Youku Wows With Outlook, Dangdang With Marketplace

by: Doug Young

Today marks the official highpoint of earnings season for US-listed Chinese companies, with at least 4 of the ones I cover reporting their results. With all that information flooding into the market, I thought I’d look at video site Youku Tudou (NYSE:YOKU) and e-commerce company Dangdang (NYSE:DANG), 2 money losers that are trying desperately to claw their way to profits. The news looks positive for both, with Dangdang reporting its losses continue to shrink as Youku has finally come out and dared to utter the word “profit” in its latest report.

Investors greeted the reports with relative enthusiasm, bidding shares of both companies up 4-5 percent after the results came out. Youku and Dangdang have seen their shares rise sharply this year, part of a broader wave of returning positive sentiment towards US-listed Chinese shares after a 2 year slump. But both are off their year highs reached in October, as investors take some profits from the recent run-up in share prices.

Speaking of profits, let’s begin our earnings day with Youku Tudou, whose results really don’t look all that impressive to me. The company reported third quarter results and only gave comparisons for the second quarter, presumably because it felt year-ago numbers were meaningless. The current Youku Tudou was formed about a year ago when then-industry leader Youku acquired chief rival Tudou.

Youku Tudou reported its revenues grew a modest 14 percent in the third quarter from the second, while its net loss nearly doubled to 219 million yuan, or about $36 million. (results announcement) While none of those numbers looked too exciting, the company also predicted it will post a profit in the fourth quarter on a non-GAPP basis.

I’ve followed Youku Tudou for quite a while now, and this is the first time I can recall it has dared to forecast any kind of profit. Of course, non-GAPP can mean lots of things, so we’ll have to see what kind of profit the company actually posts next quarter. I suspect we could see a big charge related to its Tudou purchase last year, as market talk has said that integration of the 2 companies wasn’t very smooth. But if it does take such a charge, at least it will be a one-time item and the company can move forward from there and focus on building its business.

From there let’s move on to Dangdang, which has been exciting investors for much of the last year with updates on its fast-growing marketplace. Dangdang started off as a traditional online store, selling its own merchandise to buyers. But lately it has put lots of resources into its marketplace platform, an online mall where third-party merchants can set up shops similar to Alibaba’s (OTCPK:YAHOF) TMall.

Dangdang reported that sales from merchants using its marketplace nearly tripled in the third quarter from a year earlier to reach almost 1 billion yuan. (results announcement) That jump was the main driver behind an 88 percent increase in its overall general merchandise sales for the quarter. The company predicted its marketplace sales would continue to notch strong growth of about 150 percent in the current quarter. Equally important, it also saw its net loss drop significantly in the third quarter to 27.9 million yuan, about half the loss of the previous quarter and a quarter the loss from a year earlier.

Dangdang made no mention of when it might finally return to a profit, following 2 years of losses amid stiff competition in China’s e-commerce sector. But if the current trends continue, I would expect it to return to the black by the first quarter of next year, and we could even see a profit in the fourth quarter. If that happens, look for more potential upside for the company’s stock.

Bottom line: Loss-making Youku Tudou and Dangdang have both excited investors with hints of profits in the next 2 quarters, providing potential upside to both stocks.