Monday, 2 September 2013

Comparing the Major Players in the Chinese eCommerce Industry

The Chinese eCommerce industry is one of the largest growing market sectors in the world today. A report by Bain & Company states that they expect China's eCommerce market will hit $539 billion in 2015. In 2012 that number was $212 billion compared to the US eCommerce market of $229 billion so not only is the Chinese eCommerce industry projected to more than double in three years, it will easily surpass the United States as the country with the largest online shopping market in the world. For anyone interested in growth stocks, it is clear they would want to look at the major players with their largest exposure in Chinese eCommerce.

Four companies trading on US and Canadian markets that are involved primarily in eCommerce in China are Vipshop Holdings Limited (VIPS), E-Commerce China Dangdang Inc. (DANG), Fireswirl Technologies Inc. (FSW.V) and LightInTheBox Holding Co., Ltd. (LITB). All four companies have strong revenue growth and with the exception of LITB, all of their stock prices have performed well for 2013. They have recently pulled back from their 52-week highs after what some investors view as disappointing growth in their Q2 reports or 2013 outlooks, but when viewing their revenue growth numbers and key financial ratios like price to sales there is a strong case to be made that their pullbacks represent a great buying opportunity. A summary of each company's recent financial performance can be seen below.

Vipshop has been the most successful of the four companies in achieving high revenue growth on an already large base as they take advantage of the underdeveloped discount retail market in China. Revenue has grown strongly each quarter starting from Q1 2011 and the company just started pulling small profits in Q4 2012. Their gross profit margin percentage is slowly increasing and their opex costs are growing at a slightly slower rate than their revenue so we can expect that margins will continue to improve with time, possibly reaching 10-15% by Q4 2014.

($M's USD) Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011
Revenue 28.9 40.6 52.5 105.2 227.1
Cost of Goods Sold 23.9 33.1 42.5 84.2 183.8
Gross Profit 4.9 7.4 10.0 21.0 43.3
Gross Profit Margin % 17% 18% 19% 20% 19%
Opex 11.6 26.7 27.4 84.5 150.3
Operating profit -6.7 -19.3 -17.4 -63.5 -106.9
Income to Common Shareholders -55.9 -19.5 -17.5 -63.5 -156.5
Margin % -194% -48% -33% -60% -69%

($M's USD) Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012 Q1 2013 Q2 2013
Revenue 101.3 135.3 155.9 299.6 692.1 310.7 351.3
Cost of Goods Sold 79.8 105.7 121.2 230.9 537.6 237.9 268.7
Gross Profit 21.4 29.6 34.8 68.7 154.5 72.8 82.6
Gross Profit Margin % 21% 22% 22% 23% 22% 23% 24%
Opex 30.1 35.0 38.0 63.3 166.4 67.3 75.9
Operating profit -8.7 -5.4 -3.3 5.4 -11.9 5.5 6.7
Income to Common Shareholders -8.6 -5.8 -1.5 6.3 -9.5 5.8 9.0
Margin % -8% -4% -1% 2% -1% 2% 3%
Revenue Growth % 251% 234% 197% 185% 205% 207% 160%


Dangdang has also achieved strong revenue growth over 2011 numbers, although not as great as VIPS. As VIPS passed DANG in revenue, they also passed them in market cap and are now nearly 4 times bigger. As DANG's business model of selling books and apparel online has become less in favor to the investing world compared to VIPS' flash sales business, DANG has slipped into potentially undervalued territory. Its big stumbling block is that its margins worsened from -6% in 2011 to -9% in 2012, but for the first half of 2013 have improved back to -6% on an improving gross profit margin. As the second half of 2012 showed margin improvement when compared to the first half of the year, it is reasonable to expect the same for 2013, with full year margins likely to average out to -4% to -5%. Note that the full year numbers are not the sum of the four quarters. The slight discrepancies come from the company reporting at different times throughout the year at various exchange rates for the $USD.

($M's USD) Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011
Revenue 105.0 122.3 142.5 195.7 575.0
Cost of Goods Sold 84.5 104.9 122.9 175.2 495.5
Gross Profit 20.5 17.4 19.6 20.5 79.5
Gross Profit Margin % 19% 14% 14% 10% 14%
Opex 20.7 25.5 32.4 44.2 124.7
Operating profit -0.2 -8.1 -12.8 -23.7 -45.2
Income Attributed to Common Shareholders 0.5 -4.4 -11.5 -20.6 -36.3
Margin % 0% -4% -8% -11% -6%

($M's USD) Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012 Q1 2013 Q2 2013
Revenue 172.1 190.1 204.9 259.2 833.7 214.7 243.3
Cost of Goods Sold 147.6 165.3 173.7 224.5 717.4 177.9 201.7
Gross Profit 24.5 24.8 31.2 34.7 116.3 36.9 41.7
Gross Profit Margin % 14% 13% 15% 13% 14% 17% 17%
Opex 41.5 44.7 47.9 59.0 194.8 49.8 54.5
Operating profit -17.0 -19.9 -16.6 -24.3 -78.5 -12.9 -12.9
Income Attributed to Common Shareholders -15.8 -18.2 -15.2 -21.6 -71.7 -12.3 -13.7
Margin % -9% -10% -7% -8% -9% -6% -6%
Revenue Growth % 64% 55% 44% 32% 45% 25% 28%


Fireswirl saw a big boost to their revenues and improved margin from 2011 thanks to an agreement with eBay Enterprise (formerly GSI Commerce), a division of eBay, to bring their client list of over a thousand retailers and brands to China. Expect further growth to take place for the company as they extended their partnership with the eBay subsidiary and as eBay expressed interest in becoming a bigger player in the Chinese eCommerce industry. FSW.V's revenues are small when compared to its larger American-listed counterparts, but they have already managed to maintain a scale where they are essentially at a break even point. Fireswirl looks poised to surpass $40M in revenue for 2013, doubling their total revenue for 2011.

Being a company that is listed on the Toronto Venture Exchange, FSW.V reports in Canadian dollars, as reported below. As the $CAD is very close to parity and many of the industry comparables are ratio figures, no adjustment to $USD has been made.

($M's CAD) Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011
Revenue 4.2 5.0 6.0 4.9 20.0
Cost of Goods Sold 3.6 4.7 5.0 3.7 17.0
Gross Profit 0.6 0.3 0.9 1.2 3.1
Gross Profit Margin % 14% 6% 16% 25% 15%
Opex 0.7 0.9 1.1 1.5 4.1
Operating profit -0.1 -0.5 -0.1 -0.3 -1.1
Income Attributed to Common Shareholders -0.2 -0.4 0.0 -0.3 -0.9
Margin % -5% -8% -1% -6% -5%

($M's CAD) Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012 Q1 2013 Q2 2013
Revenue 3.5 5.8 6.4 11.8 27.6 9.6 9.6
Cost of Goods Sold 2.6 4.8 5.3 10.6 23.3 8.1 8.1
Gross Profit 0.9 1.0 1.1 1.3 4.3 1.4 1.4
Gross Profit Margin % 26% 17% 17% 11% 15% 15% 15%
Opex 1.1 1.1 1.1 1.3 4.5 1.5 1.5
Operating profit -0.1 -0.1 0.0 0.0 -0.3 -0.1 -0.1
Income Attributed to Common Shareholders -0.3 -0.2 -0.2 -0.1 -0.9 0.0 -0.2
Margin % -10% -4% -3% -1% -3% 0% -2%
Revenue Growth % -16% 17% 8% 141% 37% 175% 64%


LightInTheBox is different from the others as it is a Chinese-originated eCommerce business that tends to make sales outside of the country. As a newly public issue, they have only reported their Q2 result from 2012 and 2013. Until more reports are made public to analyze the trend of the business, LITB is excluded from further analysis. Even with the minimal information provided it is evident that the company's revenues are growing strongly. They have achieved a break even point in their operations, mainly on the back of a strong gross profit margin of over 40% made possible by their foreign sales.

($M's USD) Q2 2012 Q2 2013
Revenue 47.3 72.2
Cost of Goods Sold 27.6 39.0
Gross Profit 19.7 33.2
Gross Profit Margin % 42% 46%
Opex 20.5 32.2
Operating profit -0.8 1.1
Income Attributed to Common Shareholders -2.1 0.0
Margin % -4% 0%
Revenue Growth % 53%


Below is a chart that compares the market cap, trailing 12-month revenue, price to sales ratio, revenue growth of the past 12 months compared to the 12 months prior to that and the trailing 12-month margin for Vipshop, Dangdang and Fireswirl. 

Revenue
Stock  Market  Revenue  Price to  Growth  Margin
Symbol Price Cap ($M) ($M) TTM Sales Ratio % TTM % TTM
VIPS    43.30        2,396    1,117.5              2.14 183% 2%
DANG      7.81            627       922.2              0.68 32% -7%
FSW.V      0.21              10          37.4              0.27 85% -1%

When we take a look at these metrics, we can see that each company is undervalued in its own way. VIPS has a 2.14 Price to Sales ratio. Compare that to EBAY which has a price to sales metric of over 4, PCLN which has one over 8, GRPN which has one just under 3 or AMZN which has a P/S of a little less than 2. VIPS has a P/S that is on the low end of more senior eCommerce companies out there yet has the much stronger year-over-year revenue growth and higher growth expectations given the explosion in Chinese eCommerce that is taking place. 

DANG has fallen behind VIPS thus far in terms of profitable growth. Some analysts shy away from DANG's stock in favor of VIPS as they view DANG's eCommerce business as subject to higher competition. Despite that, DANG still showed a strong revenue growth of 32% year-over-year and with a 0.68 price to sales metric is priced more closely to a mature bricks and mortar store like TGT or WMT (both have P/S metrics between 0.5-0.6) than it is to an up and coming online retail store. As it continues to close the gap on its negative margin, watch for the company's stock to be priced more closely towards VIPS valuation as time goes on. While VIPS and FSW.V are undervalued plays at this moment, DANG needs to be treated as more of a longer term play with great upside potential.  

Fireswirl is the most undervalued company of them all and as a microcap has the best chance for huge swings upwards in a shorter period of time. FSW.V is nearly breakeven in their business as they have a margin that trails VIPS by only 3% and a strong revenue growth from a small base, but have a price to sales ratio of only 0.27. Given that FSW.V has higher revenue growth and a better margin than DANG in its current state, that would suggest the price to sales ratio should be superior to DANG's 0.68 which would result in a 100-200% gain on the stock. 


3 comments:

  1. Thanks for sharing the information with us.It really useful to all.
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