Most of my readers know that I have a strong preference for value stocks with unduly depressed low valuations over growth stocks. If I am to invest in a stock that has a high trailing P/E ratio, the stock needs to pass a series of especially strict tests. These tests involve all aspects of the management team, business, and industry and must all be passed to convince me that the stock is cheap from the perspective of its future revenue and profit and have strong potential to deliver a home - run return for new investors of that stock today. One stock that convinced me is E-Commerce China Dangdang Inc. (DANG).
Dangdang Inc., through its main website, sells all kinds of goods - Chinese and foreign - language books and music CDs, VCDs, and DVDs; beauty and personal care products; home and lifestyle products; consumer electronics; baby, children, and maternity products; apparel and accessories such as footwear, handbags, and luggage, etc. in China. The company also operates the dangdang.com marketplace program, which enables third - party merchants to sell their products alongside the products sourced by Dangdang.
Like Amazon.com, Inc. (AMZN), Dangdang started its online merchandizing with books and then expanded into other categories. In fact, its entire business model and growth strategies are very similar to Amazon's, as Baidu's are similar to Google's. That's why Dangdang was nicknamed as the "Amazon of China" by Wall Street bankers, analysts, and many investors. More information for the company can be found in the IR page on its corporate website.
The investment thesis for Dangdang is actually very simple; in fact, it is simpler than all other stocks I have covered so far. The elevator speech goes like this: "it is Amazon.com, Inc. selling at $6 in 2001 or Baidu Inc. (BIDU]] selling at under $5 in early 2006."
All of the reasons that investors should have bought Amazon at $6 apply to Dangdang right now, just to a stronger extent. If you are a long - term - focused investor, this conversation should just stop here - seriously. Don't get me wrong. Investment is by no means an easy task, and there are tons of information flowing around every day that seem to affect every stock. We can crunch as many financial numbers for Dangdang as possible, but for a growth stock in such a huge market with such enormous potential, I think the following numbers in Table 1 are probably the ones that matter the most to mid - to long - term - focused investors.
Table 1: Dangdang and Amazon by the Numbers
Home Country Population
1,340 million (2)
(more like 1.4+ billion because many people are not registered)
Home Country 2011 GDP
Home Country Projected 2021 GDP
Home Country 2010 Retail Sales
$4.4 trillion(5) (6)
$2.3 trillion(7) (8)
Home Country 2010 Online Retail Sales
Company's 2010 Market Share
Home Country 2010 Middle - Class Population
250 million, 80% of total population(11)
210 million, 15% of total population(11)
Home Country 2010 Internet Population
245 million, 78% of total population(12)
412 million, ~30% of total population(14)
Home Country 2010 Online Shoppers
222 million, 71% of total population(13)
142 million, ~10% of total population(14)
2010 Estimated Online Retail Sales if 90% of Population Shops Online.
(153 * 90% / 71%)
(82 * 90% / 10%)
2010 Untapped Potential Market
2021 Estimated Online Retail Sales if 90% of Population Shops Online.
(194 * 24 / 15)
(738 * 24 / 7)
Potential Market Expansion from 2010 to 2021
Note: For data sources, please see the list at the end of this report.
As we can see from the numbers, especially the highlighted ones, the potential for Dangdang's revenue growth is astonishing. Note that the online shopping market in China is very young and fragmented today, and the company itself is very young. That explains why the company had only a 4.2% market share at the end of last year. Considering the fast revenue growth (albeit far from its full potential) that Dangdang has shown us in the past, here are my estimates of Dangdang's annual revenue in 2021 under various conditions. The ones that are the most likely, in my opinion, are highlighted in bold fonts in Table 2.
Table 2: Estimates of Dangdang's Annual Revenue under Various Scenarios
% of Chinese Shopping Online
Online Shopping Market
Dangdang's Market Share
Dangdang's Annual Revenue
As we can see, the range of the most likely annual revenue falls between $70 billion and $200 billion, with the midpoint sitting at around $135 billion, or 2.8 times of consensus estimates of Amazon's annual revenue this year ($48 billion in 2011)!
We can reach the same estimate of Dangdang's revenue in 2011 from another route. Assume that the company grows at compounded 70% annually from end of 2010 to 2021 (11 years), revenue in 2021 will be $120 billion. Can the company deliver this kind of average annual revenue growth each year? I think the odds are heavily in the management team's and shareholders' favor. Dangdang delivered compounded 73% annual revenue growth from 2008 to 2010. The company has expanded its warehouses and product lines at a fast pace this year, and based on articles and discussions I have read on websites in China, the company is generating a lot of enthusiasm and positive experiences among online shoppers in China. The brand recognition and word of mouth praise for Dangdang are multiplying in China.
I see no reason that the company cannot deliver 75% annual growth from 2011 to 2014, 70% annual growth from 2015 to 2018, and 60%~65% annual growth from 2019 to 2021. Even Amazon grew at a compounded 60% annually from 1997 to 2009. Remember that in 1997 the middle class already accounted for 80% of population in the U.S. and the economy only grew by less than 3% annually during the period. So, based on the ratios and numbers for Dangdang's background economy shown in Table 1, the management team can deliver this kind of growth if it has only an average capability for managing daily operations and executing growth plans.
For one reason or another, many people in China are not willing to pay much for things like advertisements, consulting services, software, online services such as emails, etc. For some other things such as movies, luxury goods, vacations, etc., most Asian consumers can easily sacrifice these (do not consume or consume very little) in bad times. However, general retailing is a service that every consumer needs to meet the needs of daily life. Most people are willing to pay higher fees to retailers for bringing goods to them. From what I have seen, many brick - and - mortar retailers in China make very good profit margins probably because it is still a developing country.
As the author of this article said, most Chinese very quickly and easily adapt to online shopping once they use it the first time because of very bad service quality and other problems many people experience in traditional retail stores every day. So, like mobile phones and online gaming markets, the speed of transition from the traditional model to the new online model is much faster in China than in the U.S. This is why I believe it is not difficult for Dangdang to push for very fast revenue growth and at the same time stabilize and start expanding its margins soon (see later sections for further discussions). Basing on the impressive educational credentials and professional experiences of Dangdang's CEO, Guoqing Li, and co - president, Peggy Yu, I am very confident that they'll eventually prove all doubters wrong, just as Shanda CEO Tianqiao Chen has done since Shanda Interactive Entertainment (SNDA) had its IPO in 2004.
In my opinion, for investors who have a targeted holding period of three years or longer, an investment decision should be able to be made based on the aforementioned factors. It is almost certain that a company at such fast growth stage will experience higher - than - average fluctuations in revenue and net profit each quarter, but I am not sure if it makes any sense for me to buy or sell the stock each quarter based on my view on whether the stock will beat or fall short of analysts' estimates. Seriously, it is really hard for any other strategy to beat the strategy of buying Amazon at $6 in October 2001 and selling it at $240 this October for a 40 - fold return in 11 years, or 45% compounded annual return during the period.
Some people are concerned about threats coming from Dangdang's competitors. I think this concern is overblown and misplaced. Any private company in any industry in any part of the world at any time in history faces competition. The fact that Dangdang has two major competitors, Taobao and 360Buy, which command more market share right now, and Amazon.cn, which has about the same market share, does not in any way reduce the Dangdang's growth prospects. In fact, on the contrary, it reinforces the data points I enumerated above regarding the company's huge growth potential and easily attainable high growth rate.
Having a combined overwhelming market share right now (about 60% - 70% according to various statistics), Taobao and 360Buy have a lot to lose and very little to gain in terms of market share in China, as Netflix has in the U.S. Note that I am not suggesting that these two Chinese companies will do badly. In absolute terms, they may still do well just because the entire pie of online shopping in China is still growing fast. While Chinese consumers love to shop for brands that have certain scale, they have stronger demand for brand differentiation and less desire to stick to one big brand. The result is that, unlike in the U.S., it is hard for a company in China to obtain and keep strong monopoly power over the market. As a result, most industries we see several to a dozen companies achieving good brand recognition and sharing the pie. Take mobile communications, cell phones, online gaming, online portals, search engines, and car manufacturing, for example. Consider how well dangdang.com is run and how fast it is gaining popularity. It is hard for other competitors to prevent Dangdang from taking a 10% market share in five years. As we saw from the market data presented at the beginning of this article, even with just a 3% market share, the company's revenue will be more than 10 times this year's amount in 2014, taking into account the fast growth of the entire pie.
If one visits these websites, one can easily differentiate Dangdang from other sites due to its unique site structure, page layouts, and browsing sequences. For people who actually buy items from these sites, they know clearly that Dangdang has very strong competitive advantage on prices, inventory, selections, etc. on most of the major categories on which it focuses. That's why the company is gaining popularity and customers so fast right now.
Now, beside Taobao and 360Buy, some people are throwing out Amazon.cn (formally joyo.com) as a potential threat, or even as the biggest threat, to Dangdang. This kind of talk is yet another perfect example of how misinformed many traders and analysts are on China's culture and markets. The Chinese, like the French, do not like American companies and do not like to give money to American companies, especially companies selling services or other intangible goods - period. Need an example? Here are just a few: Microsoft (MSFT), Yahoo (YHOO), Google (GOOG), IBM (IBM), HongKong Disneyland, and a whole bunch of big - name consulting/marketing/polling American brand names. Very few American service companies have achieved great success in China, let alone a dominant market monopoly to squash domestic brands. Amazon might be dominant in the U.S., but Amazon.cn is not Amazon.com, period, and Chinese consumers don't give like Amazon. I don't know if Amazon.cn will be among the top five online shopping portals after three years, but I know for sure that it has no power to prevent Dangdang from becoming one of the top five after three years. In fact, like Netflix, Amazon probably has just made a biggest strategic mistake by changing its Chinese site from Joyo.com - an easily pronounced and recognizable Chinese name built by the company it acquired - to Amazon.cn. Amazon might sound cool and is one of the most recognized names in the U.S., but it sounds bizarre and remote to most Chinese people.
One last note here: a development lately that was an added positive this year for online shopping sites including Dangdang.com was China central government's new vow to boost domestic consumption in 2012. See "Domestic Consumption and Retail Sales" and "Online Retailing and B2C" sections in my previous article on Seeking Alpha for details.
In conclusion, while there are will be challenges the company has to overcome along the way, none of them are material. While there will inevitably be some volatility in the company's top line and margins each quarter, most of it is just a result of random noises that will not stop the company from enjoying strong growth over the next several years. Although Dangdang is chasing a couple bigger and older competitors that started much sooner, just as Shanda was chasing NetEase.com, Inc. (NTES) when it started, the CEO and president of Dangdang should be able to easily steer the company on the right path with their high intelligence and leadership ability, as Shanda CEO's did.
Source 1: Wikipedia. (2011). United States of America.
Source 2: Wikipedia. (2011). China.
Source 3: Congressional Budget Office. (2011). Current Economic Projections: Selected Tables from CBO's Budget and Economic Outlook.
Source 4: China Daily. (2011). Comment: China to top US in 2021.
Source 5: RetailSails. (2011). Annual Retail Data.
Source 6: Radio Business Report. (2011) 2011 Retail Sales Still Expected to Gain.
Source 7: People's Daily Online. 2011. China's retail sales up 18.4 pct in 2010.
Source 8: Research and Markets. (2011). China Retail Report Q4 2011 - Retail Market Develops Rapidly with Partnerships Between Local Players & Multinationals.
Source 9: MarketResearch.com. (2011). Online Retail in the United States.
Source 10: BBC News. (2011). China's online retail booms as consumer base grows.
Source 11: People's Daily Online. 2010. China's middle class population could total 700 million by 2020.
Source 12: Internet World Stats. (2011). Internet Usage and Population in North America.
Source 13: Fifth Gear. (2010). Quick Online Shopping Statistics.
Source 14: Internet World Stats. (2010). Internet Usage in China E - Commerce - 2010.
Disclosure: I am long (DANG).
Disclaimer: I am a completely independent analyst and am not paid by any company I cover or write articles about. However, I may have long or short position in a stock I cover or write about at any time.My ratings and/or analyses of a stock represent only my personal view of the stock and/or my assessment on the probable movement of the stock price in the next 12 months. My ratings are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely when buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences, and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.