Dangdang Disappoints With New Yhd Tie-Up

Many shareholders in e-commerce firm Dangdang (NYSE: DANG  ) might be thinking of selling their stock after hearing about the company's latest disappointing announcement of a tie-up with Wal-Mart-backed Yhd.com. The nature of the tie-up, which will see the pair cross-promote each others' services, was a bit of a let down, especially since many had been hoping for something more substantial including an equity exchange. Dangdang had previously confirmed it would announce a tie-up after rumors of an alliance first appeared a few weeks ago. This kind of hype followed by disappointment is quite typical of Dangdang's co-founder and CEO Li Guoqing, whose fierce independence could ultimately lead to the marginalization or even death of his company.

I'm clearly not too bullish on this latest news from Dangdang, but US investors were a little more upbeat. The company's shares rose 4% in New York trading after the announcement, extending a massive rally that has seen Dangdang's stock soar 70% since it reported last week that it returned to profitability in the fourth quarter after two years of losses. Many might consider selling the stock on this latest news partly due to disappointment, but also because the recent rally is probably a bit overblown.

Let's take a closer look at the latest tie-up, which will see Dangdang open a bookstore on Yhd.com's platform, and Yhd.com open a supermarket on Dangdang's open Marketplace platform. (company announcement; Chinese article) Dangdang is certainly hyping the news, but this particular alliance doesn't seem very unusual or even cause for much excitement.

Nearly all of China's major e-commerce companies now operate open platforms in addition to their own online stores, copying the business model now used by industry leader Alibaba's wildly-popular Tmall. Such open platforms are essentially online shopping malls that allow third-party merchants to open stores on the site. Dangdang's return to profitability is due in no small part to the explosive growth of its open Marketplace, whose gross merchandise value more than doubled in the fourth quarter to nearly 1.4 billion yuan ($230 million).

It's certainly nice to see Dangdang signing up such a major new merchant to its Marketplace like Yhd.com, which also goes by the name Yihaodian and is controlled by Wal-Mart. But at the end of the day, Yhd is just one more merchant among hundreds on Dangdang's Marketplace platform, and it's hard to see why this particular tie-up has any real special meaning besides to create hype.

Master of Empty Gestures
More broadly speaking, this kind of announcement is increasingly typical of Dangdang and Li Guoqing, who also disappointed industry watchers two years ago with his formation of a similar tie-up with electronics retailing giant Gome. That tie-up also looked full of potential due to the companies' highly complementary strengths in online and offline retail, but it also ended up being mostly hype.

It's clear that consolidation is sorely needed in China's overheated e-commerce space, and there have even been some signs that such a retrenchment is coming. One of the most significant moves has Internet giant Tencent reportedly in talks to merge its e-commerce operations with JD.com, the nation's second largest e-commerce company. Dangdang is far too small to survive on its own in the longer term, and the company would be wise to form an equity tie-up or even merge with Yhd.com, which is what many were guessing when rumors of the alliance first emerged.

But this latest tie-up once again underscores that Li Guoqing has no interest in selling part or all of his company and wants to remain independent. Dangdang's recent return to profitability and the huge jump in its shares is no doubt fueling his hubris, which could ultimately lead to the company's marginalization or demise if it fails to find a stronger long-term partner.

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Comments from our Foolish Readers

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 March 07, 2014, at 8:09 PM, Sambo101 wrote:

    I'm not sure why this bashing by you and the street.com is happening. Which part of many analyst expectations of loosing 7 cents turning into a profit of 4 profit, guiding higher, expanding the business to middle and upper income consumers don't you get. The street.com has been copying and pasting the same bashing only with a new beginning paragraph.sell sell sell, when many more able analysts say buy and raising the price target. Do you not remember when amazon started in the same manner with almost 3 years of almost hardly a stock price movement to build the infrastructure? I don't understand this negative sentiment when quarter after quarter finally there is a company that is delivering yet it's not good enough for the silliest justifications. This can't be even respected as a justification, without a meaningful proof. Please, unless you are short give them a break, or publish something more meaningful or insightful that we don't already know. Thank you.

  • Report this Comment On March 08, 2014, at 2:50 AM, NoobOh wrote:

    No need to worry about negative sentiments. On Dangdang's 3rd quarter release where they say they are cutting out the losers and concentrating on making a profit, I was upbeat and people weren't. I saw no reason for the drop other than some revenue loss which they would've sold more but lost more money. Unless you are dumb, you should concentrate more on making a profit instead of just blindly selling to generate revenues and lose money till you go bankrupt. Many companies in the dot com eras were selling for massive losses and people only look at revenues. Wrong approach as that will create another bubble that is due to explode. Dangdang is going in the right track on everything they are doing right now. Expanding into consumer electronics and cosmetics for the upcoming quarters. This can be huge profits. Their v.dangdang is just picking up steam so get ready for more money in their flash sales as they progress forward. Books? Not too excited about that but it's interesting to see that there are potential tax benefits to be had. More merchants selling? That's good news as they can make more sharing some of profits from there. So what's not to like for long term? The YHD news was expected and for the most part priced in. Did you expect a merger of some kind? Why would they want to sell some or all their company for such a low price?

  • Report this Comment On March 08, 2014, at 9:44 AM, Hunter1980 wrote:

    Dangdang's stock price is steadily approaching $25.00 per share before the next earning announcement. It doesn't matter what The Street say, and it doesn't matter that the CFO is leaving the company. Its share price have been closed higher despite those negative comments and news. China is a vast market with rapidly growing internet users. Dangdang is profitable and growing. Just look at Vishop's price history, when they start to turn a profit back in 2013. I think Dangdang's share price will jump over $30.00 easily after the next earning announcement.

  • Report this Comment On March 09, 2014, at 7:55 PM, mellyell wrote:

    Social sentiment runs off the chart high for Dangdang. Let's not forget that. They are making profits without debt to speak of. Their industry is growing at 60%. What's not to value here? A year from now those who remain long will be richly rewarded.

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