PricewaterhouseCoopers released its 2011 outlook for the consumer in Asia this past Monday, which concluded, among other things, that "Online retailing may be on the brink of staggering growth in China." The evidence supporting this thesis was that Internet sales in China are up 60% year over year despite the fact that the sector remains relatively immature and underdeveloped.
Perhaps most impressive is that China's leading online retailer, Taobao.com, now gets more traffic and sells more merchandise than Amazon.com
Maybe you already knew that
While PwC's entire report is worth reading, it's clear given the recent action in Chinese dot-coms that it doesn't cover a lot of new ground for investors. The leading Chinese Internet companies, including search engine giant Baidu.com
While those valuations strike conservative ol' me as expensive, I concede that the outlook for the Chinese consumer -- and the online Chinese consumer in particular -- is promising. As I've written before, the Chinese consumer is one of the best ways to play China today.
It's important, however, to be careful when it comes to purchasing Chinese stocks. Not only are there governance, currency, and other risks associated with investing abroad, but it's clear today that -- a la the tech bubble -- a significant portion of hot China stocks today simply won't end up living up to their hype.
The Groupon of China
Yet Chinese Internet plays are popular today, and I'll wager that you clicked on this article in the hopes of being told about the Groupon of China -- a company you hope is early in its lifecycle that will go on to become China's next great consumer Internet business and earn you mind-blowing profits in the process. While I do promise to reveal the Groupon of China, it's important to note at this point that your and my idea of Groupon are likely quite different. Rather than see an emerging online superbrand in Groupon, I see a company with our country's 79th most popular website, trailing the likes of Pandora, Constant Contact, and BBC Online, no durable competitive advantages, and significant emerging competition.
With that as background, I present to you the Groupon of China: E-Commerce China Dangdang
Wait a second ...
Assuming you know Chinese stocks, you can't believe newly listed Dangdang is the Groupon of China. In fact, you may think I'm selling Dangdang short even if you believe in a bright future for Groupon. That's because Dangdang, an online retailer of books in China, has naturally been hyped by the media and its promoters as the Amazon.com of China.
Although Amazon and Dangdang both got their start selling books, that's where the similarities end. Amazon today operates the world's 15th-most-popular website and the fifth-most-popular website in the United States. Further, it's sold more than $30 billion worth of product and earned more than $1 billion over the past year while expanding into consumer electronics and cloud computing. Dangdang, on the other hand, had just $300 million in sales and was barely profitable over the same time period.
But wait, Dangdang today, you might argue, is a lot like Amazon was 10 years ago. It's not the Amazon.com of China, but the next Amazon.com of China.
This, too, is wrong. Amazon, in its early days, was a disruptive innovator pioneering sales online. Its first-mover advantage and resulting network effects are the reasons the company remains successful today. Dangdang is neither of these things in China. As I alluded to above, its flagship website was only the 77th most popular in China last year, according to data from Alexa, trailing direct online retailing competitors Taobao.com and Paipai.com. Further, neither of these competitors will be easy to beat. They are run by well-capitalized companies, Alibaba Group and Tencent, respectively, and are already vastly more popular than Dangdang.
The global view
This is what makes Dangdang's premium valuation, at more than three times sales and 300 times EBITDA, so preposterous. The company is, in short, an also-ran, but many U.S. investors are flocking to own the stock because it's among the few Chinese online retail options available to them -- Tencent is listed in Hong Kong and Taobao.com parent Alibaba Group remains closely held.
This is what makes Dangdang such a dangerous stock to buy or own today. Like Groupon, it's a mediocre business with no sustainable competitive advantage operating in a competitive space against much bigger players -- and trading at a premium valuation to boot. Of course, maybe it's not such a bad thing to own the Groupon of China. Google, in its infinite capital allocation wisdom, may swoop in and try to acquire it for $6 billion.
Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. He does not own shares of any company mentioned. Google and Baidu are Motley Fool Rule Breakers recommendations. Google is also an Inside Value pick. Amazon.com is a Stock Advisor selection. The Motley Fool owns shares of Google. You may not care about any of that, but telling you is part of our comprehensive disclosure policy.