After I published my first article on e-commerce featuring China Dangdang Inc. (DANG) on January 17, 2012, the company's stock soared for three months-appreciating almost 90% from about $6.00 on January 17, 2012 to $11.25 on April 10, 2012. Then, all of a sudden the announcement of the CFO's resignation hit the wires on April 16, 2012, and the stock fell over a cliff and lost 20% of its value in a week. Discussion boards right now are full of fear, panic and rumors.
As someone with extensive training in logical reasoning and hands-on experience in tough business situations in many companies, one of my strengths is deciphering the true causes of a special event like this and its implications for the company. So I'd like to share my thoughts on this Dangdang event with fellow investors and traders.
First, every time a CFO of a company resigns, words like "fraud" or "accounting manipulation" spread throughout the market. In the case of Dangdang, I do not think any accounting manipulation occurred, and I do not believe the CFO's resignation is an indicator of any wrongdoings. My reasons are as follows:
1. The purpose of cooking the books is to make financial statements look beautiful, not ugly. Dangdang's financial results over the past two quarters are nowhere near a level that could be described as beautiful. True, revenue grew rapidly, which was validated by the market share data, but expenses rose faster and net profits were deeply in the red. Many analysts, including me, were not particularly happy about the company's bottom-line situation last quarter, as I mentioned in my last article for Dangdang. So, if the CFO was really cooking the books, he is one of the worst book-cookers I have ever seen.
2. The CFO agreed to remain with the company for a transition period up to three months while the company searched for a new and qualified CFO. A CFO who resigns due to any accounting manipulation being uncovered will run away and cut his ties to the company as fast as he can rather than stay on for three more months -- a very long time for a person if he feels uncomfortable about staying.
3. On his personal blog and other websites in China, the CFO openly expressed his deep appreciation to Dangdang for the opportunity to work for the company for two years. He also said that it was time for him to change the path of his life (i.e., his departure now is truly for the purpose of pursuing other personal goals) and that he expected Dangdang to continue to lead the e-commerce industry in China. It is unlikely that a CFO departing due to accounting manipulation would praise the company so highly.
4. Mr. Yang has an extensive background in investment banking and specializes in helping companies go public. He helped AirMedia Group Inc. (AMCN) go public in 2007 and left the company on March 10, 2010 when its stock was at about $7.00. The stock then fluctuated and went as high as $8.24 on November 23, 2010, before gradually sloping downward amid the turmoil for Chinese small caps last year. So, this was not the first time he left a company that successfully went public, and there was no evidence of fraud in his previous employer, AirMedia. Thus, it appears perfectly normal for him to leave Dangdang now to search for the next promising private company where he can best utilize his expertise and strengths.
Now, what about the implications of Mr. Yang's departure to Dangdang's future performance? Will it have a negative impact on the company's financial results going forward? My best guess is that it will not.
Since the IPO, the CEO of Dangdang has been very ambitious in expanding the company's business. I bet that a lot of these critical top-level decisions were mostly decided by the CEO, not the CFO. Even if the CFO did have strong opinions about ROI analyses and forecasting of P&Ls for business initiatives, many well-trained financial analysts can do these calculations as well as Mr. Yang did.
Frankly speaking, I don't think that the company controlled its costs very well and failed to always make sound ROI analyses for all of its capital expenditures and business initiatives over the past 12 months. Without any disrespect toward Mr. Yang, I just don't see much of his strengths reflected in these tasks (or maybe he simply was not interested in the less exciting duties of a long-term CFO). So, as a matter of fact, if Dangdang can find a new CFO who is specialized in cost controls and return analysis for post-IPO expansion plans, the company might do even better going forward, all other things being equal.
In conclusion, I think the market has completely overreacted to the CFO's resignation. Understandably, most American investors have a deep fear of any CFO's resignation because of generalized "stock screening rules" and "investment red flags" that are overly promoted by financial publications and so-called stock-picking gurus.
People need to remember that today few people stay with one company for more than 10 years. Even Fortune 100 companies see their CFOs come and go. Judging by the surrounding facts, I personally would view this event as a none-event for my investment in the stock. Granted, because the stock has appreciated so much within a short period of time and because many buyers of a momentum stock like this use margins, the stock might see further pressures in the short term due to margin selling after a big drop. Short-term traders do face above-normal risk in the stock over the next several weeks. For long-term investors like me, the investment thesis of Dangdang hasn't changed a bit because of the departure of the CFO.
As fellow contributor Jiang said very well in his recent article, going forward the company should see increasing benefits from its mobile devices and shopping platforms. As Dangdang continues to boost its reputation and popularity in the e-commerce market, the company seems to be gaining momentum in attracting big traditional retailers, including the biggest electronic retailer, Gome, to sell products on its website. The company's position as one of the Top 3 B2C websites in China and its potential as the next Amazon (AMZN) of China are still very much intact.
Disclaimer: please read my standard disclaimer for my articles here.
Disclosure: I am long DANG.