Buy E-commerce China Dangdang Ads (DANG): DANG is a Chinese online retailer offering books and other media, personal care and general merchandise via Dangdang.com. Often called as the Amazon of China, DANG is the #2 e-Commerce player in China, behind TaoBao. Its business model is similar to AMZN except that it employs a courier-based delivery system that collects cash on delivery. Its shares fell 14.0% on Tuesday after the company reported that in the June quarter, it missed earnings estimates (6c losses versus 1c earnings), but beat current quarter revenue estimates ($122.3 million and $120.6 million) and guided September revenue higher (RMB 916-928 million versus RMB 895 million).
DANG missed estimates on account of a steep reduction in gross margins to 14.3% from 19.8% in the year-ago quarter, which at least in part can be explained by a change in its revenue mix to higher-ticket price general merchandise items as actual gross margin amounts in RMB did go up 10.1% year-over-year. Furthermore, operating expenses fell to 20.9% from 23.2% year-over-year, but actual operating losses surged to RMB 52 million from RMB 17 million year-over-year. This means that the gross margin contraction was just too severe to support the business infrastructure needed for the company to sell its general merchandise, and they will have to either raise prices or lower supply and operating costs to improve operating performance.
We believe that this is part of a growing pains challenge as the company ventures into the general merchandise category and strengthens its fulfillment capabilities. Overall, we continue to believe (as detailed in our prior article) that DANG is a good buy here based on a comparison of its revenues, growth and market-cap to Amazon (AMZN) in the late 90s when it was at a similar stage in which DANG finds itself now.