased by RMB58 million from fourth quarter last year. Turnover days for account receivables were 4.9 days in the third quarter of 2012, compared to 4.5 days in the corresponding period last year, which was primarily due to the increased Group buy business.

On a sequential basis, turnover days for accounts receivables decreased from 5.6 days in the second quarter due to the shortened collection cycles from logistic companies and better terms from advertising business. Our accounts payable were RMB1.8 billion as compared to RMB1.5 billion at year-end of last year. Turnover days for accounts payable were 157 days in the third quarter of 2012 compared to a 155 days in the corresponding period last year.

On a sequential basis, our turnover days for accounts payable decreased from the 160 days in the second quarter to 157 days. Our inventory was RMB1.54 billion at September 30, 2012 as compared to RMB1.58 billion at year-end last year. Turnover days for inventory in the third quarter of 2012 were 135 days as compared to a 132 days in the third quarter of last year. On a sequential basis, turnover days decreased from a 144 days in the second quarter due to improved inventory management.

Capital expenditures for the third quarter of 2012 were RMB17.6 million. Finally, our outlook for fourth quarter of 2012 is as follows. We expect a total net revenue in the fourth quarter of 2012 to be around RMB1.610 billion representing a year-over-year growth of around 30%.

Now I’ll open the call to questions. Operator, please go ahead. Thank you. Operator?

Peggy Yu Yu

Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Philip Wan with Morgan Stanley.

Philip Wan - Morgan Stanley Asia Limited

Hi. Good evening. Thanks for taking my question. My first question is about your online marketplace. Would you be able to share with us what’s the internal expectation in terms of GMV or commission sales contribution for the fourth quarter and next year? And also given that intense competition from online marketplaces, such as Tmall, 360buy and Suning and does Dangdang experience any pressure in terms of the commission rate trend? Thank you. And I have a follow-up.

Jun Zou

Okay Philip, thanks for your question. Yeah, as for marketplace, we believe our GMV from that sector will be on par with our self-procurement general merchandise business in the fourth quarter. And commission rate from that business varies by product. We expect commission rate from 1% to 10% based on different products.

Peggy Yu Yu

Yeah and Philip, we also mentioned how we operate Dangdang e-marketplace. Dangdang’s e-marketplace had several characteristics. Number one is because Dangdang’s customer base is unique. It has medium to high-end customers with higher income level. So we’re very selective in terms of category and on top of that we only invite merchants who meet certain operation criteria to ensure that our service quality is very high and they have faster delivery speed and they have good customer service to make sure that the service level Dangdang customer receive from marketplace about the same as they receive from self-procured.

To do that we have offered extensive delivery services that to our marketplace players. For instance, about 60% marketplace merchants use Dangdang shipping and delivery network. And some companies only offer like online payment method for market programs, but Dangdang’s customers they can chose either cash on delivery or online payment with those market programs. So within delivery service, customer level, selection of merchants and the Dangdang’s distinguished e-marketplace is doing very well. And now it’s really accelerating and are getting equal in size in terms of self-procured general merchandise business.

Philip Wan - Morgan Stanley Asia Limited

Thank you. That’s very helpful. And then my second question is …

Peggy Yu Yu

Oh Philip, I forgot to mention that we have different tiers of service level for our marketplace companies. We have things like procured by Dangdang or delivered by Dangdang or sold through by Dangdang. So it depends on the marketplace sophistication of operating e-Commerce we offer a profit service packages that they can use to sell to Dangdang customers.

Philip Wan - Morgan Stanley Asia Limited

Right. All right, thank you. That’s very helpful. And then also could you comment on the effectiveness on for you to join the QQ platform as well as the Tmall, for instance, how much GMV or customer traffic are now contributed by the – this external marketplace and has Dangdang able to convert this customers from QQ and Tmall to become a – like Dangdang direct customers? Thank you.

Peggy Yu Yu

I think both Tmall and also Tencent Dangdang stores are opened with a philosophy that we should expose Dangdang top selling category to more customers, and we should utilize traffic already available other people’s platform. And right now the merchandise value that we got from those platforms are small, but we’re going to observe how those will be improved. And I think that in addition to traditional marketing campaign or database marketing we think those kind of openness of having – of cross-selling to other peoples customer base and making our products available are very good way and are worth experimenting.

Philip Wan - Morgan Stanley Asia Limited

All right. Thank you. I’ll get back to the queue.

Operator

Your next question comes from the line of Jiong Shao with Macquarie.

Jiong Shao - Macquarie

Thank you very much. Good evening. First Jun, welcome onboard and congratulations on getting on the team.

Peggy Yu Yu

So you’re not going to give him a hard time, right?

Jun Zou

Thanks a lot.

Jiong Shao - Macquarie

Let’s try. So, I’ll start with three part first, then there’s going to be a hard question.

Jun Zou

You are welcome.

Jiong Shao - Macquarie

So, I am going to just follow-up on the earlier question about getting on Tmall and Tencent. I was just wondering sort of how do you decide what kind of products you’re going to put on those sort of virtual stores and are you able to share with us sort of the commissions you actually have to pay those guys to have your stores on their sites, that’s my first question.

Peggy Yu Yu

In terms of product category, we put available the leading categories Dangdang has to offer, these platforms like media category, like baby and the maternity categories and we pick that, the categories that Dangdang are very good at. In terms of commission rate its single digit.

Jiong Shao - Macquarie

Okay. And do you have a long-term plan in terms of the percentage of your revenue is going to come from this sort of third-party platforms?

Peggy Yu Yu

I think that will depend on how well we operate with each other and how much of our traffic pie that we can get from those platforms.

Jiong Shao - Macquarie

Okay, thanks. My next question is somewhat related. It’s great to see you gained quite a few new customers during the quarter. I was wondering all of the new customers you gained roughly what's the percentage from this, the Tmall like platforms and what are the organic kind of dangdang.com type of new customer acquisitions, and are you able to talk about your estimate on the cost per – the acquisition cost per new customer?

Peggy Yu Yu

In terms of customers we get from Tmall or Tencent, they are insignificant in numbers now. And I don’t have acquisition cost on top of my mind, but we’re paying those revenue from those customers on commission base, and so I think it’s reasonable.

Jun Zou

Let me answer that. Actually we trial launch our Tmall flagship store just in November. So, there won't be any new customers from Tmall in the third quarter. And if you are asking about our general new customer acquisition cost, for the quarter it was RMB19 per new customer.

Jiong Shao - Macquarie

Okay, that’s pretty attractive. And my next question before I hand over the floor is on your CapEx plan. Could you talk about your CapEx plan or remind us your CapEx plan for 2012 and 2013, and also associated with that lastly is, your fulfillment cost went down nicely – a little bit in the Q3. How do you explain the fulfillment cost as a percentage of revenue going forward? Thank you. That’s all my questions for now.

Jun Zou

Yeah. Actually in the fourth quarter we have a plan to spend roughly around RMB30 million to construct our Tianjin facility, but that’s highly depended upon the weather there. So, yeah well we’re not sure yet. And we have another plan to spend another RMB30 million to improve our infrastructure such as servers, IDC centers and other like warehousing facilities. As for 2013, we have not actually finalized our budget yet, but we're actually working on these right now.

Peggy Yu Yu

And then he also asked about …

Jun Zou

Fulfillment.

Peggy Yu Yu

Yeah, yeah. Go ahead.

Jun Zou

Sorry. Now yeah, we do see that actually in this quarter the fulfillment cost as a percentage of revenue decrease slightly. Even though we have increased spending over the last four quarters in fulfillment, we do see that utilization rate of our warehouse are increasing. We have achieved economy of scale in our delivery and logistics and customer services, facilities we invested. So, we believe we will see a stabilization of the cost – if not better.

Jiong Shao - Macquarie

Okay, great. Thank you very much guys.

Peggy Yu Yu

Thank you.

Operator

Your next question comes from the line of Evan Zhou with J.P. Morgan.

Evan Zhou - J.P. Morgan

Hi, everyone. This is Evan from J.P. Morgan on behalf of Dick Wei. Thanks for taking my questions. And my question is about your gross margin improvements for this quarter – [sales] is it more because of a higher margin media and third-party business mix or is it more coming from different categories of higher margin from your cost, merchandize or media business? Thanks.

Jun Zou

Let me start to answer your question Evan, and there are two main reasons for our margin expansion in the quarter, and the first one is that, we actually shipped on product categories from self-procurement sector to marketplace which is, they’re higher margin business. And secondly, we have achieved economy of scales in our destination categories, so where we actually have an advantage in terms of pricing and so on. Did I …

Evan Zhou - J.P. Morgan

Can I have a follow-up on the – you just mentioned that you shipped certain categories to third-party marketplaces. What are those categories and why are we actually – we’re actually not behind which category you want to ship third-party and which one – which category you want to keep in the self-procurement costs. Thanks.

Peggy Yu Yu

Okay. In Dangdang’s category building, we want Dangdang to be an integrated online shopping place. And inside Dangdang shopping mall there are going to be certain corner stores that we operate by our self. There are going to be certain categories, we term destination categories such as media, baby, maternity or household items. Then there would be certain convenience categories, such as electronics and then there are other programs, things like apparel and things tend to have very fashionable, trendy and a short product cycle we give them to merchants, because we think that merchants are better at identifying trends or knowing the each customer’s needs better than we do. So, it’s much of a factor of product expertise and that’s the supply chain stress. If we think we do a better job, then we do it. If we think the merchants in Hangzhou does a better job serving to (indiscernible) customers then we move that sector to merchants in [Jingyuan].

Evan Zhou - J.P. Morgan

Well, that’s very helpful, thank you. My final question is about your mobile contribution, could you give us some color on how much percentage of your (indiscernible) are from mobile, both from the self-procurement (indiscernible). Thank you.

Jun Zou

In terms of traffic there is around 15% of visitors are from mobile. In terms of order there are usually 5% to 7% from mobile.

Peggy Yu Yu

Yeah. And we see that a lot of mobile users have certain user habits. For instance they like to use their mobile phone to check the status of their order. They may check as many as three times a day to see where their parcel is. And the mobile users also have certain behavior. For instance that when they’re in the subway or like during lunch those what we call fragmented time period, their usage is higher.

Evan Zhou - J.P. Morgan

All right. Thank you.

Jun Zou

Thanks a lot.

Operator

Your next question comes from the line of Fawne Jiang with Brean Capital.

Fawne Jiang - Brean Capital, LLC

Thank you for taking my question. First one is actually regarding your marketplace. I understand you have been shifting a part of your categories from your self-procurement to marketplace. I just wonder like, where you are in the process. What I meant was, like how much more are we going to see products where value shifting to the marketplace so we could understand the apple-to-apple growth for your self-procurement. On the other side your marketplace GMV seems to grow very nicely in the past few quarters. Just wonder how much of that growth comes from the shifting, and how much of that comes from signing-up new merchants and driving new growth?

Jun Zou

Let me answer the second part of your question. It’s Jun and we had a little over 1,400 stores on our marketplace last quarter, and this quarter we have more than 2,000 stores. So, let’s say that a lot of growths are actually from the new stores, and do you have anything to add?

Peggy Yu Yu

Yeah, and she was wondering like the comparison of apple-to-apple of general merchandize. I think that’s what her question is about. I think to put it apple-to-apple, the better way to do it is to add-up the self-procurement general merchandize with that of GMV of general merchandize and that gives the right direction of our general merchandize growth which includes both categories, open platform marketplace and self-procurement.

Fawne Jiang - Brean Capital, LLC

Okay. Peggy, a follow-up question regarding that with; do you see like what is the trend for your commission rates for your marketplace in the past quarter?

Peggy Yu Yu

Our commission rates were very firm in the last quarter. And our commission rates vary from category to category. And for certain things like electronic gadgets because the intrinsic industry margin is low, we also charge low, something like 1%. And for like ladies apparel, because the industry margin for that segment is high, there we charge maybe 10%, 11%.

Fawne Jiang - Brean Capital, LLC

Got it. That’s very helpful. Last question just to feel data point, first of all what's your operating cash flow for the quarter?

Jun Zou

Our operating cash flow was negative RMB105 million roughly, yeah.

Fawne Jiang - Brean Capital, LLC

Got it. And what's your headcount for the quarter?

Jun Zou

Our headcount for the quarter was a little over 2800 self employed -- employees, and we also have 2400 roughly contracts. Also let me add to …

Fawne Jiang - Brean Capital, LLC

Thank you very much.

Jun Zou

Sorry.

Fawne Jiang - Brean Capital, LLC

No, go ahead.

Jun Zou

I just want to add a few points on the change of operating cash flow. Operating cash flow was mainly, because that we have actually decreased the accounts payable by roughly RMB200 million and which was partially offset by our decrease in inventory as well of over RMB100 million, which means that we’re paying customers -- we’re paying our vendors on a prompt -- a more prompt profession as well as we’re managing our inventory and the improvement on inventory and turnover.

Fawne Jiang - Brean Capital, LLC

Yeah, thank you. That’s helpful.

Operator

Your next question comes from the line of Tian Hou with T. H. Capital.

Tian Hou - T. H. Capital, LLC

Hi, Peggy and Jun. I have a question regarding that you opened the store in Tmall and QQ and so, I went to there to look at it, what’s in the Tmall and its not Dangdang’s book or Dangdang’s product, but rather the third-party product. So, then there will be one question; if I am the third-party providers, why do I go to Tmall myself? That’s my question.

Peggy Yu Yu

Well, I’m so curious – well I am not curious why you got that impression, because the categories the way Dangdang puts on Tmall are mostly Dangdang self-procured media and that first is media and the music and those titles, and secondly mostly baby maternity stores. And we didn’t put most of our merchants programs on Tmall at all just as you pointed out, those merchants can very well put their products on Tmall. So, I was wondering are there any kind wrong impression somewhere here?

Tian Hou - T. H. Capital, LLC

No, because when I was on the – your site on Tmall, the other tab not working, the only one tab working is babies and so I see diapers and all the other tabs not working. So, okay, so that’s the first question. The second question is who is in charge of a promotion in the Tmall?

Peggy Yu Yu

Okay. Dangdang is in charge of promotion on the Tmall and Dangdang puts all those programs together. And when you look at things like diaper or formula, those are all self-procured categories that Dangdang are very good at, that’s part of Dangdang baby maternity children store. Those are not by merchants, those are by Dangdang.

Tian Hou - T. H. Capital, LLC

So, in a Tmall store ...

Peggy Yu Yu

I think I am getting a [hulk] other impression because on Tmall it’s all different category like in the baby, there you see a lot of – you see the Dangdang baby things. But if you go to the other channel and that is like – the other tabs it leads you to Dangdang book, Dangdang movie, Dangdang video and Dangdang TV series, so …

Tian Hou - T. H. Capital, LLC

Okay.

Peggy Yu Yu

Yeah.

Tian Hou - T. H. Capital, LLC

So I will try that later, it’s right in front of me. Anyway so, and it doesn’t matter. The second one is …

Peggy Yu Yu

Yeah, we can also have IR people to get back to you to have material, they’re showing me this screen right now and I can just see all those books, and the media and other things on Tmall.

Tian Hou - T. H. Capital, LLC

Okay. So, the other question would be, is there any cannibalization in terms of traffic to Tmall or to your own sites. So, how do you decide which ones to promote?

Peggy Yu Yu

We perceive Tmall or QQ or other companies that we have those things an additional channel to give us traffic. And we need to compete with traffic with other vendors who probably operate on Tmall or operate QQ I think customers will make their choices. So, it’s rather like an external competition for traffic through certain products than anything else.

Tian Hou - T. H. Capital, LLC

Okay, I see. Okay, that’s all my questions, Peggy. So, I want to congratulate you for a good quarter even though the competition environment is still bad and even though economy is so weak and also congratulate on the CFO. So, good luck.

Peggy Yu Yu

Thank you. Thank you very much.

Jun Zou

Thanks.

Operator

Your next question comes from the line of Kevin Kopelman with Cowen & Company.

Andrew Marok - Cowen & Company

Hi, this is Andrew Marok on for Kevin. I just had two quick questions. I just like to talk about the gross margin trends in the media and general merchandize categories. Are you seeing any increase in one category or the other maybe greater than the other. And on the Chinese macroeconomic environment, I was just wondering what kind of impact you saw in Q3 and whether you’re seeing anything significant today in Q4? Thank you.

Jun Zou

I’ll answer the first part of the question. As I mentioned, we do see that due to our economic skills and strong bargain power. Our gross margin has improved destination categories. That will include the media and a certain general merchandize category. And for the other categories we do see our margin stabilized. So, I would say yeah, in the long-run our margin would definitely improve, but in the short-run the margin will definitely fluctuate because of in different promotion programs in different seasons.

Peggy Yu Yu

Yeah, the macroeconomics for third quarter was not in China overall it’s not a [robust pick]. I remembered something like retail was up like 8% in August or 12% or something like that -- not exactly in September. And so coming to fourth quarter, yes there are uncertainties with economy, but we’re all very happy that the 18th party summit is over today and there’s also a lot of things will be put back into work.

Andrew Marok - Cowen & Company

Okay. Thank you.

Operator

Your next question comes from the line of William Huang with Barclays.

William Huang - Barclays

Hello, this is William on behalf of Alicia. Thank you for taking my call and congratulation to, Jun. I have several question, let me start with a question about guidance. You guided 31% year-over-year for Q4, and can you give a bit more color in terms of the background behind what implies the growth and also if you can comment a bit more on the potential growth target for each business line, that would be very helpful. Thank you.

Jun Zou

We would continue to see a stronger growth trend from other revenue, which means revenue from marketplace. And we’ll continue to see that we maintain, at least maintain our market share in media sector in the fourth quarter. So, overall yeah, I guess, you would expect a stronger or faster growth from our marketplace.

William Huang - Barclays

Okay. The second question is about, actually you commented you have shorten, you have been short lined the inventory receivable days. Just curious whether it is due to your improved bargaining power for Dangdang, or it is across industry behavior, and also which cutting grade did you see the most improvement on receivable and inventory days? Thank you.

Peggy Yu Yu

I think a lot of it comes from higher efficiency of running things, and also there are certain stages in retail. When you open a new store like, in our turmoil open maybe a smaller new warehouse then the inventory there gets moved around slower, because it has smaller sales base – selling base and when the sales scale-up, then you’ll see the turnover of that particular spot goes up. So, there are be a certain time that when we roll-up several warehouses then our inventory gets slowed down, and then when the efficiency rate and the fulfillment rates in those newly opened warehouses scale-up then we see improvements; so, I think that’s one of the reason. And another reason is, in our overall product mix general merchandise is making of a larger percentage of the total pie and the general merchandise tend to have shorter inventory and also payable days than that of media segment. So, I think that’s an industry reason.

William Huang - Barclays

Okay. So, moving forward we should expect the trend to continue right, so …

Peggy Yu Yu

We should expect the trend to continue, but sometimes as I said in certain times when we're building certain low new centers we will see some pure article slowdown, because the efficiency and turnover in newly opened tend to be slower.

William Huang - Barclays

Okay, thanks. Just a very quick question and it is also the last question. Your comment on mobile actually account for 15% of traffic also 5% to 7% of the transaction. I just want to double check whether your mobile definition, actually include the tablet or just the smartphone? So if that include tablet, what is – do you have the data for smartphone on a standalone basis?

Jun Zou

That includes both actually. We don’t have the exact breakdown at this moment, but I think actually more traffic are coming from Android based phones and tablets and iPhone’s.

William Huang - Barclays

Okay. Thank you.

Operator

Your next question comes from the line of Andy Yeung with Oppenheimer.

Andy Yeung - Oppenheimer & Co.

Hi, good evening. Thank you for taking my question. I have a couple of questions today. My first question is about your book and media business. Can you give us an update on your e-Book publishing’s and E-Reader business.

Peggy Yu Yu

In our e-Book business and currently we have 80,000 titles available on Dangdang, and we’re revising and making changes to the first 12 sale of Dangdang readers and we haven’t launched the second 12 orders yet.

Andy Yeung - Oppenheimer & Co.

Okay. And then my next question is about your marketing expenses. When we look at your marketing expenses it had been fluctuating a little bit from quarter-to-quarter, but overall there seems to be uptick in marketing expenditures since the first quarter this year. So can you give us some color on your marketing strategies for the rest of the year, and perhaps next year, in terms of both promotions and media, advertising, procurement?

Peggy Yu Yu

Yes. Our marketing expense vary from quarter-to-quarter. Some of it has to do with things like seasonality. For instance November our anniversary month, is the month that we advertise heavily to enlarge our brand awareness and that is some other times like maybe back in school season or the pre-Children’s Day and then we’ll also have marketing campaigns. And one of the things that we have watched very carefully is about how efficiently marketing dollars are spent. And we like to achieve very high efficiency in marketing dollars spent and the customer acquisition cost. I think that if we translate into operating a brick and mortar store into an online store. In retail work, new store opening expense in my mind is roughly present a new customer acquisition cost online store. So we like to keep that very efficient, because I think that tells how strong our brand is. If we have a strong brand we’re able to keep our marketing spending very efficient.

Andy Yeung - Oppenheimer & Co.

All right, that’s helpful. Thank you so much and congrats on your solid executions on very tough macro environment and also I want to welcome Jun onboard. Thanks.

Jun Zou

Thank you. Thank you, Andy.

Operator

Your next question comes from the line of Gene Munster with Piper Jaffray.

Gene Munster- Piper Jaffray

Hi, good evening all, and my congratulations. And Peggy, just a high level question about how you think about the business just in particular the growth in marketplace. Do you have kind of a target growth number that you’re shooting for and then you’ll spend appropriately to get to that, or is more of your long-term management of the business to think more about profitability, obviously there is -- it’s a balance between the two. So, which one of those two forces is more powerful, a target growth rate or a target margin, and then a follow-up question.

Peggy Yu Yu

I think its driving the balance between the two. But on top of that making sure the stores are right are more important to us. And regardless to whether its self-procured or its sold by merchants, the stores don’t always get right, and sometimes they – the product selection and sometimes it’s the brand selection and so making sure that the satisfaction rate and all those things coming with a [pulse] in the survey is telling us that customers are happy with our selection, and with the delivery, and with the service. Those are more important than anything else. And after we do that the stores are right, then we look at how much we spend and we achieved more efficiently with our spending.

Gene Munster- Piper Jaffray

Okay. So, do you think just kind of in terms of marketplace growth as we look out to maybe next year is a 40% plus kind of growth, does that seem achievable and kind of consistent with your plan?

Jun Zou

Hi, Gene. We actually are still working on our budget next year and …

Peggy Yu Yu

So, our GMV growth for this quarter was about 150%, and going into next year – going into next quarter next year, the base will be larger, so the rates will be slower but we're moving to the direction of having more merchants selling more products on our platform.

Gene Munster- Piper Jaffray

Got it. And my last question is, you talked about some third parties using your fulfillment services, and you talked about your take rate; but is that a profitable business for you with these merchant services or are they, is it something you’re using to …

Peggy Yu Yu

Right now we don’t build it as a profit center, and it’s about breakeven. And we want to provide – because Dangdang has very sophisticated logistic network and between our warehousing capacity and our network of over 100 couriers we have great services that our merchant programs are used -- that they can use. And about 60% merchants on marketplace use it -- use Dangdang logistic services. And we pass our cost of running those services to our merchants and that’s our practice.

Gene Munster- Piper Jaffray

Got it, okay. Thank you.

Operator

Your next question comes from the line of Chao Wang with Merrill Lynch.

Chao Wang - Merrill Lynch

Hi, good evening and thanks for taking the questions. I actually have a high level question. So, in China’s e-Commerce space, so how many platforms do you think you can coexist eventually, so I mean, for the general platform not vertical ones? Thank you.

Peggy Yu Yu

I think there can be multiple ones, and each has different characteristics. For instance, on Tmall I see younger population with much smaller basket size than that of Dangdang and Dangdang customers tend to be older in age and has bigger wallets, and then on Tmall they also have a very young population. And for Dangdang and our customers because the accumulation we have with our customer base over the last number of years, they tend to be more female, and a lot of them buying for themselves and also for their families. So, I think it’s just going to a great mall with many great stores. There can be platforms that are good at certain categories and then also have their own destination or targeted customer base.

Chao Wang - Merrill Lynch

Okay, thank you. Second question is, could you elaborate more on how you improve marketing efficiency in the quarter and also on the customer acquisition cost of RMB19 that you mentioned, do you think it’s sustainable because it seems quite a lot. Thank you.

Peggy Yu Yu

Maria, can you refresh our memory how far customer acquisition cost or I think RMB19 is in the ballpark and actually we’ve been doing that for almost like that for over a year I remember like – Maria is just pointing the data to me. Last quarter was about RMB22 and then Q3 a year-ago it was about RMB21. So, yes it is efficient, but it didn’t differ that much. I think that has a lot to do with the fact that we generate a lot of customers from word-of-mouth effect and that’s pretty much the least expensive way of growing customers.

Chao Wang - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from the line of Ming Zhao with 86 Research.

Ming Zhao - 86 Research

Thank you. Thanks for taking the questions. A couple of items on the balance sheet, (indiscernible) intangible asset about RMB44 million what is that, so that’s the first question. And secondly, can you give us the update about the Tianjin, the infrastructure in the Tianjin, is that finished and what is your CapEx for next year?

Jun Zou

It’s Jun Zou. Thanks for the question. The RMB44 million goodwill you referred to is actually the lend rights in Tianjin and we have started the construction in Tianjin and we have made a very small payment there, but we expect the construction just start to grow. The overall construction cost for the project will be around $35 million. And as I mentioned before in this quarter we plan to spend around RMB30 million depending upon weather condition.

Ming Zhao - 86 Research

Okay, all right. Thanks for that. So, another question is about, your store front Tmall, going forward how big in percentage the Tmall sales will represent in your overall top line? And also I want to understand the margin implication here. Should we see the gross margin coming lower for media segment there, but marketing expense are further saved?

Peggy Yu Yu

Tmall, I think the platforms whether its Tmall or Tencent will be small and that in the near future. And in terms of margin, we sell at one price whether it’s on Dangdang’s own site or it’s through Tmall or anyone or Tencent anybody else. So, opening a Dangdang store on other companies website doesn’t have direct impact, margin per say.

Ming Zhao - 86 Research

But you’ll have to pay commission for sales in each product, right?

Peggy Yu Yu

That’s right, that’s right. That is going to go into our marketing expenses -- is that how we do it? Jun, can you handle this?

Jun Zou

I think its part of -- actually an impact on gross margin. But the impact will be very minimal because – as Peggy, mentioned we only pay a low-single digit commission to those platforms and those platforms itself tend to have a low, a very, very high online sales. So, basically I think that will offset the commission we pay.

Ming Zhao - 86 Research

All right. Thank you very much.

Jun Zou

Yeah.

Operator

Your next question comes from the line of Elinor Leung with CLSA.

Elinor Leung - CLSA

Hi, thank you for the call. I had two question, one is that; can you comment regarding your both retailing business, it’s still going very nicely at 33% in 3Q, whether it’s sustainable and how is the competition right now in the book retailing market, and any impact from the digital book market as well. And the second question is regarding your Tianjin warehouse. You just mentioned that you’re going to spend $30 million in terms of the CapEx and how much have you spend so far and how much you’re going to spend in the 2013?

Peggy Yu Yu

Yeah. The media segment in Dangdang is very strong. And we're actually building up higher market share with our -- already very large space, and the second, third or fourth player are lagging behind even more. So that’s our media segment. And so far we have seen – we haven’t seen significant impact on the e-Book side since we’re engaged in the e-Book business. We hope that this impact will come and will be benefit from it. And coming into the Tianjin warehouse project, the total CapEx of Tianjin project will be US$35 billion and I don’t remember how much we spend so far and I have to ask Jun to handle this question.

Jun Zou

Sure. Yeah, in the third quarter we actually have made a very small prepayment of RMB3 million. And as I said, we plan to spend an additional RMB30 million in the fourth quarter. So, we do expect …

Peggy Yu Yu

(Indiscernible).

Jun Zou

… RMB3 million.

Peggy Yu Yu

Okay.

Jun Zou

Okay. Yeah and so we would plan to spend the rest of course, in the year of 2013. And I will just add one point to the market share of media question; I think our gross rate is 33% in the media factor and the total book market to grow probably at less than 30%, which means we’re actually growing in market share.

Elinor Leung - CLSA

Can you comment regarding the competition rate now among yourself and other e-Commerce platform like 360buy or Suning or has the competitions slowdown?

Peggy Yu Yu

I think because e-Commerce has a very big future and we’re all going to work very hard to get a market share and 360 is a company build around its core category of consumer electronics and appliances. And Suning – and its building up its e-Commerce presence also in consumer electronics and digital as well as large home appliances like refrigerator or air conditioning. So, I think that we’re doing our – good job in media segment, in general merchandise segment and also in e-marketplace programs.

Elinor Leung - CLSA

Thanks.

Jun Zou

Thank you.

Operator

Your next question comes from the line of (indiscernible) with HSBC.

Unidentified Analyst

Hi. Good evening. Congratulations on the solid quarter. I just had a couple of questions, can – you talked about the growth rate of maybe sort of how you’re good in share, can you – its from the numbers its hard to really discern what the growth rate that you’re seeing in the other destination categories, baby and health and home products because I know, you shifted some products to the marketplace, so can you help us understand sort of the growth rate of the other destination categories please. Thank you.

Jun Zou

Our general – self-procured general merchandise business grow at the rate of around 56%. Now our – actually other revenue which mainly comprised of e-marketplace business grow at a rate of 183%. So, yeah we do see stronger growth from those sectors compared to media.

Unidentified Analyst

Can you give us an understanding of like within the different categories, what the growth rate might be?

Jun Zou

At this stage, we don’t break down to that level. But I think, the overall trend already can show you a good indication of the strong growth in general merchandise.

Unidentified Analyst

Do you expect to further shift on more categories into the marketplace or are you guys sort of offset at this point?

Peggy Yu Yu

I think in both self-procured and the e-marketplace are going to add more. And although we’re already building a very meaningful presence in baby and – or household items. There are many additional brands or additional products we can add to self-procured. At the same time, we’re also inviting more merchants and – who are also setting a bigger volumes at us. So it’s going to be powered by both channels.

Unidentified Analyst

I see. Okay. That’s all I have. Thank you very much.

Jun Zou

Thank you.

Operator

Your next question comes from the line of Tian Hou with T. H. Capital.

Tian Hou - T. H. Capital, LLC

Peggy, I have one more question. So, you mentioned there were some irrational competition and so we all knew in mid of August that there was a – some kind of irrational competition and even government came involved, interfered, so what do you see now, you see those kind of irrational competition calm down or what’s the trend in that front?

Peggy Yu Yu

I think it comes and goes. And sometimes – and also that different vendors have their different ways of dealing with it. Sometimes its flash sales and sometimes its like bundled with other things. And I think that the competition for retail or for many other consumer business are always intense, one launches a program another one follow that maybe four hours later. And who will do better will really depends on one customer biting to the promotion or not and to whether vendors participate actively or not because it’s always – it has to come from somewhere. And in our way of doing promotion, we always make sure that we have a lot of strong vendor support because only with support of 1000s of vendors we work with, we think about we can believe our – that good pricing for long-term.

Tian Hou - T. H. Capital, LLC

That make sense. And so in Q3, the better results, how much is coming from this book sale of Mo Yan’s book?

Peggy Yu Yu

Actually Q3 the Mo Yan’s book was sold out for a long time because all the publishers were unprepared for him to win the Nobel Prize. And so …

Jun Zou

That’s Q4, right?

Peggy Yu Yu

Yeah, okay.

Jun Zou

The price was Q4.

Peggy Yu Yu

Sorry, Mo Yan – just remind me that Mo Yan won …

Tian Hou - T. H. Capital, LLC

Q3, right?

Peggy Yu Yu

No, in October, yeah. But anyway so the publishers were not prepared and the products were shipped out late and – but it still generates a very good buzz about rating literally what’s particularly by him, yeah, but the publishers were really …

Tian Hou - T. H. Capital, LLC

So that’s definitely – oh, that was definitely positive for Dangdang traffic, right?

Peggy Yu Yu

What did you say?

Tian Hou - T. H. Capital, LLC

I said that, that was a definite positive for your traffic.

Peggy Yu Yu

Oh, yes. Yeah. [Multiple Speakers]

Tian Hou - T. H. Capital, LLC

Okay. That’s – yeah.

Peggy Yu Yu

That happens in October, so that didn’t happen in Q3 that we’re reporting.

Tian Hou - T. H. Capital, LLC

Okay. That’s even better. Okay. So, okay that’s all my question. Thanks so much.

Jun Zou

Thank you.

Operator

There are no further questions at this time. I’d now like to hand the conference back to today’s presenters. Please continue.

Jun Zou

Okay. I’d like to thank everybody for joining us on the call today. And thanks a lot, we will see you next quarter.

Peggy Yu Yu

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

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