Vipshop, Dangdang Look Solid, Shares Sag

Dangdang loss halves in Q2

E-commerce firms Vipshop (NYSE: VIPS) and Dangdang (NYSE: DANG) have both just reported their latest quarterly results that look quite solid, as the former consolidates its position as China’s leading discount online retailer and the latter overhauls its business model. But you would never know the results were good based on shareholder reaction, with shares of China’s 2 largest US-listed e-commerce firms both tumbling after their reports came out.

In this case, the big sell-offs were most likely a classic case of the “buy on the rumors, sell on the news” mentality, since shares of both companies have enjoyed sharp rises this year before this sudden correction. Vipshop shares tumbled the most, losing 13.9 percent after release of its second-quarter results. But even at their current levels, they have still nearly tripled this year. Likewise, Dangdang shares tumbled 11.6 percent after its latest results came out, though they have still more than doubled this year.

Let’s start with a look at Dangdang, as it’s the more interesting of these 2 companies as it struggles to return to profitability after 2 years of losses due to fierce competition in the general merchandise e-commerce sector. Dangdang hasn’t posted a profit since the first quarter of 2011, and continued to post a net loss in the second quarter of 2013. (results announcement) But the latest loss narrowed sharply to $10.4 million, about half of what it was a year earlier.

Much of Dangdang’s reviving fortunes owe to its recent strategy of diversifying its business model. The company previously sold all of its merchandise directly to consumers, but recently added a marketplace platform that allows third-party merchants to also sell to its customers. That platform is similar to the business model used by e-commerce leader Alibaba, and is attractive because it the associated costs are far lower than traditional direct-selling models.

Dangdang said the sales volume over its marketplace platform nearly tripled to $128 million in the second quarter, equal to about half of its total revenues for the period. The sharp growth in marketplace revenue helped to sharply boost the company’s margins, which helped to pare back Dangdang’s losses. The company did predict a slight slowdown in marketplace growth in the current quarter; but if the current trends continue I would expect to see it finally return to profitability at the end of this year or beginning of 2014.

From Dangdang, let’s look at Vipshop, which is a more traditional growth story as it focuses on the discount e-commerce niche. After making a New York IPO last year, Vipshop shares initially tanked due to dismal investor sentiment towards Chinese companies at that time. But they have come roaring back since then as the company posted its first-ever profit in the first quarter of this year, and they now trade at about 9 times their lows from shortly after the IPO.

Vipshop’s second-quarter profit came in at $9 million, up sharply from its first-ever profit of $5.8 million in the previous quarter. (results announcement) Its revenues also grew by a healthy 160 percent to $351 million, though it forecast a slowdown to 135 percent growth in the current quarter.

It would be convenient to blame the big sell-off on the revenue growth slowdown, though I really do think that investors were aiming to pocket some of the huge gains they’ve seen over the last year. As to the future, I do see a bit more downside potential for Vipshop shares, which look quite overvalued at their current levels. Dangdang, meanwhile, could have some upside potential as it continues its slow move back towards profitability.

Bottom line: Vipshop shares are likely due to come under pressure due to their high valuation, while Dangdang could return to profits as soon as this year’s fourth quarter.

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