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Summary

  • Dangdang shares have pulled back in the last few months, giving investors an opportunity to buy a high-growth stock for cheap.
  • Massive growth is expected in China's Internet industry, and being an e-commerce player, Dangdang is positioning itself nicely to profit from it.
  • Dangdang has delivered solid growth so far, and the same is expected in the future due to the company's cost-cutting moves and innovative new products.
  • A strong balance sheet and an impressive bottom line growth projection make Dangdang a solid bet.

Chinese business-to-consumer e-commerce company E Commerce China Dangdang (NYSE:DANG) is on a roll this year. Its shares have gained close to 45%. However, Dangdang shares have dropped close to 20% after peaking in early March. Dangdang had dropped in March due to weak export readings from China, as investors feared that this might hurt e-commerce activity in the country.

Don't fret about China

However, it cannot be denied that China is still growing at a fast pace, even though it might be witnessing a slowdown. According to The World Bank:

"With economic growth in China likely to continue to be robust, import volume growth remains solid. Meanwhile, given the outlook for the world economy, unlike in 2000-07, exports may not outgrow domestic activity in 2010-2015, despite good competitiveness and further market gains. Thus, with export price increases assumed to lag domestic inflation, the export to GDP ratio will probably diminish."

But, the positive thing is that domestic growth will still be strong, as the economy is expected to grow at a robust 6.7% in 2020. Now that the Chinese Internet penetration is still low with just 618 million users as compared to a population of around 1.4 billion, Dangdang's addressable market will increase as more of the Chinese population gets on the Internet. In addition, e-commerce activity is getting stronger. As reported by ZDNet:

"According to the latest stats from the country's biggest e-payment vendor, Alipay, the average per capita online transactions which include shopping, money transfers, and bill payments clocked at over 10,000 yuan (US$1,642) last year."

Hence, Dangdang still has a lot of opportunity to tap in the Chinese market. The good thing is that the company is already doing well in this market. Dangdang performed well in the first quarter, delivering 30% growth in revenue from last year, along with significant margin expansion. The company is making solid progress in transforming from an online bookstore into an integrated online shopping mall.

In fact, for the sixth consecutive quarter, its general merchandise sales were better than books and media, growing at a rate of 71% on a year-over-year basis. To further enhance its position, Dangdang has added many well-known brands in men's, women's, and children's section.

Tapping the market aggressively

Dangdang has increased its promotional activities by increasing its marketing spending. This is a positive step taken by management to build its new categories among customers. The results have been impressive so far as the company acquired 2.8 million new customers during the first quarter. This number is expected to increase in the coming months as Dangdang focuses on low pricing. In fact, it has launched a new program known as 'double payment for any price difference' to attract more customers.

Under this scheme, if the customer finds a similar product at a lower price on another website, then Dangdang will reimburse that customer with a payment equivalent to twice the price difference. This scheme will draw significant attention from customers.

In addition, since Dangdang is an online store, it needs to have robust warehouse operations to reduce the cost structure. In this direction, Dangdang is taking various initiatives such as rolling out collaborative planning forecasting and replenishment process in all its warehouses. With such moves, it will be able to replenish the inventory at a faster pace than before, and fulfill more orders at local distribution centers. Additionally, it has constructed a new large facility for front delivery center (FDC). This will improve its operational efficiency.

Time to buy the pullback

Dangdang is delivering profitable growth, as its net income increased to RMB2 million from a year-ago loss of RMB72.7 million. Similarly, its net margin rose to 0.1% from a negative 5.5% in the same quarter last year. Going forward, Dangdang expects the Gross Merchants Value of its market place to increase a whopping 80% year-over-year in the second quarter of 2014.

All in all the management is positive about its prospects. Currently, Dangdang does not have any trailing P/E, but it does have an impressive forward P/E of 30. Since its bottom line is expected to grow at a solid rate of almost 20% for the next five years, the forward P/E looks cheap. Additionally, Dangdang does not have any debt, and a strong cash position of $225 million. Hence, the company can continue making solid investments to bolster its business further.

So, investors should consider making the most of Dangdang's recent weakness by investing in the stock.

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

Source: E-Commerce China Dangdang: This Chinese Stock Looks Set For Solid Growth