Dangdang's stock rating remains unchanged at buy

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

-Sales are in line with expectations and earnings per share exceed expectations thanks to operating leverage

Dangdang's net loss narrowed further in the second quarter of fiscal year 2013, which met analysts ' expectations and increased its gross margin. Dangdang's operating profit margin and net profit margin in the second quarter grew 80 basis points and 120 basis points respectively, mainly due to the lower performance cost (each order performance cost decreased by 5%), thereby offsetting the television marketing activities brought about by the growth of marketing costs.

We will be Dangdang the 2013 fiscal year and 2014 fiscal year sales forecasts respectively cut 6% and 7%, but also maintain its 14 U.S. dollars (based on the cash flow discount method) of the target price unchanged. The estimate for earnings per share for fiscal year 2013 means Dangdang has a 1.1 times-fold earnings ratio, which is reasonable compared to 1.5 to 3 times times earnings.

Dangdang is on track to achieve a break-even point: 1 The rapid growth of high profit margins (total commodity transactions by 170% per cent year-on-year), revenue growth for each order (RMB 200, equivalent to twice times the core business) and 2 continue to take measures to improve operational efficiency.

-Reduce conversion rates to drive market expansion

Dangdang market business in the second quarter total commodity transactions (GMV) to achieve healthy growth, year-on-year growth rate of 178% to 788 million yuan. High-margin Apparel products account for more than 50% of total sales. The total conversion rate in the second quarter was 8.1% (less than 10% to 12% in the past few quarters), as Dangdang took incentives to lure selected businesses on its platform.

Because Dangdang market is still in the early stages of development, the company hopes to obtain high-quality business, while using positive user feedback to expand the business, so as to achieve long-term growth. Based on this, we will be the 2013 fiscal year Dangdang market business gross profit margin is expected to be reduced from 77% to 66%.

-Adopt a customized mobile e-business strategy to differentiate it from the PC platform

Dangdang's mobile usage is accelerating, and now accounts for 40% of total traffic (up from 30% in the first quarter).

Dangdang believes that mobile E-commerce business has a unique advantage, such as: 1 mobile users tend to be more loyal; 2 mobile can support "push marketing" and real-time order tracking to improve user stickiness. Dangdang plans to introduce more features on the mobile platform to cater for a variety of buying behaviors. The growth of mobile e-commerce should help retain more loyal existing users.

Target Price and risk:

Based on the cash flow discount method, we set the target price of Dangdang at USD 14, which includes: 1 net cash per share of USD 2.5, 2 The free cash flow compound annual growth rate based on 11% discount rate, 2015 fiscal year to 2019, and 25% The final growth rate of 12.5 dollars per share. We believe that the compound annual growth rate of 4% is a conservative expectation, as the compound annual growth rate of mobile E-commerce between 2007 and 2012 is still up to 11%, and Amazon has been operating the business in 1995.

This valuation means that, in the 2013 fiscal year sales forecast, Dangdang's market sales rate is 1 time times, according to the 2015 fiscal year sales forecast, Dangdang market sales rate of 35 times times, to this fiscal year Dangdang should be able to achieve break-even. In our view, it is reasonable to use the market rate as the main valuation index before the break-even is achieved, because: 1 Dangdang is less than the short-term investment cycle marketing, 2 for the Amazon and other large market-value interbank companies, investors also use the market sales rate as one of the main valuation indicators, The reason is that this is a structurally low profit margin business.

Downside risk: 1 The industry competition situation intensifies; 2 The price war is more intense than expected; 3) product risk; 4 A dispute with the Securities and Exchange Commission (SEC) and China's audit institutions; 5 A rights issue for strategic investment. (Tangfeng)