E-commerce website E-Commerce China Dangdang (NYSE:DANG) is on a roll, having gained 50% this year. The Chinese business-to-consumer e-commerce company seems to be making the most of the growing internet penetration in China, and its results indicate the same.
Dangdang reported solid results for the second quarter, with the company posting a profit as compared to a huge loss during the same period last year. In spite of this, it could not please Wall Street as its third-quarter revenue outlook failed to meet expectations. Consequently, the stock declined. However, Dangdang has strong fundamentals, and investors should think of capitalizing on the stock's recent drop for the following reasons.
Dangdang reported revenue of $316.1 million, which is an impressive increase of 31.3% from last year. Its earnings were $0.06 per share, $0.04 better than the consensus. Looking ahead, the company expects revenue of $322.4 million for the third quarter, while analysts were expecting revenue of $326 million.
Hence, Dangdang fell slightly behind estimates, but even then, its projected revenue indicates that its top line will grow an impressive 29% when it reports its next set of results. In addition, Dangdang's bottom line is expected to clock a profit of $0.05 per share, which will be a massive improvement over a loss of $0.06 per share last year.
Benefiting from Chinese Internet growth
Clearly, Dangdang is expected to continue growing at a fast pace. This is not surprising, especially considering that the Chinese economy, and Chinese e-commerce, are growing. As I pointed in my recent article:
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.
Moreover, Dangdang is financially sound. The company has a strong cash position of $263 million, and didn't have any outstanding debt at the end of the previous quarter. So, it has the flexibility to invest aggressively in its business to tap the growing e-commerce market in China, and it is doing the same.
After making its mark in the books category, Dangdang is expanding into other categories such as apparel, baby, and maternity products, along with various other options. Dangdang is investing aggressively to enhance its operations. In a bid to deliver goods more quickly, it has added a few of China's largest third-party delivery companies, known as the Zhongtong Yunda network.
Dangdang has also optimally utilized Guan Air and rail transportation services to increase the delivery speed of its products. The company is also working on a concept known as strong delivery centers (SDC), which will enable it to replenish inventory at local distribution centers more quickly.
The competitive climate
With the changing consumer shopping habits, the e-commerce industry is growing in China as we saw earlier. However, at the same time, this industry is highly competitive, so it is important for Dangdang to stay ahead of its peers by strategies such as reducing delivery times and offering strong customer support. According to management:
China's e-commerce industry has long-term substantial growth potential and it is immensely competitive with raising Chinese e-commerce company IPOs and the future ones to come.
For example, JD.com (NASDAQ:JD), another Chinese internet retailer, went public in May. In its first earnings call itself, JD.com reported a strong 64% growth in revenue. In addition, JD.com has partnered with Tencent Holdings (OTCPK:TCEHY), Asia's largest internet company to increase its market share. This partnership will pose a bigger threat to JD's peers, as the two companies can leverage their resources to maximize their profits.
So, it is not surprising that Dangdang is launching new initiatives to improve its performance. As mentioned in a recent article:
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.
As seen above, Dangdang has a lot going for it. The company has got sound fundamentals, and at the same time, its bottom line is expected to grow at a CAGR of almost 20% over the next five years, which is better than the 14% industry average. Moreover, Dangdang's strategies seem impressive, and this is another reason why investors should consider capitalizing on the stock's recent drop to buy more shares.
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