Chinese E-Commerce Company DangDang Faces Challenges

According to Bloomberg data, last year, Chinese companies raised $107 billion in IPOs, amounting to 38% of the global total. Chinese Internet companies are leading the brigade in listing at the U.S. stock exchanges. DangDang, the Chinese e-retailer, listed on the NYSE in December 2010.

Dang Dang’s Financials
DangDang’s (NYSE:DANG) Q2 revenues grew 53.3% over the year to $122.3 million, surpassing the Street’s expectations of $121.6 million. However, gross margins fell steeply from 19.8% last year to 14.3% during the recent quarter. DangDang’s net loss of $0.06 per share was wider than previous year’s loss of $0.05 per share and the market’s expected loss of $0.02 per share.

DangDang ended the quarter with 4.6 million active customers in the quarter, recording 38.6% growth over the year. Media product revenues for the quarter grew 34.1% over the year to $90.4 million, while general merchandise revenues grew 151.9% over the year to $29.6 million. Other quarterly revenues, including that from third-party merchants, grew 288.9% over the year to $2.3 million.

For the current quarter, DangDang expects revenues to be in the range of $143.5 million-$145.4 million compared with the market’s projections of $144.9 million.

DangDang’s Operations Expand
DangDang is working on expanding their fulfillment space in China to cater to growing demand in the region. They recently started a Shenyang fulfillment center and expanded a new facility in the Guangzhou fulfillment center, bringing their total warehouse space to 210,000 square meters. They plan to open at least two more fulfillment centers in China in the second half of the year. They also purchased land in Tianjin province, where they plan to build their largest fulfillment center.

DangDang needs more fulfillment space in order to cater to their “Lightning Plan” proposed earlier last quarter. As part of the plan, DangDang is able to provide same-day-delivery service to their customers in 14 cities by the end of last quarter and plans to extend that service to 50 major cities by the end of the year.

Recently, DangDang also launched their mobile application for iPhone. They already had an Android OS–based mobile application for their site.

DangDang’s Legal Woes
Recently, DangDang was sued by customers for canceling retail orders. DangDang canceled certain promotional sales because of what they term data entry errors in the listing prices of these sales. According to market reports, 19 lawsuits have been filed against DangDang for canceling the orders. This was the third time that the company canceled orders on account of faulty price entries.

DangDang has also been in the news following the recent accusations by their CEO of their IPO’s being deliberately underpriced by its underwriter, Morgan Stanley. Morgan Stanley and Credit Suisse had sold 17 million ADRs as part of Dangdang’s IPO at $16 each, valuing the company at $1.25 billion. The ADRs were originally offered at $11 to $13 each. This is a common practice among investment bankers to make shares available to their customers at attractive prices. That, needless to say, doesn’t mean that it is an ethical practice.

In the business-to-consumer market, the Chinese e-retailing industry is led by Taobao’s Tmall, which is part of the Alibaba group. Tmall claims nearly half of the B2C market in the country. It is followed by 360Buy with a share of 18.1%. While DangDang lags far behind with only a 2.2% B2C market share in the country, it is being labeled by media as the Amazon of China because it is the largest online book retailer/e-commerce platform in that country. But with a market share gap of such proportions, I find it difficult to believe that DangDang will ever be able to achieve the status of Amazon.com.

The stock is trading at $7.22 with a market capitalization of $571.44 million. It was at its highest point of $36.40 in January of this year.