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A Dose of Reality Needed for China Fever

I have purchased products from DANG in the past and was exceptionally satisfied with both the price and the service, which I would say are equivalent to AMZN in every way. The difference is that AMZN pioneered a business model and secured a first-mover advantage, mastering logistics and eliminating bricks and mortar (along with its competition as well). This business model is no longer new or novel and can be studied by anyone in various MBA case studies.

A major reason why DANG is losing money at an increasing rate is that ecommerce competition in China is already fierce. While Americans like to think of DANG as the Amazon of China, the reality is that there are many "Amazons of China," but only one that is listed in the U.S. and familiar to Americans. Two such competitors are well-known 360Buy.com and Taobao. And for that matter, there is also the real Amazon of China -- Amazon itself. Yes, AMZN has its own site in China, Amazon.cn. On a strictly anecdotal basis, I have found that when people shop online, Taobao is by far the most popular site in China. If I were to make an AMZN analogy, it would certainly be Taobao over DANG.

One unfortunate disadvantage that DANG has is that some of its competitors sell pirated products, especially books (which are still the major seller for DANG). It is my understanding that DANG does not sell pirated goods, but for consumer who do their shopping online, they can easily compare prices and get effectively identical goods from DANG's competitors at a discount of usually around 75% to 80%. That is very difficult to compete with.

In short, DANG is not the AMZN of China, but investors are eager to believe that they are getting in early on a massive bargain. Average daily volume in December was less than 2 million shares per day, but there were over 6 million shares sold short. On Thursday and Friday over 10 million shares traded and the stock was up by 20% in two days alone. As a result, I attribute much of the recent run up to short covering, which obviously is not a sustainable factor in keeping the share price elevated. Following a run up of more than 80%, DANG is one I will be watching from the sidelines.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.
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