By Isabella Zhong
The mommy business is good business. It's even better if you can
get young mothers to hand over their hard earned cash through the
simple click of a mouse.
The rise of the so-called millennial mom has captured the eye of
E-commerce China Dangdang (DANG), a US-listed Chinese e-tailer
investing heavily in marketing itself to mothers, and women more
generally, as part of its evolution from online book seller to a
more diverse e-tailer. Unfortunately, the big marketing spend,
which was equal to 5% of revenues, led third quarter earnings to
fall short of expectations for the first time in 11 quarters,
prompting investors to spank the stock. Shares fell 10% in U.S.
trading on Tuesday.
The hammering of the stock appears harsh given a successful
transformation of the company could offer a way to profit from
younger, net savvy, cashed-up Chinese consumers. Better still,
Dangdang's valuations are much lower than the eye-popping numbers
that e-commerce behemoths, like Amazon (AMZN), are fetching.
The push into a wider range of products seems to be a wise
strategy given Dangdang dominates its core business. Since starting
as an online book seller 15 years ago, the company has gone on to
snare a 53% market share of the industry. Clearly, there is limited
upside for growth from this line of business.
The marketing money is being spent on promoting its growing
range of products, notably baby-related products and women's
fashion, and reinventing its image to appear more fashionable in a
bid to attract trendier and higher spending customers. Although the
increase in marketing expenses had put a dent in Dangdang's
earnings, it had paid off in customer numbers. The company signed
up 3.6 million new customers in the third quarter, up 24% from the
2.9 million added in the previous quarter. Revenue per customer
also increased 32% compared to a year ago.
Macquarie analyst Alice Yang, who has an outperform rating on
the stock, believes Dangdang's niche customer base is an asset. She
argues the e-tailer's popularity among young mothers and
professional women allows the company to differentiate itself, as
well as allowing it to better tailor to customers' preferences and
capture the rising demand for personalized shopping experiences in
China.
It appears the company's strategy may be paying off. Dangdang
reported third quarter revenue of $323 million, an increase of 31%
compared to a year ago.
The company is forecasting solid topline growth in the fourth
quarter, with guidance for revenues to come in at $407 million, a
27% increase from the same time last year. Dangdang chairwoman
Peggy Yu Yu said a return to marketing expenses of between 3% and
4% was also being targeted over the long term.
Although third quarter earnings of $4 million, on a net profit
margin of 1.2%, fell short of the analyst expectations, they were
up 7% from the previous quarter. The stock reported a $4.6 million
loss at the same time last year.
Dangdang has often drawn comparisons to U.S. e-commerce giant
Amazon, both for its business-to-consumer (B2C) driven model and
its product selection. But unlike Amazon, Dangdang is profitable
and has been out of the red since the beginning of the year. This
also differentiates the stock from Chinese peer JD.com (JD), which
is still yet to turn a profit.
Dangdang's valuation is also compelling. At its current price of
around $11 a share, the e-tailer trades at around 19 times
projected earnings, which is cheap next to Amazon's 95 times and
JD.com's 9,000 times - yes, 9,000 times! Although Dangdang is much
smaller in size compared Amazon and JD.com, it enjoys faster
revenue growth than Amazon but trades at a much lower valuation.
Dangdang is also supported by a profitable track record and a niche
customer base.
Analysts expect the e-tailer's earnings per share to more than
double from $0.21 this year to $0.53 in 2015, and the rise to $0.84
in 2016. "We remain confident Dangdang's high operating efficiency
will enable it to grow profits even from a lower margin level,"
wrote HSBC analyst Chi Tsang, who rates the stock a buy with a $17
price target. This implies 50% upside. The average price target
among all analysts is around $14.70 a share, implying a 30% gain
could be in the offing.
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Email: isabella.zhong@barrons.com
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Comments? E-mail us at asiaeditors@barrons.com
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