Days Hao Capital maintain Dangdang hold rating

Beijing time November 19 Evening news, Days Hao Capital released a research report today, maintaining the "hold" rating on Dangdang (nyse:dang) stock.

The following is the full report:

Dangdang's third-quarter results were mixed, with weak revenue performance, but profits were better than expected. We believe that this reflects the company's market business strategy. The implementation of this strategy has boosted profit margins and boosted the attractiveness of the Dangdang platform to merchants. Even if we think that Dangdang will be profitable by the second half of 2014, we also believe that if the market competition environment does not deteriorate, then the company is now implementing the right strategy and on the road to profitability. We maintain a "hold" rating on the Dangdang stock, which is now at a reasonable level.

-Bring better profitability to the rapid transfer of market operations

Over the past 3 years, the total turnover (GMV) of the Dangdang market has outpaced proprietary business beyond books. In the third quarter, the total turnover of Dangdang excluding the book business grew by 88%, while the total trading volume of the market and proprietary business grew by 184% and 6.1% respectively year-on-year. In the third quarter, Dangdang took more forceful measures to promote the transfer of certain Low-margin commodity sales from proprietary to market. We believe that such a change would benefit profit margins. We estimate that the total turnover of the market will account for 84% of the total turnover in 2015, higher than 78% in 2014, 66% in 2013 and 44% in 2012. We also expect the 2015-year operating margin of Dangdang to be 2.2%, higher than the 2014 -1%,2013-4.2% and 2012-9.4%.

-Drive faster growth of the business by improving operational efficiency and attracting more merchants

Dangdang is focused on making services and operations more efficient, thus attracting more merchants and further accelerating the growth of the market business. Dangdang has made many adjustments, such as strengthening warehouse operations, upgrading warehouse management and quality control systems. Therefore: 1 The third quarter Dangdang's delivery cost per order reduced to 11.2 yuan, less than 11.9 yuan in the second quarter, and delivery costs accounted for the proportion of revenue from the second quarter of 12% fell to the third quarter of 11.7%. 2 inventory turnover days from the second quarter of 104 days down to 101 days. 3 Dangdang improved the personalized recommendation system and user evaluation function, which will help the conversion rate. 4 Dangdang provides instant communication tools to merchants to help them provide real-time services to consumers. In the future, Dangdang is likely to continue to push ahead with such measures.

-fourth quarter revenue growth will continue

Dangdang forecast that the fourth quarter net revenue will be about 1.9378 billion yuan, about 316.6 million U.S. dollars, the year-on-year growth of 20%, the chain growth of 27%. The company also expects total trading volumes to grow by 150% per cent year-on-year. In the "Double 11" sales activities, Dangdang gave a stable performance, sales doubled, and operations and delivery also performed well.

-third-quarter results meet updated forecasts

Before the earnings release, Dangdang gave updated forecasts to reduce revenue expectations to 248.4 million to 250 million U.S. dollars. The third quarter, Dangdang total net revenue of 249.3 million U.S. dollars, in line with the updated forecast. Net loss of 4.6 million U.S. dollars, total net revenue of 1.8%. The net loss in the third quarter of 2012 was $19.2 million trillion, accounting for 7.8% of total net revenue. The net loss in the second quarter of 2013 was $10.4 million trillion, 4.3% of total net revenue.

-Adjust expectations

According to the third quarter earnings, we adjust the future performance of Dangdang expectations. We expect the fourth quarter's total revenue to be raised from $284 million trillion to $313 million, and the loss of ads per share is expected to rise from $0.04 to $0.11. We are expected to raise the Full-year revenue for 2013 from $993 million trillion to $1.0243 billion, raising the expected loss of ads per share from $0.37 to $0.44. We are expected to raise the full-year revenue for 2014 from $1.1144 billion trillion to $1.219 billion, raising the expected loss of ads per share from $0.02 to $0.05. We give a 2015-year forecast for a full-year revenue of $1.4325 billion, with a revenue of $0.39 per share.

-Valuation

Due to the strategic transformation of Dangdang and the uncertainty of the competitive environment, we will hold a wait-and-see attitude and look forward to a clearer signal of operational profit improvement. According to our 2015 earnings per share forecast of 0.39 U.S. dollars, Dangdang stock price of the current 2015-year forward-looking earnings ratio of 24.1 times times. We consider this valuation reasonable and maintain the "hold" rating.

-Risk

1 from pure retailer to market operator, from the book retailer to the commodity retailer in the process of transformation may occur in the expansion and implementation of risk; 2. Fierce competition, sustained price pressures, 3 sustained loss operations will bring pressure to cash flow; 4 moving from PC to mobile may pose a challenge to traffic.