This analysis of E-Commerce China Dangdang (DANG) was provided to TradingIPOs subscribers in advance of its Wednesday, Dec. 8, IPO. The company priced shares at $16 each, above its $13-$15 expected price range.
E-Commerce China Dangdang plans on offering 19.55 million ADS at a range of $11-$13. Insiders will be selling 5.8 million ADS in the deal. Credit Suisse and Morgan Stanley are leading the deal, Oppenheimer, Piper Jaffray and Cowen are co-managing. Post-IPO DANG will have 78.2 ADS equivalent shares outstanding for a market cap of $939 million on a pricing of $12. IPO proceeds will be used to advance and enhance operations.
The two co-founders will own a combined total of 1/3 of DANG post-IPO. They will retain voting power due to a separate share class.
From the prospectus:
We are a leading business-to-consumer, or B2C, e-commerce company in China.
DANG is being called the Amazon.com (AMZN) of China. Website is dangdang.com. Been in business online for a decade.
Online bookseller now branching out into other consumer categories. DANG is the largest bookseller in China. 590,000 titles with more than 570,000 Chinese language titles. DANG believes they have more Chinese language titles available than any other seller in the world.
New products being offered include beauty and personal care products, home and lifestyle products, and baby, children and maternity products. Much like Amazon.com, DANG now offers third party products on their website.
6 million active customers in 2009 with 1.24 million daily unique visitors in 2010. That last number is pretty impressive. Already through the first nine months of 2010, DANG has seen 6.8 million active customers ordering 20.8 million products.
78% of revenues generated from repeat customers.
Delivery to over 750 cities in China. DANG offers cash on delivery service as well as online payments. Cash on delivery is a popular payment method in China.
Sector - Chinese retail sales of $929 billion in 2009 with the book market generating $4.6 billion in revenues. Online commerce accounted for $39 billion in 2009 revenues. 46% of China's internet users bought book and/or other media products online in 2008. B2C e-commerce sales accounted for just 0.2% of overall Chinese retail sales in 2009.
***Revenue growth has been staggeringly good. Revenues grew 67% in 2008, nearly 100% in 2009 and are on pace for 50% in 2010. Gross margins are slowly improving, still fairly low though in the 22%-23% range. Operating expenses are growing slower than revenues meaning DANG has been inching towards profitability. The financials have not quite caught up with the strong top-line growth yet. However we've seen the 'amazon.com' of China booking third straight top-line revenue growth of 50%+ in 2010. That combination makes the deal a recommend in range. Period.
Primary online competition is Amazon.cn/Joyo and Taobao Mall. An interesting potential competitor could come in the way of electronic books. With their entrenched platform one would assume that DANG would be on the forefront in China in e-book sales.
$2.25 per ADS net cash post-IPO.
Cash flows in 2010 have been impressive, much better than EPS. Through the first nine months of 2010, operational cash flows have been $0.33. 2009 was DANG's first year of GAAP and cash flow profitability.
84% of 2010 revenues from book sales.
Seasonality - 4th quarter strongest, 1st quarter weakest.
Taxes for 2010 will be negligible. Same should hold for 2011 as DANG works off previous losses.
2010 - Revenues should be $335 million with the 4th quarter being the strongest on top and bottom lines. Gross margins of 23.2%, an increase over 2009's 22.4%. Operating margins of 2%, net margins 2%. EPS of $0.09.
Note again, however, that operating cash flows will be much stronger than GAAP EPS for 2010. Depending on strength of 4th quarter, operational cash flows could be in the $0.45-$0.50 ballpark for 2010.
Conclusion - Disregard the EPS here for now, this deal will work in range short and mid-term. Dominant market leader growing revenues strongly while improving gross margins and operational metrics. Cash flows are improving nicely year over year, EPS should follow in the not too distant future. Strong deal.