E-Commerce China Dangdang (DANG US) : Another precious online traffic portal

We recently communicated with E-commerce China Dangdang (Dangdang). Here is the background information and quick takeaway.

    Still on the way to lower dependence on online book sales:Headquartered in Beijing, Dangdang is a B2C e-commerce company in China. Since inception, Dangdang focused on selling books online that still contributed 40%+ revenue in 2013A. Dangdang has increasing sales of general merchandise categories including fashion and apparel, children products and home products. Management plans to expand exposure in 2nd and 3rd tier cities especially in fashion and apparels. Comparable listcos/to-be-listcos include Amazon (AMZN US, mkt cap US$152b), Vipshop (VIPS US, mkt cap US$8.0b) and JD.com.

    Do not expect major breakthrough in operational efficiency for 14E:Taking into account cost of revenue, fulfillment costs, marketing expenses, tech & content costs and general & admin expenses, sum of above items were equivalent to 99.2%-111.5% of total revenue between 2008A and 2013A. While the ratios were below 100% in 09A and 10A before listing, management indicated that higher transparency afterwards attracted competition and raised suppliers’ expectation. In particular, the ratio was 100.3% in Q4 13A. Management does not expect major improvement in 2014E as cost control is already tight.

    Valuation discussion with respect to Amazon, Tencent and DJ.com:Last month, Tencent (0700 HK) confirmed to acquire 15% of DJ.com pre-listing shares at combination of US$215m cash and e-commerce assets. Tencent is to acquire 5% additional shares upon DJ.com listing. Taking Amazon average P/S 1.9x as reference, 1.5x P/S for US$10b DJ.com expected revenue was near valuation of US$15b. Applying 1.1x-1.9x P/S to Tencent e-commerce at US$1.3b revenue, consideration for DJ.com 15% shares was US$1.4b to US$2.5b. We incline to apply 1.1x P/S, implying 30%+ pre-IPO discount for the deal.

    Valuation constrain partly due to size could change upon M&A:While we does not see further short-term catalyst after operational breakeven in Q4 13A, Dangdang is trading at 1.1x P/S 2013A for its US$1.0b revenue, a discount to Amazon average of 1.9x and DJ.com potential rate of 1.5x+ partly due to difference in size. Dangdang itself at current size is fairly valued, in our view. Yet, it could be cooperation or M&A target. Merging with larger platform, even without synergy, combined P/S re-rating is probable that supports certain price premium in the potential acquisition. We do not suggest over-optimism on operation but do not object to speculation on M&A.