Price Target: US$10.5 Derived from base case DCF value.
Strong execution in GM business and faster margin recovery:
Sales record a CAGR of 21% over 2013-17e, driven by increasing
customer volume (14% p.a.) and ARPU (or average spending per
customer) expansion (4.0% p.a.). Gross margin rebounds to 23.9%
in 2017, 50bp better than in our base case.
Sustained volume and ARPU growth: Sales record a CAGR of
19% over 2013-17, with customer volume and ARPU growing 13%
p.a. and 3.0% p.a., respectively. Gross margin recovers from
13.9% in 2012 to 23.4% in 2017.
Slower market share gain and GM business expansion: Sales
register a CAGR of 18% over 2013-17, with customer volume and
ARPU growing 13% p.a. and 2.5% p.a., respectively. Gross margin
recovers to 22.4% in 2017, 100bp lower than in our base case.
We downgrade from OW to EW
This mainly reflects rich valuation.
Current price/12m forward sales ratio
is ~0.8x, vs. its range of 0.3-0.6x over
the past year.
Dangdang is well positioned to
capitalize on the e-commerce market
upswing in China.
It has captured half of all online book
sales in China, yet has serviced only
2-3% of the Chinese online
population, implying ample upside
Key Value Drivers
Expanding customer volume via
capturing greater share of China’s
Higher ARPU expansion as repeat
customers increase spending;
Growth beyond book distribution
through general merchandise service.
Margins for its general merchandise
service may improve, helped by better
product mix and increasing scale.
Key Downside Risks
Thin margin due to its retail nature;
Intensifying competition on multiple
fronts, e.g., Amazon and 360buy.
General merchandise initiatives may
stretch the company’s resources and
lead to brand dilution.