Forget Alibaba: This Stock Could Be The Next 'Amazon of China'

Nine times out of 10, I would choose to invest in a company that does business with China to capitalize on a growing trend in the region, rather than investing in a China-based company. I just prefer not to put money into a company exposed to the whims of what still is a communist government.

Then an opportunity comes along that’s simply too good to resist and worth the added risk… 

Specifically, one Beijing company is transforming from an online book seller to an online shopping mall — sounds a bit Amazon-ish to me.

That makes perfect sense considering China is working feverishly to overtake the U.S. as the leading online marketplace (a $5.7 billion one-day shopping spree back on Nov. 11 is testament to its efforts).

The country is offering incentives to brick-and-mortar retailers to go online. China is also working to improve payment and regulatory systems for transactions outside its borders.

Today, China’s e-commerce market is valued at $200 billion; the U.S. stands at $230 billion. The Chinese market’s rate of growth has been a phenomenal 120% between 2003 and 2011, on pace to reach $650 billion by 2020.

The main reason China is playing catch-up to the U.S. is because only 31% of its population can even access the Internet right now. But you can bet that number is destined to change, in a country with 1 billion potential shoppers.

Currently, Alibaba’s Tmall holds 51% of the e-commerce market share in China by providing cheaper merchandise and basically pricing out the competition. However, the sheer rate of the market’s growth is providing more than enough traffic and sales to go around for big and small companies.

Alibaba may be the next head-turning IPO on the NYSE and, for value alone, it may create much more of a stir than Facebook or Twitter. Some project the IPO to value the company at $100 billion.

Until then, look at E-Commerce China Dangdang (NYSE: DANG). While the larger companies focus on the rising middle class, DANG’s niche may hinge on a rapidly growing affluent class, forecast to make up 20% of the Chinese population by decade’s end.

DANG must avoid getting into a price war with its larger competitors on low-end products. Instead, it plans to carry classy brands to attract traffic. Besides, higher prices equal better margins.

The other trend DANG looks to capitalize on is the double-digit growth of mobile phone users in China and the delivery of 4G broadband for Internet browsers. Just 40% of total traffic and 10% of total revenue in China’s online market come from smart phone users.

With features like voice search and page personalization options on DANG’s mobile app, the company hopes to make user experience friendlier by making it easier to navigate the site and, ultimately, find the “buy” link.

Meanwhile, DANG has done well in the book space, up 109% year to date, including 14% in November alone. It has more than 900,000 books and e-books, the largest collection of any retailer in China.

With 15 years’ experience as an online seller, DANG does an admirable job in this arena. This experience will surely pay off as DANG expands into beauty and personal care products, clothing and electronics.

Analysts seem to agree. Many predict solid fourth-quarter numbers. Then again, that’s par for the course. DANG has beaten earnings expectations four straight times by at least 16%.

However, we cannot ignore DANG’s lack of profitability. The company hasn’t shown a profit in about two years, due partially to huge marketing efforts to boost its customer base of less than 10 million.

But with a pipeline full of promising initiatives heading into 2014, I’m confident this could be the year of recovery for DANG.

The past four months have been a rollercoaster ride for investors. DANG experienced a 52-week high of $11.71 on Aug. 13, dropping nearly 30% by Aug. 30. It then rose to $11.89 on Oct. 4, and now trades at $9.17. However, I think now is the time to consider buying shares of DANG.

Risks to Consider: Unfortunately, DANG has been slapped with a number of negative consumer reports about fake sales and slow shipping. A reputation reversal is key or the company could see its customer base shrink considerably.

Action To Take –> Although the company didn’t show a profit in 2013, its shares managed triple-digit returns — jumping from around $4.50 all the way up above $11. I think DANG has what it takes to compete against the big boys and will show it again in 2014. While it may not turn a profit until later in the year, I like the stock for under $9.

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This article originally appeared on InvestingAnswers
Author: Karen Canella
Forget Alibaba: This Stock Could Be The Next ‘Amazon of China’