If you want to gain from the rising consumerism in China, online retailer Dangdang (NYSE: DANG ) might look tempting. Like Amazon.com (Nasdaq: AMZN ) , Dangdang began focused on books, and it claims to be the largest book retailer in China. And now, like Amazon, Dangdang sells everything from handbags to handheld GPS navigators. But can it succeed like Amazon? Let's look at the arguments as to whether you should buy, sell, or hold.
Proven business model. It seems that Dangdang's management takes all cues from Amazon's past. After starting its business in books, then moving to general merchandise, Dangdang launched a marketplace program to allow third parties to sell items on Dangdang's website. Mirroring Amazon's expertise in logistics, Dangdang offers same-day delivery in 17 cities and next-day delivery in 72 cities. And in December, Dangdang launched its own e-book platform which customers can use on iPhones, iPads, Android devices or PCs -- something akin to Amazon's Kindle setup. Amazon CEO Jeff Bezos should be blushing while Dangdang tries to imitate its way to profitability.
Driven by demographics. Chinese internet users are expected to grow to 574.5 million in 2013, up from 460 million in 2010. Total retail sales in China grew 18.4% from 2009 to 2010, to a total of $2.34 trillion. These two metrics show the potential growth available to online commerce. As more online Chinese spend more money, chances are they will spend it more online.
Small player. According to iResearch, Taobao, part of Alibaba.com (Pink: ALBCF.PK), holds 49% market share in Chinese online retail. The next largest player, 360buy.com, commands 18% of the market, and plans to IPO in the second half of this year. Alibaba has been in talks with Yahoo! (Nasdaq: YHOO ) to buy back at least a portion of the 43% of Alibaba that Yahoo bought in 2005 for $1 billion --but the value of Taobao remains a large question in negotiations. Unfortunately for Dangdang, even if it follows Amazon's strategy, it has to overcome something Amazon never faced: online competitors. These competitors force Dangdang to lower prices to compete, with gross margins in the third quarter at 14% compared to the prior year's 25%. Dangdang also must increase marketing costs, which made up 4.4% of revenue, compared to the prior year's 3.9%.
Share structure. While public shares represent 21.8% of the company, due to the dual-class share structurethese shares hold only 2.8% of the voting power. With some Chinese firms coming under scrutiny for fraud, management should be sensitive to underhanded tactics when dealing with shareholders. While not pertinent to potential profit, the lack of power shareholders have when owning a share of Dangdang should be understood.
Slowing demographic trends. Even though Chinese retail grew massively in the past, there is no guarantee of high and sustained future growth. As the International Business Times reported, sales growth during the Lunar New Year holiday fell to 16%,from the prior year's 19%. Obviously this retail growth is still enviable, but beware if Chinese shoppers continue to slow spending. Unlike Chinese search engine Baidu (Nasdaq: BIDU ) , who created products in Thai and Arabic along with plans for several other languages in order to diversify away from China, Dangdang's infrastructure is tied to China, and where China's economy goes, Dangdang will follow.
The final call
If you buy Dangdang now, I believe you may be shouting its ticker repeatedly in the future. But if you already own shares, I would hold on to see how management performs in increasing market share against the large players and improving the bottom line.
While I don't believe betting on Dangdang will reward investors, there is another great retail opportunity in emerging markets. To reveal what our Chief Investment Officer believes is the "Top Stock of 2012," please click here.