Chinese online bookseller kicks off $221 million NYSE IPO

Coinciding with the year’s busiest shopping season that kicks off in the US today, online Chinese bookseller E-Commerce China Dangdang has just opened the books for its initial public offering on the New York Stock Exchange, which aims to raise between $187 million and $221 million.

Referred to as the Chinese Amazon.com, Dangdang is the largest book retailer in China in terms of revenue and, according to an iResearch consumer survey, the number one ranked brand among Chinese business-to-consumer (B2C) e-commerce companies when it comes to awareness, trusted online shopping experience and price competitiveness.

The company is offering 17 million American depositary shares (ADS), which account for 21.8% of its enlarged share capital. However, the shares underlying the ADSs on sale will be class-A shares, which have only one-tenth of the voting power of the class-B shares that most of the pre-IPO shareholders own. As a result, public investors will only have 2.8% of the voting power. The remaining 97.2% of the voting power will rest with the management, including co-founders Peggy Yu Yu and Gouqing Li, and other pre-IPO investors. A 15% greenshoe option could, if exercised, skew those numbers marginally more in favour of the public investors.

Each ADS accounts for five class-A common shares and, including the shoe, 69% of the offer is made up of new shares. The ADSs are offered at a price between $11 and $13, which represents a price-to-earnings ratio of 37.5 to 44.2 times projected 2012 earnings. The two-year forward earnings are used since the company is expecting a big ramp-up in 2012 and hence the numbers before then look somewhat inflated. Based on 2011 earnings, the P/E multiples range from 73 to 85 times.

This compares with Amazon.com at 35 times projected 2012 earnings and 50 times next year’s numbers. Recently listed Chinese online clothing retailer Mecox Lane is currently trading at a 2012 P/E multiple of 34 times.

The IPO is being arranged by Credit Suisse and Morgan Stanley and is expected to price on December 7. The trading debut is scheduled for the following day.

With 97% of its 590,000 book titles being in Chinese, few people outside of China are unlikely to log on to dangdang.com to do their Christmas shopping, but the company does offer investors another option to get exposure to the consumer retail sector in China. In the first nine months of this year, dangdang.com averaged 1.24 million unique visitors every day with the numbers rising steadily through the year to 1.6 million per day in September.

And people aren’t just browsing. Revenue has increased from Rmb446.9 million in 2007 to Rmb1.46 billion in 2009 and Rmb1.57 billion in January to September this year. The company also turned profitable in 2009, with a bottom line of Rmb16.9 million. It recorded another Rmb16 million of net profit in the first nine months this year.

China already has the largest number of internet users in the world (close to 385 million in 2009) but it is expected to increase further to 575 million by 2013, based on projections by International Data Corporation. In the same period, the number of people shopping online through B2C and consumer-to-consumer (C2C) e-commerce sites is expected to double to 245 million from 109 million and the transaction value is forecast to multiply to $187 billion from $39 billion last year.

Dangdang also believes that B2C e-commerce sales will grow as a percentage of total retail sales in China -- it accounted for a mere 0.2% last year -- as online shopping becomes more accepted and overcomes key challenges related to consumer preferences, fulfilment, logistics and payments.

But promising statistics aside, Dangdang will also have to overcome a weakening appetite for new Chinese listings in the US. The two most recent Chinese newcomers both fell sharply in their respective trading debuts in the US earlier this week. While some of that may have been down to jittery sentiment for equities in general, the recent rise in risk awareness among investors is likely to hit smaller companies from the emerging markets first. However, some bankers argue that the recent market correction will merely make investors more selective.

Based on the early feedback, sources say Dangdang is attracting a lot of attention and after two days of marketing in Hong Kong, the deal is supposedly already covered. The fact that the size of the offering is much larger than the average Chinese listing in the US this year should help as investors like liquid stocks in times of heightened volatility. Dangdang also has an easy-to-understand business model and US investors have had positive experiences with other Chinese internet companies such as Baidu, Netease and Shanda.

Mecox Lane jumped 56.9% in its trading debut on October 26 and while it has drifted slightly lower since then it is still trading 24% above its $11 IPO price. An online retailer of men’s, women’s and children’s clothes, as well as household accessories, Mecox Lane raised $129.2 million with the help of Credit Suisse and UBS.

At the other end of the spectrum is Syswin, a Beijing-based real estate agency, which fell 11.4% in its US trading debut on Wednesday. The decline came after the company had also reduced the size of its Morgan Stanley-led offering to 9.6 million ADSs from 12 million and fixed the IPO price at $7 per ADS – well below the $9.25 to $11.25 range. This put the size of the offering at just $67.2 million, compared with earlier plans to raise at least $111 million.

And on Tuesday, China Xiniya Fashion, a designer of business clothing for men, fell 9.6% on its first day of trading after it raised $88 million in an IPO arranged by Cowen & Co and Samsung Securities (Asia). The stock recovered some of those losses on Wednesday when it gained 5.5%, but at $10.50 it is still 4.5% below the IPO price of $11.

The US market was closed yesterday to celebrate Thanksgiving.