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

Q4 2012 Earnings Call

March 7, 2013 8:00 AM ET

Executives

Maria Xin – Director, IR

Peggy Yu Yu – Co-Founder and Executive Chairwoman

Jun Zou – CFO

Guoqing Li – Co-Founder and CEO

Analysts

Gee Sung – HSBC

Dick Wei – JP Morgan

Philip Wan – Morgan Stanley

Jiong Shao – Macquarie

Ida Yu – CICC

Tian Hou – TH Capital

Andy Yeung – Oppenheimer & Company

Andrew Marok – Cowen & Company

Benny Wang – Bank of America

Alicia Yap – Barclays

Ming Zhao – 86 Research

Operator

Hello, ladies and gentlemen, this is Caroline. I’ll be the operator for this conference call. I’d like to welcome everyone to the E-Commerce China Dangdang Fourth Quarter and Full Year 2012 Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. (Operator Instructions) I must advise that this conference is being recorded today, Thursday, March 7, 2013.

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

Maria Xin

Thank you and welcome to our fourth quarter and fiscal year 2012 earnings conference call. Joining me on the call today are Peggy Yu Yu, Executive Chairwoman and Guoqing Li, the CEO of Company and Jun Zou, the CFO of the Company. For today’s agenda, management will discuss highlights for the fourth quarter and the fiscal year 2012. This will be followed by a question-and-answer session.

Before we continue, I refer you to our Safe Harbor statement in our 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 the 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 and good evening everyone. I’m pleased to report a solid fourth quarter with multiple strong fans. In the last year, I shared with you on earning calls about growth rate of Dangdang’s marketplace and in marketplace, we performed truly very well. Let me call over to Dangdang’s business section by section. In media sector, we grow revenue at 30% year-over-year maintaining a dominant market share of close to 50% of book sold online in china. Despite already high penetration rate, Dangdang delivered a growth rate of 30% or more every quarter throughout 2012 with media sector. Dangdang intensified our focus on developing the marketplace program for general merchandise. General Merchandise Value from marketplace grow at 169% in fourth quarter. Among the different categories, apparel and the baby products performed particularly well.

Dangdang’s ambition is to transit from an online book store to a leading integrated online shopping mall. We shifted more resources from self-procurement business to a marketplace program with our general merchandise in last year. As a result, self-procured general merchandise sales growth lower than before. However, combined general merchandise sales from both marketplace and a self-procured business grow at 67% in Q4 and a 95% year-over-year in 2012.

During the fourth quarter of 2012, the combined general merchandise sales exceeded media sales for the first time in Dangdang’s history. This result is a remarkable milestone toward achieving Dangdang’s ambition. Moreover, other revenue of Dangdang which mainly consists of commission from marketplace and vendor advertisement revenue was close to RMB80 million in Q4, a 177% growth over the same quarter last year. For full year 2012, other revenue grow at 156% on year-over-year basis, reflecting strong marketplace growth. Throughout 2012, the investment community has been questioning Dangdang’s strategy, is Dangdang being marginalized in the heated length grabbing game of e-commerce, how can Dangdang compete against other players. Dangdang give us strive and service our performance.

We secured a permanent position in the media market. We made progress in general merchandise. We integrated our marketplace in the self-procurement business product selection and it delivers strong growth of general merchandise. We offered high quality fulfillment and the customer service with enhanced operational efficiencies. As a result, we will able to narrow our loss in the second half of 2012. We also reflected on what we could have done better in 2012.

In order to achieve fastest delivery to customers, we did parallel stocking in multiple warehouses. Suppliers couldn’t risk bump – promptly to multi location fulfillment. As a result, some popular products became out of stock. We could have adapted to the weak supply chain reality and the balance better. From time to time, we also adopted very aggressive pricing strategy on certain general merchandise such as electronic products, but didn’t commit enough marketing dollars to promote those promotions. We could have matched on marketing campaign better with promotions.

Now let me also update you on some key operational areas. As for customer experience, Dangdang continue to improve customer experience in the fourth quarter and this throughout the year. We increased fees paid for delivery company for faster services. We also began to offer door-to-door exchange services in 578 cities in the fourth quarter from 41 cities in the last quarter. Dangdang provided more logistic services to marketplace merchants by using by utilizing our logistic capacity.

Of particular note, is that 50% of marketplace orders are collected by Dangdang cash on free delivery service in the fourth quarter. We observed that merchants using our few of these services grow revenue faster than those who don’t use. Dangdang has more logistic and customer service products to develop and to deliver to our merchant partners going forward. On marketing, during the fourth quarter, we focused on brand marketing and targeted on general merchandise customers. We had 2.5 million new customers and 7.5 million active customers for the quarter.

And thirdly on technology and content, in the fourth quarter, our technology department spent more in both equipment and engineering hours for big data capability. By abutting cutting edge, dynamic modeling, we improved our data mining, cost category customer profiling and more precise marketing result tracings digital content such as E-books, although varies more, also progressed well in the fourth quarter. We gained more new customers for digital content in the fourth quarter than we had in the previous three quarters.

Dangdang will continue to focus on its long-term strategy and positioning. In building the leading integrated online shopping company, Dangdang will leverage its leadership position in media and push its expansion into general merchandising selective categories.

For Dangdang customers, where do they buy from Dangdang or market trade merchants, regardless whether they shop for media or general merchandise. We will give our customers seamless shopping, payment, delivery or return services of high standard. We are committed to deliver Dangdang value proposition to our customers year-after-year made of low price, broad selection and more conveniences.

With that, let me now turn the call over to Jun Zou our CFO for the financial review. Jun.

Jun Zou

Thank you, Peggy. Ladies and gentlemen, thank you for joining us to night. On this call, I’d like to discuss with you the fourth quarter results in more details.

Our total net revenue reached RMB1.650 billion in the fourth quarter of 2012, a year-over-year increase of 31%. Media revenue was RMB935 million, which was almost 30% on a year-over-year basis. General Merchandise revenue was RMB601 million a year-over-year increase of 24%. Other revenue, which is mainly from third party merchants advertising was RMB80 million a year-over-year increase of 177%. GMV of the marketplace in the first quarter was RMB548 million, up 169% year-over-year compared to 159% growth in third quarter of this year.

During 2012, we strategically shifted some general merchandise categories from self procurement to marketplace, where we recognized commission based net revenue instead of GMV. Therefore our revenue growth rate doesn’t properly reflect a strong momentum in the general merchandise sector.

Our overall general merchandise sales combining both the self procurement and marketplace, grew at a 67% year-over-year and exceeded that of media factor for the first time in our history.

Dangdang acquired a record high 2.5 million new customers in the fourth quarter. We have more than 7.5 million active customers in the fourth quarter, a year-over-year increase of 25%. Total orders in the fourth quarter were approximately basically $6.16 million, which also is historical high.

Average contribution for customer in the fourth quarter was RMB277, compared to RMB205 in the fourth quarter of last year. Now growth margin was 13.4% in the fourth quarter, an increase from 10.5% in the fourth quarter last year, but decreased from 15.2% in the third quarter of 2012. The year-over-year increase was primarily due to economy of scale in both Dangdang’s marketplace and self-procurement categories. The quarter-over-quarter decreases were primarily due to the additional inventory provision in the year end and the annual inventory count losses.

Gross profit was RMB216 million a year-over-year increase of 68% and a quarter-over-quarter increase of 10%. Fulfillment expenses in the fourth quarter, which include warehousing and shipping expenses, were RMB194 million, an increase of 25% year-over-year. Fulfillment expenses was 12% of total revenue in the fourth quarter of 2012 compared to 12.6% in the same period in 2011 and 14.4% in the third quarter of 2012. The decrease was primarily due to the operating leverage as our business scales up and a more efficient inventory and delivery management.

Marketing expenses were RMB84 million representing a 5.2% of total revenues, compared to 5.6% in the fourth quarter of 2011. This reduction was primarily due to more efficient marketing activities in this quarter. Technology and content expenses were RMB41.6%, which was 2.6% of total revenues, compared to 2.4% in the fourth quarter of 2011. The increase was primarily due to increased head count and investments in the technology.

General and administrative expenses were RMB46.7 million, which represent 2.9% of total revenues, compared to 2.5% in the corresponding quarter in 2011, which is primarily due to the increased professional service fees and the charges of POS services.

Share-based compensation expenses, which were allocated to related expense line items, were RMB2.8 million in the fourth quarter, compared to RMB4.1 million in the fourth quarter of 2011, which was a 32% decrease. Net loss was RMB122 million compared with a loss of RMB129.8 million in the fourth quarter of in 2011, primarily due to the increase in gross profit and operating leverage.

Net margin was 97.6% narrowed from negative 10.5% in the fourth quarter of 2011 and negative 7.8% in the third quarter in 2012.

Now moving to balance sheet items. As of year-end 2012, our cash balance was RMB1.63 billion, increased by RMB204 million from September 30, 2012. Meanwhile, our short-term borrowing increased from $200 million at the end of the third quarter to $600 million as of year-end 2012. Turnover days for account receivables were 3.3 days in the fourth quarter of 2012, compared to 4.3 days in the corresponding period in 2011 and 4.9 days in the third quarter due to shortened collection cycles from logistic companies. Our accounts payable were RMB1.6 billion as compared to RMB1.5 billion at year-end of 2011. Turnover days for accounts payable were 108 days in the fourth quarter of 2012 compared to 119 days in the corresponding period in 2011 and 157 days in the third quarter of 2012.

Our inventory was RMB1.5 billion at year-end 2012 as compared to RMB1.6 billion at year-end of 2011. Turnover days for inventory in the fourth quarter of 2012 were 97 days as compared to 115 days in the fourth quarter of 2011 and 135 days in the third quarter due to improved inventory management.

Capital expenditure for the fourth quarter of 2012 were RMB44.6 million including RMB26.6 million spending in Tianjin warehousing facility. Finally, our outlook for fourth quarter of 2012 as follows. We expect net revenue in the first quarter of 2013 to be around RMB1.3 billion representing a year-over-year growth of around 20%. We also expect GMV from our marketplace to be around RMB549 million in the first quarter of 2013, representing an accelerated year-over-year growth of 175%.

With that I will now open the call to questions. Operator, please go ahead. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). The first question comes from the line of Gee Sung from HSBC. Please ask your questions.

Gee Sung – HSBC

Good evening, thanks a lot for taking my question. I have sort of two questions, firstly, I wonder if you can give us a little bit more sort of color behind the guidance for the first quarter, I think what we’re seeing here is a sort of a mixture in revenue where the GMV continues to be solid, but overall revenue seems to be a little bit softer on a Q-on-Q basis. And I’m also wondering what the implications of that might be in terms of gross margins. And my second question is really just comments on what you’re doing in terms of mobile? Thank you very much.

Jun Zou

Okay, thank you for your question. Yeah. Actually as our strategy has been very consistent, we are selectively moving some of our actually in a self-procurement general merchandise business toward our marketplace. That’s why you can see in the accelerated growth in our GMV from marketplace. And in the meantime, we do believe our gross margin in the long-term will be actually gradually recovering from the historical low in the fourth quarter of 2011, but we do expect fluctuations due to seasonality and promotions from time-to-time.

Peggy Yu Yu

Yeah. Let me also supplement what Jun had said. If we look at general merchandise growth in terms of both self-procured and marketplace, our quarterly growth rate is much higher because we only book single digit of commission of general merchandise value showed, so it’s not entirely apple-to-apple comparison. I hope this helped doing with the questions as well.

Gee Sung – HSBC

And in terms of mobile strategy. Thank you very much.

Jun Zou

Yeah. In the fourth quarter of 2012, we do see orders coming from mobile actually increased by more than 90% on a year-over-year basis and we also witnessed the faster growth in the mobile e-commerce sector, and I think that we are part of and we are benefiting from that growth as well.

Peggy Yu Yu

Yeah. And in Dangdang, we use both APP and also WAP, and I think different customers have different user habits. And we see traffic from both APP and WAP role, and the certain customers use a lot of service functions such as checking the status of delivery and some customers place orders for the current quarter we are seeing faster development from APP over those from (inaudible). But in the long-run, I think this tool can converge or change.

Gee Sung – HSBC

Thank you.

Operator

Thank you very much. The next question comes from the line of Dick Wei from JP Morgan. Please ask your question.

Dick Wei – JP Morgan

Hi, thank you for taking my question, Jun. First question on the uptick rate for the open platform. Looks like uptick rate is increased a bit quarter-over-quarter in fourth quarter, and want to if you can explain what is the reason behind it? Thanks.

Peggy Yu Yu

Okay. I’ll try to give you a other shot. I think that we have very good category mapping here and Dangdang had a strong baby store starting from media and then we also built babies that way we might allow our merchants to sell our baby products. And on top of that because of our greater profile on the some other customer profile, our power category begin to shape up. And at Dangdang, where our firms deliver of building strong on a kilo category, just as what we did with publish, with folks. We became dominant player in the market and then people begin to identify Dangdang as a destination place for media content.

And I think the same analogy applied to marketplace, marketplace is not just one open universe and we’ll want to be very distinct in marketplace and now our apparel store, our shoes store and now babies stores are shaping up well and going forward, while going to continue to pull better margins and the better products, improve those categories and they have customers be attract to those products. And I think another reason our marketplace did there well, it’s because of the logistic service that we provide.

And Dangdang have cash on delivery capacity, which is a very comfortable with Dangdang customers. And then Dangdang merchants by using the cash on delivery and other logistic services that able to offer customers very fast, reliable, exchange, return services. So we think that’s another helpful factor. And certainly, I also think many merchants have very good product specialty knowledge, that’s what helped sales of particular product and their knowledge can be better than general B2C companies.

Let me just give you example, a teenager boy just bought a digital memory stick for a niche product for some kind of moving camera few days ago and he told me he ordered it from a Dangdang our merchant and they hick out the product the next day.

And he was very happy because he sent short message to the merchant and to ask for like a radar attached today as such as a free bonus or free gift – stick and he actually got that, but with like general B2C, a kind of all – we’re not able to offer that kind of customized or detailed services or futures to our customers. So I think it’s between the category mapping is because of logistic service, is because of strong product knowledge that each merchant has on their product range that are marketplace are shaping up.

Dick Wei – JP Morgan

Thank you, that is very good to know. Maybe just you follow-up on that out of this 80 million revenue into – from the marketplace. I wonder if you can get us more color in terms of this maybe fulfillment related versus advertising related and may be more of just the take rate related the basic take rate related?

Jun Zou

Of the 18 million, roughly three quarters of the revenue are raised marketplace and 1/4 are roughly related to advertising.

Dick Wei – JP Morgan

Okay, great. Maybe just quick second question. Do we expect to see any leverage going into the 2013 in relationship to the fulfillment expenses? Thank you.

Jun Zou

Yeah, we do see that you know, for few months expense as presented revenue has been going down in the last quarters and we believe with our ability to manage our inventory logistic much better and utilization of warehousing facility going higher. We’ll be able to see it more operating leverage there.

Peggy Yu Yu

And Dick, I also want to emphasize going forward, we intend to develop certain logistic product for our merchants who help with our marketplace abutting and for instance and some of the merchants, they can ship to Dangdang warehouses and then your Dangdang warehouses will ship out. And then some merchants don’t have that capacity or we don’t offer that service in the particular city. So going forward, we want to offer more shipping, more collecting, more return, more intercity shipping or delivery where we have different type of logistic service, we intend to deliver to our merchant program to help with their growth.

Dick Wei – JP Morgan

Great, thank you very much Peggy and Jun.

Jun Zou

Thank you.

Operator

Thank you very much. The next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

Philip Wan – Morgan Stanley

Hi, thank you. Thank you for taking my question. First of all, could you share with us any update regarding your distribution on third party platforms such as Tmall and QQ Buy?

Peggy Yu Yu

Dangdang has a very open policy. We invite other stores to come to open on Dangdang. We also go outside to team, I mean those examples include Gome and many, many others. We also go outside to places like Tencent or Tmall to attract their customers with Dangdang products and is an ongoing process and we evaluate performance and to this point the performance at Tencent is not very good and the performance on Tmall is much better and we just communicate and evaluate and sometimes we put more programs and sometimes we put other things on hold.

Jun Zou

Let me add to that actually I believe we’re not the number one book store on Tmall and we also see that customers from Tmall are basically not repetitive with our existing customer base. So it does add value as a channel to us. Thanks.

Philip Wan – Morgan Stanley

Thank you. And also another question is about your marketplace strategy as some, they are speaking increasing focuses on marketplaces for B2C players in the market. Could you comment on the competitive dynamics in this market, a marketplace model? How this Dangdang differentiate functions in terms of commission? You mentioned some full payment services, but since like many B2C players also provide similar services, for some even they have good services. I just want to get a view on how, what kind of accomplish Dangdang can offer to the merchants?

Peggy Yu Yu

I think number one is our customer and as we mentioned that we have 7.5 million active customers for the quarter. I think for the whole year of 2012, we have about 15 million active customers. So that huge amount of customers that is attractive to many merchants to open store on Dangdang. And Dangdang customers have certain profiles, they tend to be a little bit older than say a 10 more or $0.10 customer. They have a little bit more money to spend than most selective with certain brands.

So I think that our customer profile also direct us to some of our category strategy and many companies offer apparel, but for Dangdang customer we select certain brands for apparel, so this kind of category mapping goes hand in hand with our customer profile. With customer profile and a category strategy that comes to our services. I already mentioned logistic service, we also have payments service and other services to offer to all customers and just now it mentioned a word commission. I think commission is sensitive for certain type of market merchants, but not all of them. And then we’re competitive in terms of commission, but on top of – but more important than commission, we believe in driving up volume and help our merchant program could be with up their sales, so they are able to use a volume and to use a scale to better service our customer.

I already said a lot about logistic and the customer support. So I’m not going to repeat on that and the very important with our logistic capacity, because Dangdang has a model of operating our own warehouse, but outsource our shipping services – our shipping fleet. So we have a very wide national coverage for delivery. At the same time Dangdang’s way of certain things operate by our self, many things outsource by others. We have a very good cost structure base and the shipping logistic, a expensive item for any e-commerce companies worldwide and also in China and Dangdang’s cost structure enables Dangdang a very cost effective way of logistic capacity. And we learn this cost advantage to our merchant programs as well. So this also helps our merchant programs with building their companies.

Philip Wan – Morgan Stanley

That’s very helpful, thank you.

Guoqing Li

(Interpreted). May I add a few words? Actually by now, there are a few thousand merchants that are on the queue to be participating in the platform we setup all in the marketplace, we offer and right now you can see we have put in place very good quality and the commission – brand the commission service and as well as the pricing from the customer’s perspective. And right now, our branding evaluation panel as well as service quality evaluation panel is evaluating these thousands of them to be listed in our marketplace.

Jun Zou

Thank you Philip.

Philip Wan – Morgan Stanley

Thank you for the color.

Operator

Thank you very much. The next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

Jiong Shao – Macquarie

Thank you very much for taking my questions. Can you hear me, okay.

Jun Zou

We can.

Jiong Shao – Macquarie

Okay. Great, thanks. I have a couple of questions. Firstly, just following up on your comments earlier about the comparing apple-to-apples for your guidance for Q1, if you do the adjustment to total converted back the revenue from a marketplace back to GMV and how would that suggest year-over-year revenue growth would have been, if you do not or had not switching to the marketplace strategy?

Jun Zou

Okay. That’s will be actually a very healthy growth rates that’s around 70% to 80%.

Jiong Shao – Macquarie

For the combined with the media plus general merchandise?

Jun Zou

Yes, then it would actually be 48%.

Jiong Shao – Macquarie

Okay. So you would have been at 48% this year?

Jun Zou

You combine the media and the general merchandise of course, right. The media business was a very, very stable business and we already have dominant market share.

Jun Zou

Yeah.

Jiong Shao – Macquarie

Okay. That’s great. That’s would be a pretty healthy growth rate. The second question is on your e-book, I was wondering could you give us a update on e-book strategy including your plans for the devices?

Peggy Yu Yu

When now developing downloads for mobile phones for patterns for other SIM on Dangdang trial launch, is the raters in the either second or third quarter last year and at this time, what few evaluating the results from the trial or a trial launch. The product from trial launch was sold out and we debating between try our e-raters and different applications I enjoyed and I’ll add another things. We, I think the downloading in the last quarter was much faster than the downloading from the previous three quarters. Having said that, the revenue number at this time is still very small.

Jiong Shao – Macquarie

Great. And your financing strategy that’s substantially below the regular books?

Peggy Yu Yu

Sorry, I didn’t hear you, can you repeat?

Jiong Shao – Macquarie

Sure, my question was the prices, your plan for the E-books going forward, was the prices you are going to charge on this E-books, is it going to be substantially lower than the prices of the regular books?

Peggy Yu Yu

All right, yes.

Guoqing Li

(Interpreted). Let me add a few words. In terms of the pricing for the E-books, actually we – Dangdang has tried to portray the publishing houses in China as well as the writers to cultivate and developed the customers, and in the Q4 we have launched a number of initiatives, for example downloading of the E-books with RMB9 yen or RMB5 yen or RMB1 yen and the number of downloads actually is very significant.

So our short-term objective is not to increase the sales revenues. The short-term objective is to lead that the Chinese customers to develop the habit of paying for the e-contents, even though it might be just RMB1 yen.

So I’ve talked about the habit of paying 1 Yen or 5 Yen for the downloading, actually this is not about whether the Chinese people are willing to pay or not, they are willing to pay. But the most important thing is that we need to cultivate and develop a user friendly platform for the convenience of the customers.

Jiong Shao – Macquarie

Okay. Great, thank you very much for the comments.

Jun Zou

Thank you, Jiong.

Operator

Thank you very much. Our next question comes from the line or Ida Yu from CICC. Please ask your question. Ida, your line is open.

Ida Yu – CICC

Hi, good evening. Thank you for taking my questions. And I only have one question in regarding of your marketing expenses in Q4 and I think there is a big epic spike in compare with Q3. I’m wondering what is the most frequently used at the format that is used for Q4 and what’s the trend to going forward in the future?

Jun Zou

Now, if you compare Q4 to Q3, we do see an increase of actually marketing expense that’s mainly because we spend actually branded advertising and in particular the advertising related to our anniversary as well as the quarter 4 of 2011. But this is a seasonal every year now compared to the fourth quarter of 2011 I do see that as a percentage of revenue, our marketing expense decreased from 5.6% to 5.2% so which means our marketing campaign are very efficient because as a result of smaller percentage of marketing expense we attract a record high new customers. Over to Ida.

Ida Yu – CICC

What’s the trend going forward in 2013?

Jun Zou

Ida, actually Mr. Li want to add a few words if you don’t mind.

Ida Yu – CICC

Okay.

Guoqing Li

(Interpreted). Our materials for the total. In the Q4, we actually did a lot of branding of Dangdang and the most important objective of those branding campaign is to tell the customers, the existing customers as well as potential customers of Dangdang that now we have a panel offerings in Dangdang and actually due to the branding initiative, the growth rate of the apparel business is a few times than of its growth rate of the marketplace in – on the average, which is 160% almost.

Jun Zou

Sorry Ida, you can continue on your next question.

Ida Yu – CICC

My next question is, what’s the trend going forward in 2013 and what is your expected operating rate showing Q1 and going forward?

Jun Zou

Historically, Q1 is not a quoted with heavy marketing expense and with operating leverage, economy was scaled and better management in terms of logistics and fulfillment, we do believe we’ll achieve better operating leverage.

Ida Yu – CICC

Okay. Thank you.

Jun Zou

Thanks.

Operator

Thank you very much. Our next question comes from the line of Tian Hou from TH Capital. Please ask your question.

Tian Hou – TH Capital

Hi, Peggy, Jun and Guoqing Li. Yeah, I have some couple of questions. And why is regarding – how many a marketplace partner do you have right now. That is number one. Number two is regarding the SKU, so that can now how many SKU – number of SKU you have for the marketplace, for the sales procurement. I have more questions, so let’s get this first. And then I will follow up with second question?

Peggy Yu Yu

This is the number of merchants and there are several solvents. And in terms of SKU and the self-procured general merchandise SKU, we have been reducing. And for marketplace, general merchandise SKU, we have been increasing. And, I think in Q4 for SKU for general merchandise, we have 940,000 SKU and does about 50,000 SKU increased from previous quarter. And for self-stock as I said, we have been reducing the SKU.

Jun Zou

Just to add to that, a number of merchants on our platform has been increasing at a roughly 60% year-over-year rate.

Tian Hou – TH Capital

Is that possible to give us the absolute number now, today?

Peggy Yu Yu

We just give the ballpark of solvents now.

Tian Hou – TH Capital

Oh. Okay, good. Yeah that’s it now with the first question. Also, the second one is that if I look at the young year trend, I saw the cost, fulfillment, marketing. Those three things are down and X percent of revenue and however technology and content as well as SG&A, those two were up. So I wonder what’s the trends going forward in 2013.

Peggy Yu Yu

I think for e-Commerce, the E-part, the technology part, is very important. And for technology, number one we increased the number of engineers by over like, I think by our head count increase last year was more than 100%, so while increasing our engineering capacity and that we want to purse Dangdang needs now and we also want to contribute more capacities for the future. And also Dangdang technology platform is getting increasingly complex. We had a technology platform for Dangdang self-procured model and now we’re adding capability for merchants and we want to add other features, so more people can use our technology platform, so we made this intentional effort, intentional spending in both our engineering hours and in Q4 particular, we also increased our CapEx.

Jun Zou

Let me address the G&A part, we do see actually G&A as percentage of revenue do you have some increase. It’s mainly because that we have some professional service fees in 2012 as well as increase the use of poster this, but generally speaking we’ll see some operating leverage on the G&A side.

Tian Hou – TH Capital

Yeah – and yeah, I heard the Li Guoqing whispering, so the other three lines I also want to know what the track could be cost of a few marketing?

Guoqing Li

(Foreign Language).

Tian Hou – TH Capital

Can you translate that?

Peggy Yu Yu

Yes. Actually the largest portion of increase in the engineers and the technicians, which the cost increased by 120%.

Tian Hou – TH Capital

Okay. So if you allow me, I have two small questions. Why is – I would like to get some updates on your self-brand Dangdang Premium. So what’s the updates on that one and also the impact of Tmall store, you opened it in October and has seen over the quarter past. So I guess at this point probably, you could see some specific results of that, so I wonder what you like – what you don’t like on Dangdang store?

Peggy Yu Yu

For Dangdang, OEM self premium products and we’ve seen as this is a manufacturing behavior and its catered put on Dangdang customer and the general – the gross margin for those line is very good. We think for the top line it takes a long time to nurture and if I observe other merchants, other retailers like Wal-Mart or may be Costco, Costco has higher like Wal-Mart, maybe it has 8% to 10% OEM in total sales, so to reach that is our long-term goal and is long term.

And for the platform and we opened Tmall platform in November and it’s more than a quarter and we are very pleased with the progress we made so far. There are a few, a lot of glitches to work out because Tmall customers are very, very different from Dangdang customers. Tim pointed out before that 80% of customers from Tmall are not repetitive from Dangdang customers and Tmall customers are used to certain features and also in terms like orders, stockings, and other things and we need to work out those things. And so far we like the customer flow and we are working very hard in matching Dangdang service features and other things with Tmall customers.

Tian Hou – TH Capital

Thank you for answering my question. Good, add a few words.

Guoqing Li

(Interpreted). Actually it is a much better deal for us to acquire new revenues and new customers in Tmall compared to other marketing initiatives.

Tian Hou – TH Capital

In which way?

Guoqing Li

(Interpreted). Actually the commission we pay to Tmall is very low and the team. We have to serve this platform; actually the cost is also very low. And we haven’t witnessed anytime that the customers from Dangdang in the major cities would go to Tmall to buy books. So there is no such trend witness.

Tian Hou – TH Capital

Okay. Thank you.

Operator

Thank you very much. The next question comes from the line of Andy Yeung from Oppenheimer & Co. Please ask your question.

Andy Yeung – Oppenheimer & Company

Oh hi, thank you for taking my questions. My first question is actually about a follow-up on your customer acquisition cost. Can you give us some color in term of the trend there? I know, like in the marketing cost as a percentage of revenues have increased sequentially due to seasonal factors, but have declined year-over-year. But overall, can you just give us a little more color on your customer acquisition cost? Was it a bit customer retention rate there? And how do you – in going forward – how they’re trying to reduce customer acquisition cost going forward?

Peggy Yu Yu

Yeah, actually customer acquisition cost in the quarter was RMB33 and its flat compared to the same quarter in some 2011. As I mentioned you, seasonally fourth quarter is usually a heavy promotion quarter, that’s why the cost usually is high in the fourth quarter. But obviously, it’s good – it’s actually a very good job for marketing department to have done in such a competitive market that they can be made the customer acquisition cost a flat compared to a year ago. And now for the entire year, new customer acquisition cost is around RMB23, it’s also a flat compared to a year before, which is again very difficult sort of achievement I would say in such a competitive market.

Andy Yeung – Oppenheimer & Company

Okay, I got it there. Okay my next question is then regarding your cash flow situations as well as your cash balance. Obviously, you’re still in the very high growth phase and a few consuming cash. How – what’s your view on that? And how should we think about the cash borrowing going forward?

Peggy Yu Yu

We do see our actually cash flow improving on a year-over-year basis. In 2012, our operating cash flow were negative RMB92 million compared to negative RMB124 million in 2011. And so, we still have RMB1.6 billion – or more than RMB1.6 billion cash on our book. So we believe we’ll be able to actually sustain long enough and we’ll be able to recover our cash flow consistently as well.

Andy Yeung – Oppenheimer & Company

Thank you very much.

Peggy Yu Yu

Thank you Andy.

Operator

The next question comes from the line of Kevin Kopelman from Cowen & Company. Please ask your question.

Andrew Marok – Cowen & Company

Hi, this is Andrew Marok, I’m for Kevin. I just had a couple questions, expanding on your mobile comments from earlier. Do you have any metrics related to the percentage of visitors or orders or revenue from mobile and if you have a smartphone and tablet breakout? And if you could talk a little bit about the macroeconomic conditions in China in Q4 and run into Q1. That would be great, thank you?

Jun Zou

Let me address your first question, Kevin. We do see that the traffic coming from mobile are in the mid to-high teen percentage of our total traffic and orders from mobile terminals are somewhere between 5% to 10% of total orders.

Guoqing Li

(Interpreted). Let me add up the words. Actually regarding the mobile when we pay attention to is the share of mobile traffic, this is the priority focus we have and our purpose is not to most of the usage from computers to the mobile.

Andrew Marok – Cowen & Company

And Jun, I don’t have the smart phone and the tablets breakdown on top of my head and can Jun give some color on the third question he asked of the macroeconomic situation here?

Jun Zou

Well macroeconomic situation that’s really a broad question, what we do see that the after the People’s Congress are being held everything stabilizing and obviously the government has rollout numerous measures to actually stimulate economy by organization. And I don’t know how many trail of dollars or RMB that will mean, but I have confidence that the economy will grow at a very healthy pace and also see, note the different measures the new government has rolling out to, I guess, most of people here pleased and confidence in those policies.

Operator

Thank you very much. The next question comes from the line of Benny Wang from Bank of America. Please ask your question.

Benny Wang – Bank of America

Hi, thanks for taking my question. My first question is coming from the revenue mix, so within the general merchandise category, we understand Dangdang has been doing fairly well in the baby segment. And I think you had mentioned about the expansion into the apparel category. So I just want to understand the next going forward because we understand that within the general merchandise previously the baby segment is more than one-third within the general merchandise segment. So I just wanted to add that, that going forward would baby still contribute a bigger portion and second would be apparel. And I guess next will be the home and lifestyle products?

Peggy Yu Yu

Going forward, apparel, baby, home and lifestyle will overall. And in the last several quarters and also I think going forward, our apparel show particularly strong growth momentum. I think that has a lot to do with the types of merchants we recruited, and that was a team contribution. And I also expose in baby and the baby apparels and carriages and the baby related products from our general merchandise merchants as well. Home and life, we used to do this category mostly by self-procured, merchandising style and going forward we’ll also open that business to merchants as well.

Guoqing Li

(Interpreted). Okay, can I add a few words. Indeed, we have been working hard to develop the destination category. Apart from the media, we also are developing the babies apparels, home and life products, and we hope that in the future in the consumer survey, when people ask, where do you go to buy baby products or toddler products they would say Dangdang is the first choice. And of course, when we would like to attract is the mid and high end customers.

Benny Wang – Bank of America

Thank you.

Operator

Thank you very much. Your next question comes from the line of Alicia Yap from Barclays, please ask your question.

Alicia Yap – Barclays

Hi, good evening thanks for taking my questions. Just a couple of the housekeeping questions. So, first of all can you remind us whether the total active customer and the total order of metrics that you disclose, actually include those users and out of coming from your marketplace?

Jun Zou

Yeah, we have 16 million orders in the fourth quarter of 2012, 7.5 million active customers and 2.5 million new customers, and yeah, so that’s what we breakdown for now.

Alicia Yap – Barclays

So are those including the traffic coming from the marketplace.

Jun Zou

Yes.

Alicia Yap – Barclays

Okay. And then the second question is can you remind us the reasons for you shot term loan and we are treating that an increase of the short term loan from RMB200 million to RMB600 million this quarter, what is the reason for that?

Jun Zou

Basically we believe, first of all banks here in China are actually confident enough in our business and they actually in extend credit lines to us. And to me I believe borrowing costs are much lower than equity – cost of equity. So we believe some leverage is actually a really good for us to use and help us to grow, and that’s why we decide to leverage our balance sheet to preserve cash.

Operator

Thank you, very much. The last question comes from the line of Ming Zhao from 86 Research. Please ask your question.

Ming Zhao – 86 Research

Thank you. I’ll ask the question in Chinese then I’ll translate it. So my question is how to improve the bottom line of our performance? Thank you.

Guoqing Li

Okay. (Interpreted). I guess, people have seen the last quarter of Dangdang because actually Dangdang is a typically listed company and we have a very – we are very transparent and fully transparent.

Ming Zhao – 86 Research

I’m sorry.

Peggy Yu Yu

The intelligence of our competitors. I think, I believe that because of flow we have in Dangdang is actually the minimum and it is the best deal we have in the industry.

Guoqing Li

(Interpreted). The second question about the adequacy of cash flow and after the according to my information on the losses of the competitors. I think of my financial capacity in Dangdang is stronger than the competitors? The third question about how to reduce on the losses. I think actually they are two alternatives for Dangdang. One is to maintain higher rate of growth without the decrease of losses.

And the second alternative is If we just shut down the self procured general merchandise business, we’ll be able to reduced the losses and the make profits. The actual we can shut down the self procured general merchandise business, because these are business offers standardize plenty products for the mid-end and the high-end customers. And this actually can increase the thickness of our customers and we capacitive purchases by the customer. And for this purposes actually, we cannot rely on the marketplace our merchants to do this.

Okay. And regarding the self procured general merchandise business actually, for example in digital 3C products, might pricing, our pricing strategy is very offensive actual we adopt a low pricing strategy. We follow on the pricing in debt of all the competitors, and our pricing is always a few percentage points lower than that of the competitors. So of course if you, if we intend to reduced our losses, we could just bring up the price to an average market level.

Jun Zou

Okay.

Guoqing Li

(Interpreted). Let me add a few points here as well. Now we had mentioned that we do see a improving operating cash flow in the year of 2012. And we also see that our net loss margin has been narrowing in the last two quarters. So, we believe we are actually gradually recovering our margin. And not to say that we do have more than RMB1.6 billion cash order on our book here.

Operator

Thank you very much. We have come to the end of the Q&A session. I will hand the conference back to Maria.

Maria Xin

Thank you for joining us today. See you next time.

Jun Zou

Thank you.

Operator

Ladies and Gentlemen. That concludes our conference for today. Thank you for your participation. You may all disconnect.

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