What surprised us
Dangdang (DANG) reported largely in-line 1Q results but guided 2Q revenue8%/6% below GSe/Bloomberg consensus. Takeaways: 1) Revenue grew 58%yoy in 1Q, with media accelerating slightly to 35% but general merchandisedecelerated to 124% (from 210% in 4Q) reflecting strategic shift to marketplaces.
DANG guided 2Q growth to decelerate to 50% yoy, due to a weaker economyand shift from principal to marketplaces (where DANG only recognizescommissions). DANG gained 1.9mn new customers (+45% yoy) for 6.1mnactive customers (+44% yoy) in 1Q, implying average customer spend grew9% to Rmb178 and average order value grew 7% yoy to Rmb92; 2) Grossmargin improved to 14.2% in 1Q12 (10.5% in 4Q11), attributed to moderatedprice competition and shifting revenue mix to higher-margin marketplaces.
Management discussed marketplaces as a growing strategic focus, mainlyworking with large branded retailers (e.g. Gome), with product categoriessuch as consumer electronics and apparel being channeled to this platform.
Marketplace GMV is targeted to exceed principal GMV by 2012-end/ 2013, butwe view the commission fee structure as potentially at risk from growingcompetition. 3) Marketing spend growth decelerated to 27% yoy, attributed tomarketing efficiency and user acquisition facilitated by improved fulfillmentservice quality (e.g. next-day delivery available in 140 cities), which drovefulfillment cost growth to accelerate to 107% yoy. DANG plans to grow fulfillmentrapidly, providing more next-day delivery and supporting marketplace growth.
What to do with the stock
Maintain Neutral but cut our 12-m TP to $7.0 (from $7.5), aggregating the booksDCF valuation at $6.0 (from $6.4) and general merchandise at $1.0 (from $1.1). Wecut our 2012E-2014E EPS by 4%/19%47% due to slower revenues and fasterfulfillment cost growth. Risks: faster rev growth, cost inflation, competition.