Hot Dang! China's Amazon Has an IPO

It's apparently good to be called the Amazon.com (Nasdaq: AMZN  ) of China.

E-Commerce China Dangdang (Nasdaq: DANG  ) rocketed in its Wall Street debut yesterday. China's leading online bookseller was initially expected to price its offering between $13 and $15 a share. It was able to price at $16, but opened at $24.50 and closed at a whopping $29.91.

The company's dangdang.com website had 6 million active customers last year, and this year is drawing an average of 1.2 million unique visitors a day. It stocks 590,000 different book titles, and it's gradually expanding into new product categories. Yes, this seems a lot like the Amazon.com playbook circa the late 1990s -- and unfortunately that comparison bleeds over into Dangdang's financials.

Unlike Youku.com (Nasdaq: YOKU  ) -- the Chinese video-sharing site that soared in its debut alongside Dangdang yesterday -- the Web-based retailer is profitable, but not by much.

After posting losses in 2007 and 2008, Dangdang earned a profit of $2.5 million on $217.9 million in net revenue. Through the first nine months of 2010, net revenue has climbed 56% to $234.8 million, with net income clocking in at a mere $2.4 million.

Did you catch those pathetic net margins? Just 1% of Dangdang's revenue is making it all of the way down to the bottom line. That's pathetic.

Investors that are spoiled by China's dot-com sprinters Baidu (Nasdaq: BIDU  ) , Netease.com (Nasdaq: NTES  ) , and Changyou.com (Nasdaq: CYOU  ) sporting net margins north of 40% are supposed to put up with 1% in net margins? Yes, these examples are delivering data. The bottom line takes its lumps when there's physical products and fulfillment involved, but even Shanghai's disappointing Mecox Lane (Nasdaq: LANE  ) -- a Web-based retailer that has seen its stock slammed since October's IPO -- is cranking out better net margins.

Dot-com history buffs will point out that Amazon's margins were horrendous when it was at this point in its life cycle. Even now, Amazon's net margins of roughly 4% are nothing to write home about. However, the best Chinese companies are the ones sporting healthier margins than their stateside rivals at any point in their timeline.

Dangdang bears watching because it is already the category killer in Web-based books. It will face competition as it broadens its offerings, including from Amazon itself after its 2004 acquisition of Joyo. However, one can also hope that margins will also expand as Dangdang grows and Chinese media items begin having the same digital transformation that we've been seeing domestically in recent years.

Don't chase Dangdang at this point. It still has a lot to prove. It would also be a mistake to dismiss it entirely.

Have you bought any of 2010's hot IPOs? Share your thoughts in the comment box below.

Baidu and Netease.com are Motley Fool Rule Breakers selections. Amazon.com is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 09, 2010, at 1:31 PM, jacobske wrote:

    Rick,

    Thanks for your thoughts. In your research did you see how they plan on handling e-books?

    I'll definitely wait before dipping my toe in this one.

    Kip

  • Report this Comment On December 09, 2010, at 3:07 PM, TheSecretHistory wrote:

    Investors looking to get involved in China should be very aware of the very unique situation China is in. A good place to begin getting informed is from English-language Chinese sources themselves, a good place to start is http://www.globaltimes.cn/

  • Report this Comment On December 09, 2010, at 6:21 PM, TMFBreakerRick wrote:

    Kip, I don't know Dangdang's e-book strategy. It may be too early at this point, though it will inevitably be a major component one would think.

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