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LITB: Better But Cheaper Than VIPS & AMZN

|Includes:AMZN, DANG, LightInTheBox Holding Co., Ltd. (LITB), VIPS

Risk and negative factors:

1. Too much reliance on Google's search to get target clients. More than 80% from Google. Marketing fee paid to Google accounted for more than 50%.

2. Too low repeated patron rate. More than 80% of its clients are one-off ones while regular clients are less than 20%. The company has to keep paying Google to obtain new clients.

3. Too low net profit margin, only 3%.Over the past years, none of its domestic peers has make profit yet.

However, with the successful IPO, the company is now famous and can attract more individual consumers. They can go directly to visit the company's website, thus somehow saving the cost paid to Google, improving net profit margin.

4. Some of the products that sold by its China entity may infringe IPRs. Since the products are not manufactured by the entity nor the company itself, and legal action against Chinese companies by foreigners usually turn out to be nothing, the IPR issue here has very minimal impact to the company.

5 Momentum slowing down. CAGR decreased from 2008-2012's 234% to 2013Q1's 100%.

6 Potential threat from competitors. & are the 2 most powerful competitors in China. They have not entered the company's territory yet. The emerging global online retail market should be big enough for thousands of them to survive.

7. China's increasing labor cost may erode its gross profit margin. In east coastal cities, the labor cost did have increase a lot over the past years, 10% p.a at least. However, not in the rest of China. The company could purchase products manufactured in the much less developed west inland cities, where labour cost is much lower than the east coastal cities.

Positive factors.

1 Management:Dream Team. Each team member has more than 15 years of successful starting up and management experience in the E-com & internet service provider sector. Each is an expert in his area. They are well-educated overseas returnees and have worked for both the Chinese companies and foreign-owned companies, including Google and Amazon. The team has been very efficient and stable since they started up the company in 2008. Insiders and competitors describe them as "down to earth,low profile, creative and professional".

2 Impressive growth & huge market potential. Sales increased from $6.4m in 2008 to $200m in 2012, up 30+ times. 98% of its sales from outside China, only focusing on wedding gown, small accessory/gadgets, and home and garden. With its successful track record, it can certainly turn around and tap on the huge Chinese market and enter other products and establish its own brand and make bigger money. One more thing to remember is that E-com penetration rate today is still just way too low. According to Euromonitor, global retail online sales is expected to grow at CAGR of 18% to $850b in 2015.

3 Immune to economy's slowdown. The company's clients are all individuals that seek deeply discounted bargains. The worse the economy, the more bargains they buy, the better the company's business.

4 Unique business model. As an E-com, the company does not maintain a sales team that has to entertain its clients. It relys on Google's search to obtain buyers online. Once the buyers make orders and payments online, the company instructs its supplier to produce and deliver to UPS, who then couriers to the buyers around the world. Once the buyers acknowledge receipt of goods, the company pays the supplier. From the day the company receives orders to the day clients receive goods and suppliers get paid, it's only around 26 days on average, while its domestic competitors may take at least 90 days. With a much better payment terms, suppliers jump in line to do business with LITB. The company has done tons of work to streamline its operation and improved the whole supply chains. Right now it has successfully maintained 0-sales team, 0-inventory, 0-account receivable, therefore, no inventory risk, no bad debt risk, no labour issue, and of course, always positive working cash flow, and even operation cash flow. None of its competitors could have achieved this, including its domestic peers, DealExtreme (8086.HK), DANG, VIPS,,, nor its foreign peer, Amazon.

5 Transparent and hard to cook books. E-com companies business are easy to understand and almost everything transparent. Daily online visitors attracted, daily couriers sent, unit prices, etc, are all easy to get. Investors can even personally visit their websites and test their services. What's more, unlike many other US-listed Chinese companies via reversed take-over, LITB is not a family business and has gone through a much stricter IPO process. Note that its IPO is not before the rampant Chinese accounting scandals, but right AFTER.

6 Operational risks totally diversified. The company sells about 5000+ products produced by 2000+ suppliers, to 150+ countries, in 18 languages. The means it does not rely on any single product, supplier, or any single country.

7 The founders used to work for Google, Microsoft,and Amazon. They have know-how on Google's key word search algorithm, on E-com's supply chain management. They are well connected to Google.

8 It'll take years for its domestic competitors to achieve what the company has achieved today, e.g., well-connected to Google, know how on the algorithm, 18 languages, 150+ countries, 2000+ suppliers, 5000+ products, 0 inventory, 0 receivable, 0 sales team. For its overseas competitors like Amazon, they are not based in China, thus not able to enjoy the cheap labour cost.

9 Estimate. LITB began to make net profit of $1.1m in 2012Q4, and $2.4m in 2013Q1, with a net profit margin of 4%. The company is expected to report net profit of $4.6m in Q2, $7.2m in Q3 and $11m in Q4, making total net profit of $25m in 2013, EPS=0.5, net value per share is $2.1. The other simple way to estimate is to assume its sales double 2012 and achieve net profit margin of 6%, thus making net profit of $24m. With sales double and marketing fee decreased, EPS=0.5 VPS=2.1 should be totally achievable in 2014, if not in 2013.

10 Evaluation. VIPS now trading at 50 PE and 20 PB and Amazon at 212 PE and 16 PB. LITB only at 30 PE and 7 PB. The gap will soon be filled, by either VIPS and Amazon down or LITB up when its next 2 quarters result comes out. VIPS is also a China-based E-com that flash sells discounted dresses within China, but its business model has now been copied by many other followers and faces heads up competition from E-com giants like DANG, and It has not make any profit yet before 2013. Amazon sales only increased 3 times 2008-2012 and has very little room to improve its profit margin & growth, while LITB increased 30 times 2008-2012 and has huge room to improve its profit margin & growth in the years to come. So if the market can give them 50-212 PE and 16-20 PB, why can't LITB? if so, based on EPS=0.5 VPS=2.1, its stock price should be (25 to 42) as per VIPS, or (34 to 105) as per Amazon.

When China-based E-Com VIPS had its IPO in Mar 2012, the whole market did not trust it and became very skeptical. Will it become another accounting scandals? Will it meet or even beat Wall Street's EPS expectation?Will Sino-US corporate audit rift persists? VIPS started to soar in Sept 2012 when it did beat the expectation. Now its stock price has risen 5 times since the IPO. In May 2013, Sino-US reached a partial deal on the rift. This is a big break-through after the 3 years impasse and definitely a good news for all the US-listed Chinese companies. True still many other issues pending, e.g, VIE issue, but what can you get when everything settles down?

So let's sit back and see if LITB can follow VIPS's suit, beating the Street's consensus expectation in the next 2 quarters.

Disclosure: I am long LITB.