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Puzzle as online bookseller DangDang sells itself to cash-strapped HNA

Peggy-Yu-w

Founding couple: Li Guoqing and Peggy Yu

For many years Amazon’s closest doppelganger in China was not Alibaba nor JD.com, but the Beijing-based e-commerce player DangDang. They both started out selling books, with their founders marrying English majors who were also financially savvy. Indeed, in both cases the founders’ wives helped build their business empires.

(MacKenzie Tuttle – who met Jeff Bezos in 1993 – was a highly esteemed student of novelist Toni Morrison at Princeton University before joining US hedge fund DE Shaw. Peggy Yu, the wife of DangDang’s Li Guoqing, was an English literature and MBA graduate who worked on Wall Street in the early 1990s – see WiC92.)

But the fortunes of the two online retailers have diverged in recent years. While one has clicked, and made Bezos the world’s richest man; the other has floundered.

Amazon – now the world’s third largest enterprises with a market capitalisation of more than $750 billion – is constantly scouting for targets that could further scale up its global reach. Conversely DangDang has become a target – having been marginalised by its deep-pocketed Chinese e-commerce rivals. The online bookseller is looking to sell itself to troubled conglomerate HNA Group.

The news came out on March 17 when a Shanghai-listed unit of HNA, said in a filing that it is in the process of buying the parent company of DangDang as well as its affiliate held by the Li family.

Speculation on the deal had begun to circulate last October, putting the price tag at around Rmb10 billion ($1.5 billion). Although this is higher than what DangDang’s management had paid in a $556 million ‘take private’ buyout deal in 2016, it still represents less than a quarter of its worth upon its debut on the New York Stock Exchange eight years ago (see WiC87).

The shrinkage mirrors DangDang’s share of China’s e-commerce market, which declined from its peak of 40% in 2009 to 0.8% by the end of 2017, according to Chinese data company Analysys.

In the segment of B2C online book sales, DangDang also lost its dominant position to JD.com for the first time in the third quarter of 2017 as its market share dropped to 35%.

And for an idea of how far it has been eclipsed: JD’s total sales represented only 75% of DangDang’s in 2008, but exceeded the latter’s by 18 times in 2015 on the back of investment by Tencent (JD’s lead also grew when it acquired Walmart’s China e-commerce platform in 2016).

“Amid the money-burning race between e-retailers, DangDang failed to make a pivot, thus sinking further and further from the top league,” surmised Dong Yizhi, a columnist for Shanghai-based consultancy iResearch. He noted that Suning, JD.com and Tmall had all been expanding their product offerings, building logistics infrastructure, and providing micro-lending services, whereas DangDang was stuck.

DangDang has tried to forge a new path with plans to build 1,000 brick-and-mortar bookstores, but so far it has made little inroads (see WiC317). Even in its core field of book merchandise, DangDang was slow to respond to market changes. It only launched its first e-reader in 2015 (Amazon released its first Kindle in 2007), and largely missed out on China’s online digital reading market – which is projected to be worth Rmb13.4 billion by 2020, according to market leader China Literature, a unit of Tencent.

CBN Weekly had predicted last October that “it’s just a matter of time before DangDang is acquired”. What came as more of a surprise was the buyer: the financially stressed Hainan-based aviation conglomerate that is now in the thick of shedding its assets around the world.

With its flagship Hainan Airlines reportedly struggling to foot its fuel bills, and a cash shortfall of at least Rmb15 billion for debt repayment in the first quarter, HNA has sold more than $13 billion in prime real estate in Australia, New York and Hong Kong, as well as shares in Deutsche Bank, Park Hotels & Resorts and Hilton Grand Vacations in the past two months.

At home, it is hawking at least nine real estate projects across Shanghai and Beijing, as well as its sprawling interests in the business district of its home turf Haikou. Bloomberg said the group is hoping to offload Rmb100 billion worth of assets in the first half of this year.

What HNA saw in DangDang is its e-commerce experience, Big Data capabilities, and brand recognition, according to the 21CN Business Herald. “Our ABCD strategy – plans to develop (a)rtificial intelligence, (b)lockchain, (c)loud computing, and (d)ata – is set in stone,” an HNA executive told the newspaper, “DangDang fits in with its expertise in ‘C’, which can complement our resources which are rather concentrated in ‘B’ at present.”

“It’s okay for DangDang to sell itself, but not to HNA,” wrote Liu Shengjun, executive vice president of the CEIBS Lujiazui Institute of International Finance. “Even if it could afford to buy DangDang, HNA would not have the bandwidth to turn DangDang around.”

That prompted Liu to warn Li and Yu: “Don’t thrust your child into a fire pit.”


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