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Back in June, I met with the CFO of Mecox Lane (MCOX) Paul Zhang at his offices in Shanghai. They're a clothing e-commerce site, backed by Sequoia China with perhaps China's most famous VC, Neil Shen, on their board.
The stock was one of the first new batch of Chinese e-commerce sites to test the IPO markets last year, making its debut in November.
It quickly rose to $18.50 a share or a market capitalization of about $1 billion.
That valuation was about 4x Sales. Not cheap, but not expensive by most Chinese growth company standards.
About a month after Mecox Lane's IPO, Dangdang (DANG) had its IPO. It also zoomed. Dangdang is a more general e-commerce play. It carrier books, electronics and other goods. Its bankers described it as "the Amazon (AMZN) of China" - even though it has only 2.2% of the Chinese e-commerce market and declining margins in the face of strong competitors like Tmall (which is 40% owned by Yahoo! (YHOO)) and the private 360Buy.
Nevertheless, Dangdang's IPO did very well. Even today, after seeing its stock price decline 74% from its initial price, Dangdang still has a $3 billion market capitalization and trades at 7.1x its trailing 12 months of revenues.
But Mecox Lane has been severely punished by the market since its IPO. The stock is down 89% from its initial trading price in November.
Mecox Lane does have some challenges facing it. It is still proving out that selling clothes over the Internet in China is viable. Some of its general competitors like Dangdang raised more money in its IPO. Other pure play competitors to Mecox Lane - like Vancl - might hold IPOs before the end of the year and be able to raise more money. Mecox also -- like all Chinese e-commerce firms -- has to face the challenges of costly logistics in China, such as building out distribution centers and dealing with dozens of different delivery companies to cover the country.
Mecox Lane has lost a little money in recent quarters, including disappointing results right after its IPO.
However, at a certain price, all companies start to look attractive as an investment. This is a case like that, which is why I now own the stock.
Consider these facts about Mecox Lane:
- At its current stock price of $2, its trading at 1.1x its cash
- Its price/sales ratio is 0.52x
- It still has $100 million in cash, or $1.74 cash / share
- Its last 12 month of revenues are $226 million and it was profitable over that time period.
Now, let's compare that to Dangdang:
- At its current stock price of $7.56, its trading at 1.36x its cash
- Its price/sales ratio is 2.31x
- It has $257 million in cash, or $3.28 cash / share
- Its last 12 month of revenues are $438 million and it had a negative operating margin over that time period.
Even though Dangdang is not even twice as large as Mecox Lane from a revenue perspective - with lower margins - it is getting a huge market multiple.
Now, it's probably true that Dangdang deserves to come down more in price (I was previously short the stock but currently have no position in DANG), but it's also true that Mecox Lane is severely under-priced.
It got down to below its cash a few days ago at $1.43.
Next Tuesday, Mecox will report its latest results. Analysts are expecting a loss of 6 cents a share for this quarter and a loss of 11 cents a share for the September quarter. There is no question that Mecox Lane does have work to do, but I think the stock is still way to low. The business is surely worth more than their cash and - unlike some of their competitors - this management team is conservative and still can last for 4 years on the cash they have.
They are doing some smart things like franchising out their stores so that they can focus more solely on the e-commerce business. It's also great that they have Neil Shen on their board to help them.
What Wall Street is also forgetting about Mecox Lane's perhaps greatest strength is that Sina (SINA) bought a significant stake in the company (from Sequoia) last March. They bought in at $6 a share or 3x the current price.
Sina said at the time of the investment that they see e-commerce as very strategic. Indeed, Sina's bigger competitors as going into this and many other areas. Sina wants to keep pace with Tencent and Baidu (BIDU), as well as Alibaba Group.
To this point, Sina hasn't really started monetizing its very popular Weibo service of 200 million users. It has said it plans to later this year and into next. Sina has an enormous incentive to steer traffic to Mecox Lane. After all, Sina did get a board seat on Mecox Lane's board as part of their investment.
The bottom line is that I expect Mecox to go back to at least Sina's investment price of $6 as this monetization starts to occur. We don't precisely know when, but I would guess it will happen over the next year.
Mecox Lane is a classic "throw the baby out with the bathwater" value play. At its current price, there is a great return potential compared to its downside risk.
[At the time of publication, Jackson was long MCOX, SINA and YHOO]
Note: This Post was updated with correct financial info on DANG, which had been overstated on Yahoo Finance
