Why Is Dangdang Becoming Multi-Functional?

| About: E-Commerce China (DANG)

The Chinese online retail industry is dynamic and growing explosively. According to the latest reports by China Internet Network Information Centre, the Chinese ecommerce market is expected to reach $190 billion market by 2013 and $440 billion by 2015. In terms of value, China will soon be the second largest ecommerce market after United States.

Who Are the Key Players in the Chinese Ecommerce Market?

Tmall.com, a subsidiary of the privately owned Alibaba, has 40% of the Chinese online market share. 360 Buy.com is in a distant second with 15% of the market share. Companies like Suning, Amazon China, and DANG are in the third tier of the market share. DANG's current share of the Chinese ecommerce market stands at 1.6%, which is behind Amazon (NASDAQ:AMZN) with a market share of 2.2%.

DANG Emergence as a Significant Player

Dangdang (NYSE:DANG) is the Beijing based Commerce Company in China and remains well positioned to garner a significant share of the Chinese ecommerce market-which is slated to grow to $440 billion by 2015.

After emerging as a market leader in China's online book and allied media market, DANG wants to leverage its massive customer base and technology platform to sell products which offer higher margins.

DANG's strategy is to transform itself from a purely 'books and media' online store to a full-fledged two-pronged ecommerce site. It entered into strategic alliances with strong third party vendors such as Gome electronics, offering them its technology, warehouses, and fulfillment infrastructure. DANG also came out with its own apparel and electronics product lines, which extensively increased its online offerings within its ecommerce. The success of DANG's shift in strategy is a boon from the companies 1Q13, announced in May.

DANG has shown steady growth as it acquired new customers throughout the past few quarters. It managed to add 2.4 million new users in 1Q13, which translates to a 24% increase YoY. DANG's customer base currently stands at 7.4 million.

The customer base increase has translated into more sales. DANG has increased its gross merchant value by 193%, which is $94 million over the same period last year. Arguably, it has managed to shrink its net loss by 25% YoY. Net loss in its 1Q13 was $12 million, which is 5.5% of total revenue-compared to $16 million in 1Q12.

DANG has a market capitalization of $641 million and is trading at near record highs of $8 per share. The average volume of its shares traded during the last three months stands at about 2.2 million. It has shown substantial growth of 54% in revenue in 2012 and an earnings growth of 43%.

All These Positive Growth Trends are Indicative of DANG's Emergence Within a Sustained Phase of Double Digit Growth in the Upcoming Years

DANG's stock price has doubled during the past year. I foresee DANG repeating this feat this year as well, thanks to their change in top management and their approach to sharper market segmentation.

Some of the significant reasons I am bullish about DANG's prospects throughout the next few years are as follows:

DANG is currently outpacing its nearest competition:

While DANG is adding new customers and successfully retaining its loyal customer base, its closest competitor Amazon is struggling.

Amazon has only a thin 0.6% lead over DANG in China online market:

DANG has already taken on Amazon by releasing E-book platform in China, which is cheaper and has more features than Amazon's Kindle. Thanks to DANG's command of market share in Chinese online book market, it is marching ahead of Amazon in this key segment of the market.

Considering China has a 590 million internet user base, DANG will gain 5.3 million new users if it is only able to increase its market share by 1%. This will take significant market share away from Amazon. In my view, DANG's proven track record to secure new customers and transactions will result in a significant jump in their overall sales numbers.

DANG co-opting new vendors on to its online platform:

In the 2Q13, DANG predicts a substantial jump in its earnings. DANG will earn commissions from third party vendors who rent DANG's warehouses, along with its technology and fulfillment services, which will allow these third party vendors to sell their products on DANG's web portal. DANG has recruited new vending partners, encouraging them to sign exclusive agreements which allow DANG's customers to have ample choices of merchandise at assured lower costs.

DANG, is transforming from a hard hitting B2B online network into an ecommerce portal offering a wide variety of products ranging from books, electronics, household items, and apparels which ensure high volume sales and high margins.

DANG executes customer-centric marketing strategy by leveraging technology:

Techniques such as DANG's engagement with customers via social media, based on market research, are now being adopted by competitors. In May, DANG launched a 'Flash sales channel', where the company offered a pre-decided list of products from famous brands at a marked down price for a limited period of time in a day. Customized software is used to analyze customer buying patterns and generate the product lists on FLASH sales channel. These Flash sales happen daily and help build and retain momentum of sales.

What's Ahead for DANG

DANG has predicted a 23% YoY growth in revenue in 2Q of this year along with a further reduction in its loss by up to 21% YoY. TMall.com is the market leader in China and has reported doubling of its revenue to approximately $650 million, in an announcement on July 17. This indicates a positive near and medium term in the underlying market dynamics for e-commerce in China.

I believe DANG to be attractively priced and expect it to brush off its losses to become even more attractive to investors by 4Q14.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.