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E-Commerce China Dangdang (NYSE:DANG)

Q4 2013 Earnings Call

February 27, 2014 7:00 am ET

Executives

Sophia Zhou -

Yu Yu - Co-Founder, Executive Chairwoman, Interim Chief Financial Officer and Executive Chairwoman of Beijing Dangdang Information Technology Co Ltd

Zou Jun - Former Chief Financial Officer

Analysts

Dick Wei - Crédit Suisse AG, Research Division

Binnie Wong - BofA Merrill Lynch, Research Division

Jiong Shao - Macquarie Research

George Chang - Macquarie Research

Chi Tsang - HSBC, Research Division

Thomas Chong - BOCI Research Limited

Philip Wan - Morgan Stanley, Research Division

Andrew Marok - Cowen and Company, LLC, Research Division

Ella Ji - Oppenheimer & Co. Inc., Research Division

Tian X. Hou - T.H. Capital, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2013 E-Commerce China Dangdang Incorporation's Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 27th of February, 2014.

I would now like to hand the conference over to your first speaker today, Ms. Sophia Zhou. Thank you, please go ahead.

Sophia Zhou

Thank you, and welcome to our Fourth Quarter 2013 Earnings Call. With me today are Peggy Yu Yu, Executive Chairwoman; and Jun Zou, the CFO of the company. 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 discussions of certain non-GAAP financial measures. Please refer to our earnings release, which includes a reconciliations of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during the call are in renminbi.

I would like to turn the call over to our Executive Chairwoman, Peggy Yu Yu.

Yu Yu

Thank you. Good morning, good evening, everyone. I'm happy to report that Dangdang has returned to profitability in the fourth quarter of 2013. This reflects our commitment to improving our financial performance and a solid execution of our strategies to transform Dangdang from online bookstore into a integrated online shopping mall targeting mid- to high-end consumers.

Our marketplace delivered another quarter of strong performance and growth. Looking at our designation -- destination categories, fashion and apparel accounted for over half of our marketplace GMV and outpaced the growth of the overall marketplace. Baby and Maternity also saw accelerated growth. Our Flash Sales Channel continues to perform well and we recently added new categories, such as cosmetics, books, food and the consumer electronics to this channel.

Combined general merchandise sales from both principal and marketplace surpassed those of books and media for the fifth consecutive quarter, increasing 80% year-over-year. We remained the dominant force in China's online books and media sector, generating revenue growth of 28% for the quarter.

Let me update you on some other key operational achievements. In fulfillment, more efficient operations and operating leverage drove costs to 9.4% of total net revenues. We utilized Robin Woh [ph] to increase efficiency and implemented other measures and allowed us to lower headcount. Thanks to our large scale, we achieved a further reduction in intercity transportation and last mile logistic costs.

Single's Day taking place on November 11 presented a challenge for China's e-commerce industry as a whole, particularly in terms of shipping and the delivery. By taking advantage of our scalable logistic model, our execution in this area was one of the best in the industry. We are proud of our ability to serve our customers at such a high level, especially during the peak season. We continue to build awareness of the Dangdang brand through marketing and branding activities, especially in fashion and apparel.

By coordinating online and off-line campaigns, we kept expense in line with that in 2012, but with better results. We acquired over 3 million new customers in the fourth quarter of 2013 at a lower cost per customer and saw strong gains in both order size and the contribution per customer.

In technology, we fine-tuned our personalized recommendation system to drive in-house buys at check out and enhance our competitor monitoring system, which helps us identify top-selling products and determine pricing strategy. We opened our platform and introduced new services for merchants, who now have access to hundreds of independent software vendors to help them run their business more effectively.

Our ability to offer a consistently positive customer experience is one of our key advantages. We have always offer our customer a variety of convenient payment options, and now we have made it even easier to purchase goods on Dangdang with the addition of express payment. We have made -- we also made the return and exchange process easier and faster and introduced gift services, including gift wrap and personal gift card messages.

We continue investing in mobile Dangdang, as we believe mobile devices are the future of e-commerce. We launched a new version of our mobile app, and wireless orders exceeded 10% of total orders for the first time.

In summary, the fourth quarter represent a significant milestone for Dangdang. We improved operations and the return to profitability. We have made excellent progress transforming our company into integrated online shopping mall. In 2014, we plan to drive growth in general merchandise through our marketplace and the principal business. We will devote considerable resources to developing of the destination categories, while seeking to aggressively expand our share in the books and media market.

We remain focused on the healthy development of our business and we'll employ a disciplined approach to improving our financial condition and the performance.

China's e-commerce industry has tremendous growth potential, supported by the expanding middle-class and the millions of graduates entering the workforce each year in major metropolitan areas. At the same time, we recognize that we operate in a highly competitive industry. We plan to leverage mobile Internet, our growing base of more than 20 million loyal customers. Strong supply chain and a superior operation management capabilities to further enhance the customer experience. We expect our strategy of becoming integrated online shopping mall will meet even greater success in 2014.

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

Zou Jun

Thank you, Peggy. And ladies and gentlemen, thank you for joining us today. I would like to discuss with you the fourth quarter results in more details. Our total net revenues reached RMB 1.97 billion in the fourth quarter of 2013, a year-over-year increase of 22%. Media product revenue was RMB 1.2 billion, which was up 28% on a year-over-year basis. General merchandise revenue was RMB 678 million, up 13% year-over-year. Other revenue, which is mainly commission-based net revenue from third-party merchant's and advertisements, was RMB 99 million, a year-over-year increase of 25%.

We continue to strategically adjust a certain general merchandise categories between our principal business and the marketplace. And we will continue to do so going forward as we believe there is still more room for margin improvement. GMV of the marketplace in the fourth quarter was RMB 1.39 billion, up 154% on a year-over-year basis, above our guidance of 150%. Our overall general merchandise sales, combining both principal and marketplace grew 80% year-over-year and exceeded books and media product sales for the fifth consecutive quarter, demonstrating our continued successful execution in transforming our company from an online bookstore into an integrated online shopping.

We grew the number of new customers by 21% year-over-year to approximately 3.1 million. Active customer numbers increased 18% year-over-year to around 8.9 million. The average contribution per customer grew 32% to RMB 367, up from RMB 277 in the same period last year. Total orders in the fourth quarter were approximately RMB 18.1 million, up 13% year-over-year.

Now gross margin in the quarter was 17.6%, an increase from 13.4% in the fourth quarter of last year, and unchanged from the third quarter of 2013. The year-over-year increase resulted -- was result from strong gross margin contribution from books and media products and the increasing other revenue, representing the sustained scaling of the marketplace business.

Gross profit was RMB 348 million, a year-over-year increase of 61% and a quarter-over-quarter increase of 30%.

Fulfillment expense in the fourth quarter, which include warehouse and shipping expenses, were RMB 185 million, down 5% from last year. And fulfillment expense were 9.4% of total net revenue in the fourth quarter, compared to 12% in the same period last year, and 11.7% in the third quarter of this year. Now the year-over-year, quarter-over-quarter decrease in fulfillment expenses as a percentage of total net revenue were primarily due to more efficient operations, increased employee productivity and the lower headcount.

Marketing expense were RMB 83 million, representing 4.2% of total net revenue compared to 5.2% in the fourth quarter of last year and 3.8% in third quarter of this year. The year-over-year decrease as a percentage of total net revenue was due to better coordination of online, offline marketing campaigns. The quarter-over-quarter increase as a percentage of total revenue was due to investment in brand campaign and a fashion apparel advertisements.

Now technology and content expenses were RMB 39 million, which was 2% of total net revenue compared to 2.6% in the fourth quarter of 2012 and 2.9% in the third quarter of 2013. The year-over-year and quarter-over-quarter decrease in technology and content expense as a percent of total revenue were primarily due to operating leverage.

G&A expenses were RMB 45 million, which represented 2.3% of total net revenue, compared to 2.9% in the corresponding quarter last year and 2.4% in third quarter of 2013. The year-over-year and the quarter-over-quarter decrease in general and administrative expenses as a percentage of revenue were primarily due to larger scale and improved management efficiency.

During the quarter, we received RMB 12.1 million in government grants related to tax refund and other subsidies.

Share-based compensation, which were allocated to related expense line were RMB 3.2 million in the fourth quarter compared to RMB 2.8 million in the fourth quarter of last year, which was a 13% increase.

We returned to profitability with net income of RMB 21.7 million in the quarter compared with a loss of RMB 122 million and RMB 28 million in the fourth quarter of last year, third quarter of this year, respectively, primarily due to strong execution on margin expansion and operating leverage.

Net margin was 1.1%, up from negative 7.6% in the fourth quarter a year ago and negative 1.8% in the third quarter of this year, which represent improving margin for the fifth quarter in a row, demonstrating management's determination and commitment to improving bottom line.

Now moving to balance sheet. As of year end 2013, our cash and equivalents, restricted share and short-term time deposits totaled RMB 1.21 billion as compared to RMB 1.63 billion at the end of last year. Meanwhile, short-term bank loans decreased from RMB 600 million as of end of last year to 0 as of December 31 this year. Additionally, we generated RMB 273 million in operating cash flow in 2013 compared to a negative RMB 134 million operating cash flow in last year, reflecting a narrowing net loss and a better working capital management.

Turnover days for accounts receivable were 2.6 days in fourth quarter of this year compared to 3.3 days in the corresponding period last year due to improved payment terms from our advertising business. Turnover days for inventory in the fourth quarter of 2013 were 88 days, reduction of 10 days as compared to 97 days in the fourth quarter last year and the 13 days compared to the third quarter of 2013, due to improving inventory management and better production -- product selection. Turnover days for accounts payable were 113 days in the fourth quarter of 2013, 4 days longer than the corresponding period in 2012, primarily due to improving inventory turnover rate and better commercial terms with our suppliers.

Capital expenditures for the fourth quarter of 2013 were RMB 17 million.

Finally, our outlook for the first quarter of 2014 is as follows: we expect our total net revenue in the first quarter of 2014 to be around RMB 1,734,000,000, representing a year-over-year growth rate of around 30%. Our revenue guidance incorporates a positive impact of the tax circular issued in December 2013 by the PRC Ministry of Finance and State Administration of Taxation, exempting wholesale and retail book sales from value-added tax from January 1, 2013, through December 31, 2017. We also expect GMV from our marketplace to grow at the rate of 100%.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Dick Wei from Crédit Suisse.

Dick Wei - Crédit Suisse AG, Research Division

I have 2 questions. And the first question is on the marketplace GMV. Just -- you mentioned that it is at -- it is around 100% growth for 2014 for marketplace. I wonder, how should we think about the commission rate for 2014 on the marketplace? And secondly, if you can add some color on the fulfillment expense side? Probably beyond on more of the head count reduction that would be great for the fourth quarter fulfillment expense trend.

Yu Yu

Dick, I believe your first question refers to the GMV guidance of the first quarter of 2014, is that right?

Dick Wei - Crédit Suisse AG, Research Division

Sorry, what I'm referring to is for 2014 the full year, the marketplace GMV growth, that's what my question that I want to ask and take rate.

Yu Yu

Okay. Our 1Q...

Zou Jun

100%

Yu Yu

100% is our quarterly guidance. And the commission rate I expect to be somewhat similar to what we saw last year. And the commission rate of Dangdang is made of about 4 parts. One is the rental, the second is a commission and the third is, some of them uses COD services, and another is...

Zou Jun

Advertisement.

Yu Yu

Advertisement. So among those 4 segments of commission of the take rate, the commission goes along with the volume, but not the other 3 types, so that's why our take rate fluctuates from time to time as we introduce new categories or as we recruit or eliminate certain merchants. So that's my answer to the first question. The second question about the headcount reduction in -- for the fourth quarter. We invest very aggressively in technology and especially in fulfillment logistic technology. We -- some of those linguals are not quite familiar with, such as the Robin Woh [ph] and the Planting [ph] and some other things. But the net result is when we served more puzzles in the fourth quarter of last year, we had -- we need to use less headcount, less workers to achieve this result. Yes, so a lot of it is driven by the procedure and operational efficiency that is given to us by some of the technology investments we did.

Dick Wei - Crédit Suisse AG, Research Division

Maybe just a quick follow-up for the first question. I was wonder for the full year -- for the first quarter guidance for the whole company, do we -- have you factored in the tax benefits into the numbers...

Zou Jun

Yes, for more of top line guidance, Dick, we have factor in the tax positive impact from tax circular. Of course, our books and media business now will be exempt from VAT, so top line will have certain -- actually increase.

Operator

The next question comes from the line of Binnie Wong from Bank of America Merrill Lynch.

Binnie Wong - BofA Merrill Lynch, Research Division

So my first question is on the profitability wise. So we know that like this quarter, fulfillment as a percentage of sales has basically lowered us from almost like 12% to just less than -- to 9% as a percentage of sales. And know that, like, for the operating margin also improved. So I was wondering that going into 2014, whether -- I guess in the -- maybe in the first quarter, how should we expect whether -- because we have very -- we are very pleased to see the turnaround in this quarter. But then, going to first quarter, because this going to be a lighter quarter, seasonally is not as strong, then would that be the case is that fulfillment will be going up again and so forth, for the other cost? And then our margin will be -- like our profitability will be affected in the first quarter or second quarter going into 2014?

Yu Yu

Let me try to throw in my 2 penny of wisdom and Jun may give us more color. And the way I see the first quarter this year, there's several seasonality factors. One is this spring, Chinese New Year, is much earlier this year and push a lot of those sales into the fourth quarter of last year. So that's one seasonality that we experienced in the fourth quarter. The second seasonality reason that we saw that we didn't expect is we had a particularly warm winter this year and the 2000 -- January, February 2013 was quite cold, but January, February this year, we saw, like, warm winter, which had a negative impact on our sales of apparel and shoes and some of those heavy wintering clothes. And having said that, we think that given our historical trend and our fourth quarter margin holds pretty strong historically. So I think margin-wise, 1Q this year looks good. Jun, do you have something to add on?

Zou Jun

Sure. Yes, and Binnie, what Peggy was referring to, historically, if you look to like, in the last several years, usually the first quarter, prices -- pricing tend to be much lighter and gross margin tend to be better than fourth quarter. So I guess, Peggy was implying here. And -- okay, let me just add some color to the operating efficiency fulfillment. And Peggy has mentioned investment technology and also there's a lot of actual improvement in operating efficiency. We cut a lot of staff that were redundant and we improved actual procedure in terms pick, pack and shipping. And with scale, we also was able to actually lower down unit costs in shipping. So all of those factors actually contributed into, actually, a much more efficient and cost-effective fulfillment operation.

Binnie Wong - BofA Merrill Lynch, Research Division

So we should continue to expect as a percentage of -- like fulfillment costs as a percentage of sales, could be stayed down below 10% as a percentage of sales going forward?

Zou Jun

No. That's probably not a...

Binnie Wong - BofA Merrill Lynch, Research Division

It would be ideal, right?

Zou Jun

Sure, the quarter is a light quarter in terms of top line.

Binnie Wong - BofA Merrill Lynch, Research Division

Yes. Okay, all right, all right, all right. Okay, got you. Okay, second question is on the marketplace take rate. Recorded in the last quarter, we said that the take rate is lower because of the incentive to attract new merchants, we have like promotional period in terms of like for advertising or maybe free fulfillment for quality merchants to attract them to listed on the Dangdang marketplace. So I guess, like this quarter, we see that improve that to 7%. So I just want to know like maybe going forward, the trend on the take rate, what should we expect?

Yu Yu

Going forward, I expect the take rate to trend down a little bit for the whole year for the reasons that I was trying to explain. One is, take rate has 4 components and only one component, commission, that is in proportion, mathematical relationship with the volume and the store rental, advertisement and also our COD are relatively flat for each merchant. So that's one reason. And another reason is the product mix. As we are inviting, like, food staff and the grocery stores to join our marketplace, the take rate for those merchants are lower than the take rate we charge from other companies. So I think that while our GMV grow and our take rate will trend down a little bit.

Operator

The next question comes from the line of Jiong Shao from Macquarie.

Jiong Shao - Macquarie Research

My first question is about your revenue guidance. I think Jun, you said your Q1 guidance already factoring the tax change. Could you quantify the impact for Q1 revenue guidance from this change?

Zou Jun

Theoretically, I can tell you, because the VAT rate for books and media is around 13%. So if you -- if you got exemption for the VAT rate on books and media, and therefore, that particular business segment, you would have 13% more gross.

Yu Yu

And -- in -- but at the same time, all the bookstores are having this VAT tax rate, and we also, we're not sure how publishers will react to this new selling environment. And we wonder whether some of the book publishers will raise the price somewhat. And in that way, if the unit price goes up, that may eat up some of the theoretical 13%.

Zou Jun

Yes.

Jiong Shao - Macquarie Research

Okay, so if nothing else changes, your revenue, if apples-to-apples comparison, without this change at least for the media segment, would have been 13% lower? Is that sort of a right way to look at it?.

Yu Yu

13% lower?

Jiong Shao - Macquarie Research

1, 2 and 3.

Zou Jun

Yes. Yes, well, I guess we didn't factor in the full, I guess, 13% as Peggy has mentioned, but large part of it.

Jiong Shao - Macquarie Research

Okay. You -- do you have a range, I don't know what the right number is that 7% of impact. Do you -- have you found the calculation, just so that all of us have the right number to work that off?

Zou Jun

We have made some conservative assumptions here. I guess, so we assume that normal business will grow at maybe 20%, but the rest should come from -- but this is just a general guidance. Things can change. And as Peggy has mentioned, there are a lot of other players in the food chain and we probably would also share some of that aside.

George Chang - Macquarie Research

Okay. My second question related to that is that your year-over-year growth rate sort of declined from beginning of 2012 down -- all the way down now in Q3, you're at 18.5%, and Q4 now starting to show growth year-over-year. Should we take this as a turning point as you sort of more or less finish your transition to the marketplace now? Going forward, we should see the continuation of revenue growth re-acceleration?

Yu Yu

I do see picking up of revenue growth and at the same time, marketplace will be some -- a place that we are going to devote a lot of resources. And when we look at Dangdang today, we should now take the old version of what we had 3 years ago when we first went IPO. At that time, 3 years ago, when we had IPO, we were a company about RMB 2.3 billion in revenue, and RMB 1.9 billion out of that was books. And today, our principal business is what, between is RMB 6 billion, RMB 7 billion and our GMV was about RMB 3.7 billion. So in totality, we're a company of RMB 10 billion in revenue. And the large segment, general merchandise and then, books. So when you look at the growth rate, please look at the combined growth rate of general merchandise in both principal, as well as marketplace because that reflects our consumer growth that reflects our Dangdang business growth.

Jiong Shao - Macquarie Research

Okay, will do, Peggy. My next question is just for your marketplace. Could you share with us some of the key verticals, the categories of the products on your marketplace? If you can give you any kind of a mix breakdown, that would be great. And also, I don't think you have opened up your logistics to your marketplace here yet, maybe I'm wrong. Could you maybe us an update on when you are you going to roll out the services, logistic services to your marketplace merchants?

Yu Yu

For our logistics service, we opened it to our merchants. And some of our merchants use the cash on delivery and some of them don't. And also for technology platform, and the merchants can use a lot of Dangdang propriety software that we develop to help them run their business. In addition to that, in the fourth quarter, we also added independent software developed services to our merchants. So the merchants have access to decent portions of Dangdang's logistics services. And they can choose what part of logistics services they use. And so that's a quick answer to your question. I'm sorry, I quite -- I kind of forgot, what was the first part of your question, again? .

Zou Jun

GMV composition on the marketplace. We got probably almost 60% of our GMV from fashion apparel segment in the quarter. And then the rest are quite evenly distributed among I guess, 3C, baby and maternity, general merchandise. And we also started actually in the books and media on the marketplace as well. This is quite small at this stage.

Operator

The next question comes from the line of Stefan Chang [ph] from China Renaissance.

Unknown Analyst

I just have a one little question, it's about the revenue from the third-party marketplace. How much will you expect the future proportion of that part of the revenue, I mean, as of total revenue?

Zou Jun

Yes. In the past quarter, it represents 5% of our total revenue. And we definitely believe this percentage of revenue will grow in the year to come, in 2014.

Unknown Analyst

Yes. What about the growth of our general merchandise? Are you expect to have a 0 growth or slightly positive growth?

Yu Yu

For the principal mode of our general merchandise, we expect it to have growth. And we have a very clear category strategy, meaning in given category, some, we use marketplace merchants, and some we take inventory we sell by ourselves. So across the border -- across the board from both marketplace and the principal business, we expect general merchandise to grow.

Unknown Analyst

Okay, okay. So are we going to take a -- to take the products with a higher gross margin for our principal sales and others for the marketplace? Is that our strategy in the future?

Yu Yu

No, because that strategy is too clear and too easy for everybody to use. And where everybody wants to do profitable business and give a very lean [ph] and struggling business to some other people. And it is a choice between what we do in principal, what we do a marketplace, depends on who has better selection and pricing for customers. For certain things, our marketplace vendors are closer to our customers, are quicker to ship and is good for them to give that part of the general merchandise for them, say, to ship to customers in Xing Yan [ph] and we give that to maybe a Xin Yan [ph] merchant. And sometime, certain categories such as baby formula, and for us, it's bulky, it has very low gross margin and it is not easy to ship. But because baby formula contamination is such a serious concern for moms and the families in China, even if it's a very low margin business, we do have our principal out of our own warehouse. So this -- the cut between marketplace and the principal is really subject to supply chain, selection choice, pricing, convenience, delivery and some other factors.

Operator

The next question comes from the line of Chi Tsang from HSBC.

Chi Tsang - HSBC, Research Division

Yes, I had a -- clearly you guys are at, I think, what is a turning point in terms of profitability. I was wondering if you can sort of comment just on again, the sustainability of profitability in -- as it relates to your ability to continue to expand gross margins and also where the operating leverage is in the OpEx?

Yu Yu

Yes. I will be very happy to address your question. I think returning to profitability is really a result that -- it comes from the effort of Dangdang's thousands of employees and we work really hard throughout the year to turn this result. I think the reason that we turn to profitability in the fourth quarter, there are several of them I can count. The first thing is, I think Dangdang has very good sales products structure. When you look at our product structure, general merchandise is bigger, but general merchandise has several categories in it. When you look at one single category, the largest single category are still books and media. And in this category, we have very dominant national market share and the growth margin, the inherent industry growth margin, is very high. So I contribute the first reason of our profitability is the very good product sales structure of Dangdang. The second reason is I see that efficiency enhancement coming from technology and coming from scale. I mean, retail is really a lot of signs and improving efficiency in every single procedure along the way is very important to us. And we did that very well and we made that effort continuously. So I think the investment in technology to improve our logistics, our buying a lot of those things, delivered a good result. And I think those technology driven efficiency are very sustainable because they are going to be easier. We are going to continue to use them. We are going to continue to use them on a larger scale. So this third reason is I think that Dangdang has a balanced growth model, meaning that we balance our marketing investment, we balanced other things to give -- to have a very disciplined approach. And also, our operation model has a lot to do with it. Some company believe in building entire logistic by themselves, having both warehousing and the shipping team on their own, but Dangdang has a combination. We do warehousing by ourselves, but shipping, we give to a very efficient third-party. So I think this kind of approach is very helpful in scalability and running much larger SKU and the squeezing incremental cost driving down. So I think that's the reason. And also in the fourth quarter, I think the flash sales channel performed well. So I think that those reasons that our sales structure, technology-driven efficiency enhancement and the logistics scalability and also flash sales, I think those reasons all helped us to turn the profit in the fourth quarter. And I -- we want you -- push those kind of forces forward than to give another -- and work very hard and give another solid year 2014.

Chi Tsang - HSBC, Research Division

Fantastic. Can I just ask just one more follow-up to that. As it relates to -- your gross margins have improved substantially consistently over the number -- last number of quarters. What is the right way -- I mean, how would you sort of continue to expand your gross margin, sort of, over the next several years, let's say?

Zou Jun

I guess, from the books and media sector, we have strengthened our leadership in the year of 2013, which gives us lot of bargain power and from suppliers and vendors. This will help us continue to drive a healthy and probably improving margin in the sector. And you see that we also have a growing -- I mean, fastly growing marketplace business, which we booked only a net revenue, say, which definitely it should pass directly through to gross margin. And in general media business -- in general merchandise business, obviously, the last year was in adjusting, sort of, phase, and there has a very low gross margin there. So in the quarters to come, we believe we may have the chance to see some recovery in that business as well.

Operator

The next question comes from the line of Thomas Chong from BOCI.

Thomas Chong - BOCI Research Limited

I have 2 questions. My first question is regarding the competitive landscape for the apparels as well as the cosmetics business. So given the recent M&A activities in this sector, how should we see Dangdang strategy in terms of such as -- due to the changes in competitive landscape and Dangdang pursuing any M&A activities? Or will you still grow organically? And my second question is regarding the mobile payment. Going in the future, how would you see the payment between Ali Baba as with Tencent?

Yu Yu

For the competitive landscape of apparel and Tmall is making apparel and VIP VShop (sic) [Vipshop] is in flash sales of apparel. And Dangdang is catching up very quickly. We believe apparel, with this huge size and with many brands and with many other product opportunities, we believe even with the few players in the pond, there is tremendous growth that we can derive for the -- from the apparel business. And right now, all the apparel growth have been, in Dangdang, have been realized by organic growth internally. And that going forward, we would love to keep our eyes or get very lucky with potential M&A opportunities. And for cosmetics and a lot of our cosmetics take place in marketplace. We have somewhat limited exposure in principle, but not a whole lot. I wonder whether you are referring to the cosmetic pricing war that is going on right now, and I noticed that as well. Fourth quarter of 2012, I think the price war of cosmetic was happening between Jumei, Yo Pi [ph] and Lefeng. And the fourth quarter this year, I am seeing the pricing war taking place among Jumei, Lefeng, Suning, I think also Jingdong, about 4 of them. And I think price war in retail is common and for this particular segment and in this particular quarter so far, I have seen limited impact on Dangdang ourselves. For mobile payment, Dangdang introduced express payment last quarter of the year and consumer can just a type in a few words they get from their bank, from their mobile phone and input it, and then the payment goes through. And it's a lot easier than what they did before, they need to import bank account number and some other things. And for Dangdang's position, we are going to be very, very open to convenient payment methods, regardless to whether it's provided by Alibaba, by Tencent, by China Merchant or whoever, and it is our belief that we should make very convenient for customers. We do not make consumers to take a step, you either go this way or you go that way. So I think that's our consumer-centric, consumer-friendly approach. And so we'll be very open to every single good online payment methods out there.

Operator

Your next question comes from the line of Philip Wan from Morgan Stanley.

Philip Wan - Morgan Stanley, Research Division

My question is about on your mobile business. You mentioned that mobile now exceeding 10% of total sales. Could you just comment on the margin profile between the 2? Meaning, people buying on mobile versus PC? And also, have you observed any difference in terms of customer demographic or behavior between the 2 platforms?

Yu Yu

Jun, can you address that?

Zou Jun

Sure. Yes, well, I guess, we see our orders coming from mobile exceeded 10% for the first time in our history. And for orders, we don't see actually a significant difference between, let's say, orders on mobile and on fixed line computers. And of course, one thing is that mobile payment may have a higher fee compared to normal payment on fixed line computers, but it's only a fraction of a percentage difference. And customers, of course, tend to use their connected time on mobile. And so the conversion rating is a little bit slower on mobile compared to conversion rate on fixed line. But however, I guess, we do see -- we have a large percent of our traffic coming from mobile now, thanks to the customer profile of ours. We tend to serve, actually, better-educated people with a higher income in top 20 cities, where they have -- tend to have actually large, probably, penetration of the smartphones in this group. So that gives us lot of, actually, an advantage in terms of attracting traffic from mobile and also offering them differentiated services on mobile, such as customize the front page, such as, I guess, customer service in the pocket. And we continue to see -- we will actually roll out more, actually, customer friendly applications and the customer friendly user experience on mobile.

Yu Yu

Yes. Even that -- let me add a few words. Even the mobile order in the fourth quarter exceeded 10% and going -- still going up, I think that mobile Dangdang will be a very significant initiative and push for us going forward in 2014. And there are so many people glued to their mobile and their frequency of using their mobile is much higher than their frequency of using their PC. So in our technology initiative we have installed in place for 2014, mobile team will have the most, like, increase of headcount. So that we give a bigger push.

Philip Wan - Morgan Stanley, Research Division

Okay, that's very helpful. And then my second question is could you share with us any update about the electronics books distribution?

Yu Yu

We have added another couple of what, 40,000 titles or something?

Zou Jun

440,000 SKUs right now in the e-book sector. And last year, we also rolled out a new application that can be compatible for iOS and Android system. So we do see actually downloads of application, as well as downloads of titles increased a lot and -- in the last year. Of course, into the revenue contribution, that's still quite limited. We mainly use that to see -- as a sort of like marketing tool to allow us to have access to customers, to -- and make users or customers more sticky to us.

Yu Yu

Yes. I believe the future of digital content of digitalized format of books and the process takes very long, but I think with the customer experience and with the fact people that are having so many more convenient devices at their disposal, the future of e-book will be good.

Operator

The next questions come from the line of Kevin Kopelman from Cowen and Co.

Andrew Marok - Cowen and Company, LLC, Research Division

This is Andrew Marok on for Kevin. Continuing on the mobile theme, 2 questions on that front. Can you give us any color around the percentage of revenue that you're deriving from your mobile products? And then separately, are you seeing any difference in behavior between your smartphone and your tablet customers?

Zou Jun

Well, they're more expensive [ph] because, I guess, there are around 13% of orders coming from mobile. And as we mentioned, we don't see much difference between people's order size on mobile and fixed line. Now in terms of smartphones and tablets, I guess, at this stage, we do see more users from smartphones. But with exact numbers it's constantly changing, because Chinese, the penetration of smartphone and tablets in China are actually increasing almost every quarter. Within particular introduction of 4G in China this year, I believe the picture will change a lot this year.

Andrew Marok - Cowen and Company, LLC, Research Division

Okay, and I guess particularly, are you seeing any sort of divergence in conversion rates between smartphone and tablet customers?

Zou Jun

We actually don't look it that way. And at this stage, it's kind of too early. Again, there are several hundred million subscribers for China Mobile, the largest mobile operator in China. And we stay adopting 4G this year. They don't have 3G in particular I would say. With introduction of 4G this year, I believe the total picture will change greatly. And so we're going to, actually, as Peggy mentioned, invest in technology to capture every opportunity that present themselves. So it's not like in the U.S. 4G and 3G, you have already a very high penetration in China -- in the U.S. We're just starting here.

Operator

from the line of Ella Ji from Oppenheimer.

Ella Ji - Oppenheimer & Co. Inc., Research Division

Quickly just also regarding the mobile orders. I just wonder, if management can talk about like the categories people purchases on the mobile, is there any differences versus the ones on the PC? And then, also a second question is can management talk about the key investment areas in 2014?

Yu Yu

'13, '14 you mean last year and this year?

Ella Ji - Oppenheimer & Co. Inc., Research Division

Are you talking about the second question? It's about your key investment areas in 2014.

Yu Yu

Okay, 2014. Okay, sorry, okay. I think that people across -- consumers across Dangdang, they are more category driven than device driven, meaning that they either go after our dress, our maternity products, our books rather than, say, I don't think the mobile or nonmobile population have a very big difference in terms of category preference in their purchase. That's my first observation. My second observation is their usage of mobile versus PC are very different. On the mobile, they're sort of breaking down their shopping tasks into several, they browse some products, they don't necessarily buy. They put things in shopping basket and then maybe, few hours later, when they were waiting for the elevator to look at the review of some other things. So I think that mobile is really a device of people who are sort of breaking down their shopping tasks into several, and the minute they aggregate everything together and they put in their shopping basket, it can be either on mobile or on PC or something else. So I think that first, I don't see category, product category, difference between mobile versus nonmobile. Second, I think the usage of mobile versus PC are very different. Service, reviews, browsing, are sort of heavier user behavior that we see on mobile customers. And for investment in 2014, 2014, we are going to continue to invest in technology and our logistic distribution center. And our new center in Tianjin, we'll start in operational phase between Q2 and the Q3 2014. And the technology, especially in the area of mobile technology, will be heavy investment area in 2014.

Operator

Next question comes from the line of Hou Tian from T.H. Capital.

Tian X. Hou - T.H. Capital, LLC

So I have a couple of questions, but I go really quick. One thing is you guys have some cooperation with Alibaba and also Yihaodian, so I wonder how that going and what kind of benefit you get from them and to what kind of benefit they can get for you? So that's number one question. Number two would be, 2014 is a very dynamic and interesting year, so almost every day, we hear some kind of a merger and acquisition or investment news. And there are lots of talks about who is going to get together with whom. So if, from Dangdang's point of view, you want to choose the best partners, and who could be your best partner, from your point of view? That's my 2 questions.

Yu Yu

Okay. And Dangdang's business relationship with Alibaba. Number one, Dangdang is a user of Alipay and some of Dangdang customers, Alipay uses. So that's one business relationship, but I think you're probably referring to the fact that Dangdang opened a bookstore on Tmall. I don't think in 2013 or some time or late '12, okay.

Zou Jun

The Singles Day in 2012.

Yu Yu

Yes, yes. So it's been in operation for more than a year. And we are also working with No. 1 Store under which cooperation agreement, No. 1 we will start to sell grocery and the food item to Dangdang customers on Dangdang marketplace. And then, Dangdang will open bookstore on No. 1 store to sell books. So the benefit for each other is, I think, the synergy of the 2 kinds of agreements are quite similar, making very strong category of products to customers in that -- in either Yihaodian or Alibaba that are not otherwise available to them. Before Dangdang's entry into Tmall, Tmall's -- a lot of Tmall store, bookstore, are very small store and some of them either carry infringed products and there are a lot of consumer, customer complaints, but Dangdang has very large selection, make it shopping very easy and very pricing-competitive. So that gives Tmall customer the benefit of having access to Dangdang books that they don't otherwise have access Tmall routinely. And the same thing applies to No. 1 store. And in Dangdang, our food grocery is a very small category. And by inviting No. 1, our customers have much wider food and grocery to select from. So that's a benefit we have to each other. And then, customer pool is another benefit. We develop customers on Tmall and then we can also develop our customer on No. 1, and No. 1 can develop customers from Dangdang as well. So I think it's very, very good, sensible business to enter. In terms of the dynamics, I think, that you see news of VIPs purchase of cosmetics store or VIP is considering buying the apparel brand ports and all kinds of news, or whether Tencent will be investing in Jingdong or not. But I think the main theme, I'm hearing on the marketplace is, BAT: Baidu, Ali, Tencent. BAT, are the 3 large pillars and they are very important for all companies going forward. And my -- Dangdang's approach towards this is, number one, we are very open, number two, whoever -- BAT has the best -- the advantage of BAT is traffic. But to transform traffic into product sales revenue is a different story. Years ago, every single portal in China, like Sina, Nayi [ph] or Sohu, all had Sina [Chinese], Sohu [Chinese], none of them could transform traffic into product revenue sales. So I think to Dangdang, what is very important or who is very good partner is working with whom can give us consumers with buying -- with online purchase behavior. And we may get it through cooperation or we -- very well we get it on our own. And if you look at our marketing expense, if you look at how many customers we acquire and how much money we are spending, I can say that Dangdang's ability of getting customer, which is the essence, a logic behind working with BAT or anybody or anyone with traffic, is getting customers. So I say that our ability of getting customers at reasonable cost is enormously strong and is a key core competence that this company has. And we do it very well. And our ecological system is what we call [Chinese] meaning, cross-selling internally in Dangdang, [Chinese] means act through affiliates such as our cooperation with Tmall or with No. 1 store. So that's how we do.

Operator

Interest of time, we'll now take the last questions from Alex Yao from JPMorgan.

Unknown Analyst

This is Vin Makonnen [ph] from JPMorgan on behalf of Alex. My first question is on the recent M&A developments. As we can see, large Internet names have become more aggressive in terms of M&A. So just wondering, what is management's view on these initiatives and how will this shape the competitive landscape? And I have a follow-up on the Yihaodian cooperation. Just wondering what is your criteria in selecting such partners? And shall we expect such collaborations to expand to other e-commerce platforms?

Yu Yu

I will leave that M&A question to Jun to address. Let me answer your No. 1 store. We look for partners where with very, very strong category characteristic or very strong consumer demographic. And for us, No. 1 store, they have been in business for number of years, and their snack, their food, their grocery, their beverage, their drinks have very good reputation among consumers. So those companies with distinct strong category performance are the kind of companies that Dangdang looks for because that complements what we don't offer or what we don't have at Dangdang. So Dangdang customers have a more products to select from. So that's behind what we want to work with No. 1 store. Jun, can you go ahead with the M&A scenario with -- yes.

Zou Jun

Yes. We have an open mindset to discuss different scenarios. And we already, if you start -- started the business partnership with Tmall. We started business partnership with Yihaodian. And we are open to actually go out and partner with them and open up our store on their platform, and we're open to actually introduce their products into our marketplace, so to build our own ecosystem. And also, many of those major acquisitions, what we have seen today, are in particular with BAT, are actually aiming toward the huge amount of traffic coming from BAT's platform. Now Dangdang actually is a little bit different from some of those companies we have seen because have a loyal customer base, more than 20 million of the customers in 2013 and more than 40% of the traffic coming to Dangdang are actually organic traffics. And many, actually more than 70% of the sales, are to repeating customers. We're not the lowest industry in customer acquisition cost. New customer acquisition cost is around RMB 27 in the fourth quarter last year. And for the entire year, it's around RMB 24, RMB 25. So basically, I guess we have a lot more options than, I guess, just trying to stick of one exit.

Operator

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

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