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    China Business
     Oct 27, 2010

Dangdang heads for Nasdaq
By Sherman So

Dangdang, China's largest online book retailer, will be going public in the United States next month with a listing on Nasdaq and carrying a US$1 billion valuation, according to sources. This is the first major Chinese e-commerce site to sell shares to the public and is expected to attract considerable attention. However, investors interested in a piece of the action had better beware: this is the first, but might not the best.

The value put on the Beijing-based company was "aggressive", an investment banking source said. With Dangdang earning about US$5 million in profit last year, this suggested a 200 times earning price tag. Such high price-to-earnings ratios are usually reserved to companies with an extremely high potential or growth rate, for example those growing revenues at more than 100% a year or with a market size that is expected to increase considerably within a few years. While these might hold true for


the overall online retail sector in China, they might not be the case for Dangdang.

Total transaction volume of Chinese online retailers grew 107% to 252.77 billion yuan (US$38 billion) last year, according to Beijing-based market research firm Analysys International. The trend continued in the first half of this year, when total transactions surged 103% to 213.31 billion yuan from the same period in 2009.
The country's online retail market is also at an early stage and has lots of potential. Where about 4% of consumer goods in the United States were sold online as of the end of last year, only 1.98% were sold via the Internet in China, a figure that could more than double to 5% by 2014, estimates Shanghai-based iResearch.

The overall business-to-consumer (B2C) market will be worth 1.27 trillion yuan in 2013, or up over 380% from the 2009 level, the research says.

That is a tough rate of growth for Dangdang to match, and after selling books online in China for over 10 years it may be hard-pressed to increase its market share.

Founded in 1999 by Peggy Yu and her husband, Li Guoqing, Dangdang vies to be the leading online bookstore in China with Joyo, Amazon's subsidiary in the country. The two companies each held an 8.9% market share in China's business-to-consumer sector in the third quarter, iResearch estimated.

Last year, Dangdang's book-selling business grew about 60% from a year earlier, according to Chinese media. "The growth rate lagged the overall market growth and it will be even slower in the future," said an industry analyst. "As Dangdang already has about 10% of the overall book market in China, excluding academic books, it would be hard to expand [the book-selling business] a lot."

To boost sales, Dangdang introduced a new business line in 2008, which sells a wide range of products from electronics to linens, slippers, home decor and milk powder. The new line grew about 230% last year, according to Chinese media. "But, that is only a small portion of Dangdang's overall business," said the analyst.

Moreover, Dangdang has limited advantages in these areas, as it has many competitors selling those items online - Beijing-based 360buy.com is a very strong competitor for electronics, in which it specializes, and is four times bigger than Dangdang in terms of transaction volume. Its market share in the overall B2C sector was 35.6% in the third quarter, iResearch estimated.

360buy.com is also growing much faster than Dangdang. Its market share expanded to 35.6% in the third quarter from 26.6% in the first quarter, according to iResearch, while Dangdang's market share shrank from 10.7% to 8.9%.

In garments, Beijing-based online store Vancl boosted its B2C market share to 5.3% in the third quarter from 4.1% in the first.

And when it comes to every other sort of product, Taobao, the country's leading auction site, is probably the first choice most people go to. (Former Taobao vice president Huang Ruo went in the opposite direction - he is now Dangdang's chief operating officer.) Small and medium size shops sell everything you can imagine over Taobao's platform. The company, which belongs to Hangzhou-based Alibaba Group, dominates China's consumer-to-consumer market, with an 84.8% market share, according to iResearch. Its transaction volume has been doubling for each of the past five years, reaching 208.3 billion yuan in 2009.

Dangdang chief executive Li Guoqing told a conference in Beijing last month that he would rather have a moderate growth rate and maintain profitability than an extremely high growth rate while making a loss. Some investors, however, considered that a drawback.

"Dangdang is as not aggressive as its peers," said a hedge-fund manager, "Now it is time to grab market share rather than achieve profitability." He cited the case of Amazon, which for many years failed to report a profit, instead pushing for bigger market share, until "now no one can beat it in e-commerce".

Most of Dangdang's peers have chosen to follow Amazon's example, building up infrastructure and going for high growth, rather than making profit early on. Their ambitions are fueled by money from private equity and venture capital. 360buy got a US$$1.5 billion investment in January this year from Tiger Global management and other investors.

"As capital is cheap, why not use it to increase market size and build infrastructure," said Xing Kongyu, president of Paidai.com, which organizes an industry forum for e-commerce players in China.

Dangdang's service quality might also be of concern to investors. "Among the top online retailers in China, only Dangdang is still relying on third-party companies for delivery. The others have established their own delivery teams for faster and better services, despite higher cost," said the industry analyst, "I heard quite a few Dangdang customers complain about delivered books being damaged."

But perhaps it is because it did not invest in building up its own delivery team, Dangdang is the first among top online retailers in China to achieve profitability.

"Other top online retailers, such as 360buy and Vancl, can breakeven if they want to, but they invest in building up their logistic system and other infrastructure," said a venture capital investor with money backing Chinese online retailers.

The top five online retailers in iResearch's survey are 360buy, Dangdang, Joyo, Vancl and New Egg - which specializes in electronic goods and secured a 4.4% of China's B2C market in China in the third quarter.

"Both 360buy and Vancl have IPO plans already," said the venture capital investors, with share sales possibly going ahead next year.

Their relative success or failure in attracting buyers, compared with Dangdang, may say much about the merits of seeking profit or growth in China's online retail space. For the time being, Dangdang at least has the IPO field to itself.

Sherman So is a Hong Kong-based correspondent and co-author of Red Wired: China's Internet Revolution.

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