Seeking Alpha
Profile| Send Message| ()  

I am still bullish as ever on shares of Dangdang (DANG), and have been taking advantage of this Chinese economic "slowdown" (still robust 8.1% growth), and accumulating shares. I thought this would be a good time to put out an update, as the stock technically sits above all averages except for the 50 day (6.81 as I type) which I expect it to break above shortly.

So the stock has slipped to 10 week lows after its earnings outlook trailed estimates. Really? Second quarter guidance expects revenue to rise to 1.18 billion Yuan ($187 million) which is still an increase of 50% YOY and an increase of 8.25% sequentially. The average estimate expected second quarter earnings to rise to 1.27 billion Yuan. How many US companies forecast 50% YOY revenue growth, or 8.25% revenue growth quarter over quarter? DANG first quarter revenue surged 58% YOY to 1.08 billion Yuan or $172 million USD. More good nuggets I picked out of the 1st quarter earnings is that they had $110 million in media revenue (books) and $58.2 million in general merchandise revenue, up 35% and 124% YOY respectively.

More encouraging, as another Seeking Alpha contributor wrote, gross margins from the first quarter improved to 14.2% from 10.5% in the prior quarter. In the conference call CEO Peggy Yu explained the margin improvement as less discounts being offered in the first quarter. So yes to the naysayers, DANG can still generate huge revenue growth without giving the product away. One analyst commented that DANG is burning cash. I must be missing something, because even though DANG recorded a loss for the first quarter, DANG's cash position increased. As of quarter end March 31, 2012, the company had 1.39 billion Yuan, $220.6 million USD in cash and cash equivalents, short-term time deposits and held -to-maturity investments. 1.3 billion Yuan more than at the end of last year.

Other positive developments since the end of the first quarter, which will further add to the 124% YoY general merchandise revenue growth, DANG reached an agreement with Tencent (Tencent is China's biggest Internet company) to operate book and baby product sales in Tencent's online store. Tencent plans to invest $1 billion in its e-commerce unit. Dangdang has a strategy to use more common online marketplaces as channels to distribute their books and core products.

The web traffic of DangDang since mid may has had an astounding surge. DangDang is currently 35 in ChinaRank this is up from 60 a couple months ago. I can attribute this traffic surge as a direct result of its alliances with Tencent, Gome, etc. You better believe there is a strong correlation between increased web traffic and increased revenue.

Lastly there is nefws that one of Dangdang's competitors 360buy has delayed its IPO until 2013. I consider this a positive or Dangdang as 360buy is in need of cash, and will not be able to continue to slash their prices if they want to live to see their IPO come to fruition.

China is already cutting interest rates, and will do whatever it takes to get their economy back on track. I am a patient investor, with the opinion that investment in DANG at these levels will be a grand slam, and will continue to accumulate shares of DANG while it is still in single digits.

Source: Dangdang: Accumulating Shares