Raise target prices to 14 dollars; market expansion will bring more action

BofA Merrill Lynch today released its research report, reaffirming the "buy" rating of Dangdang (Nyse:dang) shares and raising its target price to $14.

The following is a summary of the contents of the report:

Raise target prices to 14 dollars; market expansion will bring more action

-We've raised the Dangdang target price to $14 trillion, the upside for the 40% per cent of Dangdang's share price, at the high-end Wall Street analyst expects

Based on the cash flow discount method, we will increase the Dangdang target price to 14 U.S. dollars. Earnings per share forecast for fiscal year 2013, P/E is 1 time times; earnings per share in fiscal 2014 is expected to be 0.8 times times higher. In terms of P/E ratios, Dangdang stocks are still more attractive than the nyse:vips (NYSE:LITB) and the Orchid Pavilion, which is 1.8 times times the earnings per share for the 2013 fiscal year and 3.2 times times the ratio of the Blue pavilion.

We have reduced the net operating losses in fiscal 2013 and fiscal 2014 by 10% and 50% respectively, mainly because of: 1 we have strengthened our confidence in the plans for Dangdang to shift to a high-margin market model. We anticipate that 2013 fiscal year Dangdang from the market business orders in the total order in the proportion of 20%, 2014 fiscal year will reach 30%, mainly because of the new flash-purchase channel support, 2 better inventory management measures and the cost of performance savings will bring effective operating leverage, The reason is that Tianjin as the center of the new distribution center opened in 2013, by 2014 will be gradually upgraded.

Based on this, we expect Dangdang to achieve a break-even in the quarter-2014 fiscal year, rather than in the third quarter of 2015.

-Expected second quarter performance

Dangdang will report its second-quarter earnings in the eastern time of August 15. We expect Dangdang earnings to show that the company's second-quarter revenue was 1.5 billion yuan, up 24% from a year earlier; net losses narrowed further to 64 million yuan, with a net profit margin of 4% per cent, better than the net loss of 84 million yuan on the average expected by Wall Street analysts.

-Product mix shifts will drive profit margins and boost growth potential

We anticipate that the Dangdang product portfolio will change from two aspects: (1) The product portfolio will be rearranged because the company is offering a diverse portfolio of products ranging from books to consumer goods, with a larger expansion of the product category, with an increase in revenue per order (up 22% in the first quarter); (2) Shift to the market model. Dangdang has made good progress on both fronts, with GMV (total commodity value from two platforms) accounting for more than half of total revenue, and the share of market GMV has reached One-third since its release in 2010.

Within the market business, clothing is a major product category, with more than 50% per cent of the GMV (up from 40% in the previous quarter). The volatility of profit margins brought about by price wars and seasonal promotions should be one of the main factors that investors are concerned about.

Investment theme:

We rated Dangdang stock as "buy": (1) Dangdang is the largest online book retailer, providing a core user base for cross-selling, thus having a competitive advantage, (2) a shift in the product portfolio to a high-margin market business; (3) opportunities from the rapidly growing commodity sector are surfacing. We believe that the return of profit margins is imminent and that Dangdang is expected to achieve break-even by the end of 2014.

Valuation：

Based on the discounted cash flow method, we set the Dangdang target price at USD 14, which includes: 1 2.5 USD Net cash per share, 2 11% USD per share based on the 2015 discount rate, the free cash flow compound annual growth rate in 2019 fiscal year 30% and 4% of the final growth rate. This valuation means that the market sales rate of Dangdang is 1 time times as expected in the 2013 fiscal year, and the market sales rate is 35 times times the forecast for fiscal year 2015.

Downside risk:

(1) Increased competition in the industry; 2 price wars are more intense than expected; 3) product risk; 4 The dispute between the US Securities and Exchange Commission (SEC) and Chinese audit Institutions; 5) issue new shares for strategic investment.