How to Benefit From China's Huge E-Commerce Market

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China's e-commerce market is simply too huge to be ignored. Just consider that Nov. 11, called "Cyber Monday" or "Singles' Day" in China, millions of users took advantage of online shopping promotions tailored for single people. According to e-commerce giant Alibaba, by 11p.m., sales volume had surpassed more than $5.4 billion. To put this in perspective, the amount of online sales handled in one day in the second largest economy was equivalent to roughly 80% of the whole market capitalization of Groupon.

The amazing scale and growth rate of this market suggests plenty of investment opportunities. Vipshop Holdings , which offers branded products to consumers in China through flash sales on its websites, is up 130% in the past six months. Likewise, E-Commerce China Dangdang , which offers the largest online book selection, saw its share price rise an outstanding 94%. However, LightInTheBox , which focuses on selling lifestyle products in more than 15 languages, is down 30% since early June. What should retail investors pay attention to when studying investment opportunities in China's huge e-commerce market?

Source: Statista

A genuine growth story
Vipshop operates one of the largest flash sale e-commerce sites in China, with roughly 3.5 million active customers. Since its $6.50 IPO last year, the company has experienced double-digit revenue growth and massive share price appreciation. The company's market cap now surpasses $5 billion.

Although the company's current price-to-earnings ratio is quite high, Vipshop could represent a genuine growth story. First, its flash sales concept is quite popular in China, which should generate retail sales of $3.8 trillion this year, according to Frost & Sullivan. Second, the company has managed to establish solid relationships with well-known brands that rely on Vipshop to sell excess inventory at discount prices. More importantly, the company has reached a point where scale advantages are increasingly favorable; its increasing ability to sell inventory quickly is set to attract more business partners.

As a result, the company tripled its revenue to $682 million in 2012. Furthermore, margins are also improving, which demonstrates the scalability of the business model. Operating income increased from 8.2% in 2009, to 22.3% in 2012. However, according to a public filing for its secondary offering, the company acknowledges it has been subject to allegations that some of its items sold "are counterfeited or without authorization from the relevant brand owner." This risk should be included when considering the plausibility of Vipshop as an investment option.

Beyond books
Dangdang knows the advantages of early specialization very well. With more than 900,000 books and media products registered, the company has the largest book selection available from a single retailer in China, and is famous for being a reliable source for books.

Dangdang is expanding its operations and now sells beauty and personal care products, apparel, digital and electronic products, etc. To compete with Alibaba's Taobao, the company is also promoting its third-party platform. While there's no guarantee that Dangdang will succeed in its new ventures, the company has developed very efficient supply chain management in its 15 years of online business experience.

In the first quarter of 2013, the company added 2.4 million new users, which translates into a 2.24% increase in revenue. With a customer base of less than 10 million, revenue expansion for the next five years does not look particularly challenging. However, keep in mind that Dangdang is not a profitable company, experiencing a loss of $12.9 million in the first quarter of 2013. The good news is that the company is investing heavily on marketing, which could help to explain recent weak profitability.

The anti-Vipshop
Fool Rick Munarriz sees LightInTheBox as the anti-Vipshop due to its disappointing share performance. The company operates in very competitive segments: apparel, small accessories, and gadgets. Its websites are available in 17 languages. In other words, the company may be exposed to too many market segments at the same time. 

On the other hand, LightInTheBox's customized system emphasizes product categories according to the customer's preferences. In the long run, the company's well-designed, data-driven system could pay off.

Furthermore, despite being a small company, LightInTheBox is profitable, with a gross margin of 46% according to the latest earnings call. The downside is that, after reporting net revenue of $72.2 million in the second quarter, the company forecasts no growth for the third quarter. This could be due to the fact that, after experiencing massive growth, the company may be experiencing saturation in key markets such as Europe, which is the company's largest market, with $44.1 million in revenue last quarter.

My Foolish take
The size of China's e-commerce industry suggests plenty of investment opportunities. However, it's important to focus on long-term competitive advantages when picking stocks because this is also a fierce space where many companies have failed. Furthermore, judging from Vipshop, which specializes in flash sales, or Dangdang, which specializes in books, it seems that specialization is an important success factor in the industry.

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The article How to Benefit From China's Huge E-Commerce Market originally appeared on

Adrian Campos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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