A Chinese Small Cap I'm Keeping My Eye On

In the past, I've called Amazon (Nasdaq: AMZN  ) my highest conviction pick in the stock market. Its focus on customer service, long-term time horizon, and protective moat of strategically placed fulfillment centers make it a top-tier company.

In a related note, I started 2012 by swearing off all Chinese small cap companies... at least for a year. This leaves me at a crossroads, as the performance of Dangdang (NYSE: DANG  ) -- often referred to as the "Amazon of China" -- continues to intrigue me. Read below to find out why, and at the end I'll let you in on a safe way our analysts think you can take part in international economies.

First, the numbers
Before looking at Dangdang's story, let's just familiarize ourselves with the company's numbers.

Market Cap $408 million
Price-to-Earnings N/A
Price-to-Sales 0.6
Revenue Growth (MRQ) 53%
Total Cash $226.6 million
Total Debt $15.7 million

Source: Yahoo! Finance, SEC filings. MRQ = most recent quarter.

The company came out with earnings just this week and broke out even more of its numbers. Media revenue -- think music, movies, and e-books -- increased 32% since 2011. That's good growth, but it's important to note that there are several options for the Chinese to use if they want to get these things via the Internet.

Though the company might keep fewer pennies of every dollar from selling general merchandise -- think anything that actually gets sent to your house -- the numbers here are the important ones. Over the past quarter, the company's revenue increased 110% since last year and now accounts for one-third of all revenue for the company.

The company still isn't turning a profit, but it's good to know shareholder money is being put to good use, as the company is carrying out a familiar game plan.

Following in the footsteps of Amazon
Chinese Internet search giant Baidu (Nasdaq: BIDU  ) has been able to grab significant market share by following in the footsteps of its American counterpart: Google (Nasdaq: GOOG  ) . Dangdang seems to be taking the exact same approach when it comes to e-commerce. That's important, because rivals Taobao and Qihoo 360 (NYSE: QIHU  ) already have a significant presence.

One of the reasons Dangdang has yet to be profitable is because it's spending a lot of money to build out its fulfillment centers, a vitally important move if it wants a sustainable competitive advantage. As CEO Guoqing Li stated, the company has "implemented next-day-delivery services in 150 cities, delivery-in-evening services in 10 cities and same-day-delivery in 20 cities."

The company has also taken a page from Amazon's Kindle playbook by coming out with its own e-reader: the Dangdang Doucon. It's too early to tell whether the Doucon will be as big a hit in China as the Kindle is in the United States, so it'll be interesting to see how things play out.

Enter with caution
I'm interested and bullish enough on Dangdang to give the company a green thumbs-up CAPScall on my All-Star profile, but I'm not buying quite yet. I hate trying to own things that I can't actually use, and as I'm in the United States, I have yet to receive a package from Dangdang.

There's also the inherent risk that comes with investing in Chinese small-cap stocks, which have proven nefarious over the past few years.

Most importantly, I'm not worried if I don't get in right now. If Dangdang becomes the e-tailer in China, it will grow to be many hundreds of times bigger than it is today, and I can pick up shares later, when there's less risk involved.

If you're interested in the Dangdang story, you'd be well served learning everything you can about its U.S. equivalent -- Amazon.com. In this brand new premium report on the company, one of our top analysts goes through everything investors must know about the e-tailer, including why it's triple-digit P/E ratio shouldn't scare you off. Click here to claim your copy now.

Fool analyst Brian Stoffel owns shares of Google, Amazon, and Baidu. The Motley Fool owns shares of Amazon.com, Google, and Baidu.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google, and Baidu.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 23, 2012, at 2:48 PM, XMFMadMardigan wrote:

    DANG could be a decent pick, but investors need to unbelievably cautious in this space. Chinese small caps are notorious for fraud. More over, Chinese business practices are...foreign (hehe) to American investors. In my experience, on the ground due diligence is almost if not definitely a requisite before taking any position in a Chinese small cap.

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