Earnings Evaporate At Dangdang And Qunar

| About: E-Commerce China (DANG)

We’ll finish out this peak earnings week for US-listed Chinese stocks with a look at fading e-commerce firm Dangdang (NYSE: DANG) and online travel site Qunar (Nasdaq: QUNR), which have both just posted profit trends that look quite gloomy. But while investors forgave the young Qunar for posting a large net loss, they were less generous towards the older Dangdang, whose profits nearly evaporated after recently emerging from 2 years in the red.

In this case it’s fitting to start with some share price summaries that show how investors feel about these 2 Internet companies, one a fast-growing newcomer and the other an industry veteran that is quickly becoming obsolete. Shares of newcomer Qunar jumped 4.4 percent in after-hours trade after it posted its results, regaining ground they lost during the regular trading session. Meanwhile, Dangdang’s shares tumbled nearly 15 percent after it announced its results.

Dangdang shares were in the gutter for most of 2012 and last year as the company was rapidly overtaken by more nimble e-commerce rivals like Alibaba and JD.com. But the stock came back to life in the second half of the year as signs emerged the company would return to profitability after 2 years of losses. The stock climbed as high as $18 in March, but is now back below the $10 mark following its latest results announcement.

Investors were clearly focused on Dangdang’s bottom line, which shriveled to a net profit of just $300,000 in the first quarter. (company announcement) That was an improvement over its 72.7 million yuan ($12 million) loss a year earlier, but was down sharply from the fourth quarter of last year when it finally returned to the black with a 21.7 million yuan profit. Revenue climbed a respectable 30 percent for the first quarter, with gross merchandise value for its younger marketplace doubling.

The company gave so-so guidance for the second quarter, with revenue growth expected to stay at about 30 percent and growth of the marketplace platform seen slowing to around 80 percent. But the big drop in its share price shows investors are clearly worried that Dangdang could slip back into the red next quarter, perhaps never to emerge again. I’ve previously suggested the company should look for a merger partner if it wants to survive, but Dangdang’s fiercely independent founders don’t seem interested in such an option.

Next let’s look at Qunar, whose current stock price represents about a 60 percent premium from its IPO in last year’s fourth quarter, even though the stock is down sharply since March. In this case investors seem to be focused on the top line, which saw the company’s revenue jump 84 percent to 336 million yuan in the first quarter. (company announcement) In another positive signal, Qunar predicted revenue growth would jump to 90-95 percent in the second quarter.

Qunar’s bottom line was less pretty, with the company posting a net loss of 183.6 million yuan for the quarter. That was quite a bit bigger than the 121.6 million yuan loss in the fourth quarter, and the company’s profit of 24.3 million yuan a year earlier. I have no doubt that the year-ago profit was at least partly the result of aggressive accounting to make the company more attractive in the run-up to its IPO.

Investors are willing to forgive the widening net loss as long as Qunar continues to post aggressive revenue growth. But China’s slowing economy and looming price wars with industry leader Ctrip (Nasdaq: CTRP) and other up-and-comers could easily put a damper on the company’s revenue growth in the second half of the year. I personally wouldn’t be surprised to see that slowdown come even sooner, meaning Qunar could fail to meet its revenue guidance in the current quarter and could see the growth rate drop down to the 70-80 percent rate for the rest of the year.

Bottom line: Dangdang could slip back into the loss column in the second quarter as it fights a losing battle with larger rivals, while Qunar’s revenue growth could slow due to competition and a slowing Chinese economy.

Disclosure: None