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
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
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
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
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
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
"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
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