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Filed Pursuant to Rules 424(b)(4)
Registration No. 333-170663
PROSPECTUS
 
17,000,000 AMERICAN DEPOSITARY SHARES
 
(E-COMMERCE CHINA DANGDANG INC. LOGO)
 
E-Commerce China Dangdang Inc.
 
Representing 85,000,000 Class A Common Shares
 
 
This is an initial public offering of American depositary shares, or ADSs, of E-Commerce China Dangdang Inc. Each ADS represents five Class A common shares, par value US$0.0001 per share. We are offering 13,200,000 ADSs, and the selling shareholders identified in this prospectus, including one entity controlled by one of our co-founders, are offering 3,800,000 ADSs. We will not receive any of the proceeds from the ADSs sold by the selling shareholders. Prior to this offering, there has been no public market for our shares or ADSs.
 
Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “DANG.”
 
Investing in our ADSs involves a high degree of risk. See “Risk Factors” beginning on page 13.
 
 
PRICE US$16.00 PER ADS
 
 
                                 
        Underwriting
      Proceeds to
        Discounts and
  Proceeds to Us,
  the Selling
    Price to Public   Commissions   Before Expenses   Shareholders
 
Per ADS
  US$ 16.00     US$ 1.0656     US$ 14.9344     US$ 14.9344  
Total
  US$ 272,000,000     US$ 18,115,200     US$ 197,134,080     US$ 56,750,720  
 
The underwriters have an option to purchase up to 300,000 additional ADSs from us and an aggregate of 2,250,000 additional ADSs from certain selling shareholders, including two entities affiliated with a member of our board of directors, at the initial public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus, to cover over-allotments of ADSs.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the ADSs to purchasers on or about December 13, 2010.
 
Credit Suisse Morgan Stanley
 
Oppenheimer & Co. Piper Jaffray Cowen and Company
 
The date of this prospectus is December 7, 2010.


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(COVER GRAPHIC)
Publication Electronics Apparel and Accessories Footwear, Handbags and Luggage Baby, Children and Maternity Home and Lifestyle Beauty and Personal Care

 


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(COVER GRAPHIC)
Headquarters Distribution Center A Leading B2C E-Commerce Company in China

 


 

 
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You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.
 
We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.
 
Until January 1, 2011 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY
 
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from a consumer survey commissioned by us and conducted by iResearch Consulting Group, or iResearch, an independent market research firm, in May 2010 to provide information on our position in the business-to-consumer e-commerce market in China.
 
Our Business
 
We are a leading business-to-consumer, or B2C, e-commerce company in China. Our brand dangdang.com is the number-one ranked brand among China’s B2C e-commerce companies for awareness, trusted online shopping experience and price-competitiveness, according to a consumer survey conducted by iResearch in May 2010 at our request.
 
Since our inception, we have focused on selling books online. Based on publicly available information, we believe that we are the largest book retailer in China in terms of revenues. As of September 30, 2010, we offered approximately 590,000 book titles on our website, including more than 570,000 Chinese language titles, which we believe is the largest selection of Chinese language titles available both online and offline from a single retailer in China. We also offer other media products and selected general merchandise categories on our website, including beauty and personal care products, home and lifestyle products, and baby, children and maternity products. In July 2009, we launched the dangdang.com marketplace program, which allows third-party merchants to sell their general merchandise products alongside our products.
 
We have developed a large and loyal customer base through our continuing focus on creating an enjoyable online shopping experience for our customers. We had six million active customers in 2009. Our average daily unique visitors increased from approximately 910,000 in 2009 to 1,240,000 in the nine months ended September 30, 2010. Our average daily unique visitors further increased to 1,610,000 in September 2010. In the three months ended December 31, 2007, 2008 and 2009 and the three months ended September 30, 2010, approximately 66%, 71%, 77% and 78%, respectively, of our product revenues, were generated from repeat customers. During the nine months ended September 30, 2010, we acquired approximately 3.4 million new customers. We believe that our wide product selection, competitive pricing, rapid and reliable fulfillment and user-friendly and intuitive interface customized for consumers in China are the key attributes of the dangdang.com customer experience.
 
As a pioneer in China’s e-commerce market with over a decade of operating history, we have developed deep supply chain management expertise and strong and, in some cases, exclusive relationships with over 1,000 suppliers throughout China, which enable us to offer a wide selection of quality products at competitive prices. We have also built our nationwide fulfillment and delivery capabilities, high-quality customer service support and a scalable technology infrastructure to provide a compelling online shopping experience to our customers. Through our extensive fulfillment and delivery network, we offer cash-on-delivery payment service in over 750 cities and towns in China, a popular payment option for Chinese consumers. We also offer our customers other payment options including online payment, wire transfer and postal remittance.
 
We have grown significantly since we commenced operations. Our total net revenues increased from RMB446.9 million in 2007 to RMB1,457.7 million (US$217.9 million) in 2009, representing a compound annual growth rate, or CAGR, of 80.6%. For the nine months ended September 30, 2010, our total net revenues amounted to RMB1,570.8 million (US$234.8 million), representing a 55.6% increase from RMB1,009.6 million for the nine months ended September 30, 2009. We incurred a net loss of RMB70.5 million in 2007 and a net loss of RMB81.8 million in 2008. We achieved a net profit of RMB16.9 million (US$2.5 million) in 2009 and a net profit of RMB16.0 million (US$2.4 million) for the nine months ended September 30, 2010. We intend to continue to leverage our brand recognition, large and loyal customer base, proven supply chain management expertise and fulfillment and delivery capabilities to further capture opportunities in China’s B2C e-commerce


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market. However, the successful execution of our strategies and business plans involves challenges, risks and uncertainties as described in “—Our Challenges,” “Risk Factors” and other parts of this prospectus.
 
Our Industry
 
China’s retail market has experienced substantial growth in recent years. According to Euromonitor International, total retail sales in China grew from RMB4.2 trillion (US$619.3 billion) in 2005 to RMB6.3 trillion (US$929.0 billion) in 2009, representing a CAGR of 10.7%. As China seeks to further increase domestic consumption, retail sales are projected to grow to RMB8.5 trillion (US$1.3 trillion) in 2013, according to Euromonitor International.
 
According to OpenBook Co., Ltd., a provider of information services for China’s book market, China’s book market (excluding newspapers, magazines and textbooks) grew from RMB23.4 billion (US$3.5 billion) in 2005 to RMB31.3 billion (US$4.6 billion) in 2009. The book retail market in China is fragmented. The majority of book retailers in China are individual book stores or local book store chains within a province or city. We believe the small scale of traditional book retailers limits consumer selection because it is difficult for these retailers to carry large inventories.
 
China currently has the largest number of internet users in the world, according to International Data Corporation, or IDC, an independent market research firm. IDC estimates that the number of internet users in China will grow from 384.8 million in 2009 to 574.5 million in 2013. The increasing functionality, accessibility and overall usage of the internet have made it an increasingly popular medium for conducting commerce. According to iResearch, the number of B2C and consumer-to-consumer, or C2C, e-commerce users in China grew from 55 million in 2007 to 109 million in 2009, and the number is projected to grow to 245 million from 2009 to 2013, representing a CAGR of 22.4%. Driven by the increases in the number of users and purchase volume per online shopper, total B2C and C2C e-commerce transaction value in China is expected to increase at an even faster rate from RMB263 billion (US$38.8 billion) in 2009 to RMB1,269 billion (US$187.1 billion) in 2013, representing a CAGR of 48.2%. Approximately 46.0% of China’s internet population bought books and other media products online, which is the second-highest among all product categories in 2008.
 
China’s B2C e-commerce market is expected to grow at a faster rate than the overall e-commerce market in the coming years. iResearch estimates that total transaction value in the B2C e-commerce market (excluding B2C third-party merchant marketplace) will grow from RMB14.5 billion (US$2.1 billion) in 2009 to RMB201.2 billion (US$29.7 billion) in 2013, representing a CAGR of 93.0%. According to Euromonitor International, B2C e-commerce sales as a percentage of total retail sales in China was 0.2% in 2009. We believe that B2C e-commerce in China will increase as a percentage of total retail sales as it becomes more accepted and gradually overcomes key challenges in areas such as consumer preference, fulfillment, logistics and payment.
 
Our Strengths
 
We believe that our first-mover advantage and local expertise have enabled us to address the unique challenges and capitalize on the opportunities in China’s B2C e-commerce market. We believe the following strengths have contributed to our success and differentiate us from our competitors:
 
  •      leading B2C e-commerce company in China;
 
  •      large and loyal customer base;
 
  •      strong and trusted brand;
 
  •      supply chain management expertise;
 
  •      capital-efficient business model;
 
  •      proven fulfillment and delivery capabilities; and
 
  •      experienced management team.


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Our Strategies
 
Our goal is to become the dominant online retailer in China. We plan to achieve our goal through the following key strategies:
 
  •      strengthen our leading position in the online book retailing market;
 
  •      selectively broaden our general merchandise product offerings;
 
  •      continue to enhance the dangdang.com customer experience;
 
  •      invest in long-term growth; and
 
  •      pursue strategic alliance and acquisition opportunities.
 
Our Challenges
 
Our ability to achieve our goal and execute our strategies is subject to risks and uncertainties, including the following:
 
  •      Our business depends heavily on the market recognition and reputation of our dangdang.com brand, and any harm to our brand or failure to maintain and enhance our brand recognition may materially and adversely affect our business, financial condition and results of operations.
 
  •      We depend heavily on the continued success of our core business of selling books and other media products online, and any event that adversely affects our sales of books and other media products could harm our business and results of operations.
 
  •      We had a history of net losses prior to 2009 and may experience earnings declines or losses in the future.
 
  •      If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.
 
  •      Our success depends on our ability to identify and respond to constantly changing consumer preferences.
 
  •      We face intense competition, and if we do not compete successfully against existing and new competitors, we may lose market share and customers.
 
  •      Our further expansion in the general merchandise business and third-party marketplace business may lower our profit margins. In addition, given the relatively short history of these new businesses, it may be difficult for you to evaluate our business and prospects.
 
Please see “Risk Factors” for a more detailed discussion of these and other risks and uncertainties we face.
 
Corporate History and Structure
 
Ms. Peggy Yu Yu and Mr. Guoqing Li, our co-founders, established our holding company in the Cayman Islands in preparation for overseas fund raising in January 2000. We changed the name of our Cayman holding company to E-Commerce China Dangdang Inc. in June 2010. We refer to this entity in this prospectus as Dangdang Holding. In April 2000, Dangdang Holding obtained control of Beijing Dangdang Information Technology Co., Ltd., or Dangdang Information, a PRC company.
 
Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and other government regulations. We are a Cayman Islands company and our PRC subsidiary, Dangdang Information, is considered a foreign invested enterprise. As a wholly foreign-owned enterprise, Dangdang Information is restricted from holding the licenses that are necessary for our business operation in China, such as licenses for operating our website and for sales of audio and video products in China. We approved a corporate structure plan and instructed Ms. Peggy


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Yu Yu and Mr. Guoqing Li, our co-founders, both of whom are PRC citizens, to establish Beijing Dangdang Kewen E-Commerce Co., Ltd., or Dangdang Kewen, in August 2004 in order to apply for and hold such licenses. To gain effective control over Dangdang Kewen and its subsidiaries, Dangdang Information entered into a series of contractual arrangements with Dangdang Kewen and its shareholders. Dangdang Information conducts a substantial portion of our business in China, including, for example, handling our product procurement and fulfillment operations and holding lease title to our warehouse facilities across China, while Dangdang Kewen holds the licenses for operating our website and for sales of audio and video products that Dangdang Information is restricted from undertaking under PRC law. See “PRC Regulation—Regulations Relating to Foreign Investment in Value-Added Telecommunications Industry” and the several risks discussed under “Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry” for a comprehensive description of the various material risks related to our corporate structure. In particular, see “Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry—Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC laws and regulations relating to online commerce and the distribution of internet content in China. If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations, we could be subject to severe penalties, including the shutting down of our website.”
 
To further develop our business, Dangdang Information established a subsidiary, Wuxi Dangdang Information Technology, Co., Ltd., or Wuxi Dangdang Information, in Wuxi, China in August 2010. Wuxi Dangdang Information will support Dangdang Information in conducting our B2C e-commerce business in China. Dangdang Kewen established a wholly owned subsidiary, Wuxi Dangdang Kewen E-commerce Co., Ltd., or Wuxi Dangdang Kewen, in Wuxi in September 2010. Wuxi Dangdang Kewen will support Dangdang Kewen to conduct our B2C e-commerce business in China.
 
The following diagram illustrates our corporate structure:
 
(FLOW CHART)
 
 
(1) Each of Ms. Peggy Yu Yu and Mr. Guoqing Li, wife and husband, owns 50% of the equity interests in Dangdang Kewen.
 
Our contractual arrangements with Dangdang Kewen and its shareholders, Ms. Peggy Yu Yu and Mr. Guoqing Li, include:
 
  •      a loan agreement pursuant to which Dangdang Information has granted an interest-free loan to the Dangdang Kewen shareholders solely for their capital contributions to Dangdang Kewen. The loan is due upon demand by Dangdang Information.


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  •      an exclusive call option agreement pursuant to which the Dangdang Kewen shareholders jointly and severally granted to Dangdang Information an option to purchase their equity interests in Dangdang Kewen at a purchase price equal to the capital contribution amount, unless otherwise required by PRC law or agreed in writing by the relevant parties. Dangdang Information may exercise such option at any time until it has acquired all equity interests of Dangdang Kewen and it can set off the purchase price against the loan repayment under the loan agreement.
 
  •      an exclusive technical support service agreement pursuant to which Dangdang Kewen agrees to engage Dangdang Information as its exclusive provider of technical platform and technical support, maintenance and other services. This agreement may be terminated by the parties thereto in written agreement at any time.
 
  •      an irrevocable power of attorney pursuant to which each shareholder of Dangdang Kewen agrees to appoint Dangdang Information as the attorney-in-fact to act on his or her behalf on all matters pertaining to Dangdang Kewen and to exercise all of his or her rights as a shareholder of Dangdang Kewen. The power of attorney with each shareholder expires when the shareholder ceases to hold any equity interests in Dangdang Kewen.
 
  •      an equity pledge agreement pursuant to which the Dangdang Kewen shareholders pledged all of their equity interests in Dangdang Kewen to Dangdang Information as collateral for all of their payments due to Dangdang Information and to secure performance of their obligations and those of Dangdang Kewen under the exclusive technical support service agreement and the exclusive call option agreement.
 
See “Corporate History and Structure” for additional information and “Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry” for all risks related to our corporate structure. In particular, see “Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry—Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC laws and regulations relating to online commerce and the distribution of internet content in China. If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations, we could be subject to severe penalties, including the shutting down of our website.”
 
Our Shareholding Structure
 
In September 2010, our shareholders approved a dual-class common share structure, pursuant to which all common shares held by our existing shareholders as of September 10, 2010, including our founders, were re-designated as Class B common shares, and our outstanding preferred shares will be automatically converted into Class B common shares upon the completion of this offering. All common shares issued thereafter, including common shares issued upon exercise of vested options or other incentive shares and common shares to be issued in this offering, will be designated as Class A common shares. We intend to maintain the dual-class common share structure after the completion of this offering. The two classes of common shares have different voting rights; each Class A common share issued and outstanding will be entitled to one vote per share and each Class B common share issued and outstanding will be entitled to ten votes per share. Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B common shares under any circumstances. Upon any transfer of Class B common shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B common shares shall be automatically and immediately converted into the equal number of Class A common shares. We do not have any outstanding Class A common shares prior to this offering. On November 15, 2010, our shareholders approved a 1:10 share split of our authorized and outstanding share capital with retrospective effect.


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The following diagram illustrates our shareholding structure immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:
 
(CHART)
 
Corporate Information
 
Our principal executive offices are located at 4/F, Tower C, The 5th Square, No. 7 Chaoyangmen North Avenue, Dongcheng District, Beijing 100010, People’s Republic of China. Our telephone number at this address is (86 10) 8419-1932. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, KY1-1104, Grand Cayman, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc.
 
Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is www.dangdang.com. The information contained on our website is not a part of this prospectus.
 
Conventions Which Apply to This Prospectus
 
Except where the context otherwise requires and for the purpose of this prospectus only:
 
  •      “we,” “us,” “our company,” “our,” and “Dangdang” refer to E-Commerce China Dangdang Inc., a Cayman Islands company, and its PRC subsidiary, Beijing Dangdang Information Technology Co., Ltd., and, in the context of describing our operations and consolidated financial information, also include its consolidated affiliated PRC entity, Beijing Dangdang Kewen E-Commerce Co., Ltd.;
 
  •      “active customers” for a specified period refers to customers who have purchased products offered by us at dangdang.com at least once during that period;
 
  •      “daily unique visitors” refers to unduplicated visitors to our website each day;
 
  •      “repeat customers” for a specified period refers to customers who have purchased products offered by us at dangdang.com prior to this period;
 
  •      “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong, and Macau;
 
  •      “shares” or “common shares” refers to our Class A and Class B common shares, par value US$0.0001 per share, “preferred shares” refers to our series A, series B and series C convertible preferred shares, par value US$0.0001 per share; in November 2010, our shareholders approved a 1:10 share split of our authorized and outstanding share capital with retrospective effect. All presentation of share capital information in this prospectus is shown giving effect to the 1:10 share split;
 
  •      “ADSs” refers to our American depositary shares, each of which represents five Class A common shares;
 
  •      all references to “RMB” or “Renminbi” refer to the legal currency of China; and
 
  •      all references to “US$,” “dollars” or “U.S. dollars” refer to the legal currency of the United States.


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THE OFFERING
 
The following information assumes that the underwriters will not exercise their over-allotment option to purchase additional ADSs in the offering, unless otherwise indicated.
 
Offering price The initial public offering price is $16.00 per ADS.
 
ADSs offered by us 13,200,000 ADSs.
 
ADSs offered by the selling shareholders
3,800,000 ADSs.
 
Common shares outstanding immediately after this offering
389,554,210 shares (or 391,054,210 shares if the underwriters exercise their over-allotment option in full), comprised of (i) 91,783,340 Class A common shares, par value US$0.0001 per share (or 104,533,340 Class A common shares if the underwriters exercise their over-allotment option in full), and (ii) 297,770,870 Class B common shares, par value US$0.0001 per share (or 286,520,870 Class B common shares if the underwriters exercise their over-allotment option in full).
 
ADSs outstanding immediately after this offering
17,000,000 ADSs (or 19,550,000 ADSs if the underwriters exercise their over-allotment option in full).
 
The ADSs
Each ADS represents five Class A common shares, par value US$0.0001 per share.
 
The depositary will hold the Class A common shares underlying your ADSs. You will have rights as provided in the deposit agreement.
 
If we declare dividends on our Class A common shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A common shares, after deducting its fees and expenses.
 
You may turn in your ADSs to the depositary in exchange for Class A common shares. The depositary will charge you fees for any exchange.
 
We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.
 
To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
 
Common Shares Our common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares and Class B common shares have the same rights except for voting and conversion rights. In respect of matters requiring shareholders’ vote, each Class A common share is entitled to one vote, and each Class B common share is entitled to ten votes. Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B


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common shares under any circumstances. If at any time Ms. Peggy Yu Yu, our executive chairwoman of the board of directors, and Mr. Guoqing Li, our director and chief executive officer, and their affiliates collectively own less than 5% of the total number of the issued and outstanding Class B common shares, each issued and outstanding Class B common share shall be automatically and immediately converted into one share of Class A common share, and we shall not issue any Class B common shares thereafter.
 
Over-allotment option We and certain selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an additional 2,550,000 ADSs.
 
Use of proceeds We plan to use the net proceeds we receive from this offering to broaden our product categories, expand our fulfillment capabilities and further enhance our technology infrastructure, and for general corporate purposes, including working capital and funding potential acquisitions of complementary businesses, although we are not currently negotiating any such transactions. See “Use of Proceeds” for additional information.
 
We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
 
Lock-up We, our directors and executive officers, our existing shareholders and certain of our option holders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ADSs or shares or securities convertible into or exercisable or exchangeable for our ADSs or shares for a period of 180 days after the date of this prospectus. Furthermore, all of our directors, executive officers, existing shareholders, and holders of the options to purchase our Class A common shares are restricted by our agreement with the depositary from depositing common shares in our ADS program or having new ADSs issued during the same period. See “Underwriting” for more information.
 
Proposed symbol Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “DANG.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.
 
Payment and settlement The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on December 13, 2010.
 
Depositary The Bank of New York Mellon.
 
Directed share program At our request, the underwriters have reserved for sale, at the initial public offering price, up to 1,020,000 ADSs offered by this prospectus to our directors, officers, employees, business associates and related persons.
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of risks that you should carefully consider before investing in our ADSs.


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The number of common shares that will be outstanding immediately after this offering:
 
  •      assumes conversion of all outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares upon the completion of this offering;
 
  •      assumes no exercise of the underwriters’ over-allotment option;
 
  •      excludes 32,823,600 Class A common shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$0.604 per share; and
 
  •      excludes 10,362,270 Class A common shares reserved for future issuances under our 2010 share incentive plan.


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OUR SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following summary consolidated statements of operations and cash flow data for the years ended December 31, 2007, 2008 and 2009 and the summary balance sheet data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our summary consolidated balance sheet data as of December 31, 2007 has been derived from our audited consolidated financial statements not included in this prospectus. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP.
 
The selected consolidated statement of operations data for the nine months ended September 30, 2009 and 2010 and the selected consolidated balance sheet data as of September 30, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented.
 
Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                                                         
    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for share and per share data)  
 
Summary Consolidated Statement of Operations Data:
                                                       
Net revenues:
                                                       
Product revenue
                                                       
Media
    409,023       697,681       1,297,120       193,875       915,397       1,322,065       197,603  
General merchandise
    36,894       66,829       152,976       22,865       90,908       236,162       35,298  
                                                         
      445,917       764,510       1,450,096       216,740       1,006,305       1,558,227       232,901  
Other revenue
    947       1,550       7,556       1,129       3,315       12,550       1,876  
                                                         
Total net revenues
    446,864       766,060       1,457,652       217,869       1,009,620       1,570,777       234,777  
Cost of revenues
    (365,284 )     (638,817 )     (1,129,961 )     (168,890 )     (795,380 )     (1,223,963 )     (182,940 )
                                                         
Gross profit
    81,580       127,243       327,691       48,979       214,240       346,814       51,837  
Operating expenses(1):
                                                       
Fulfillment
    (85,802 )     (120,837 )     (201,270 )     (30,083 )     (143,274 )     (198,961 )     (29,738 )
Marketing
    (35,503 )     (40,766 )     (38,473 )     (5,750 )     (27,290 )     (55,485 )     (8,293 )
Technology and content
    (17,202 )     (26,436 )     (38,989 )     (5,828 )     (26,917 )     (44,151 )     (6,599 )
General and administrative
    (20,931 )     (26,991 )     (38,021 )     (5,683 )     (26,255 )     (46,583 )     (6,963 )
                                                         
Income (loss) from operations
    (77,858 )     (87,787 )     10,938       1,635       (9,496 )     1,634       244  
                                                         
Income (loss) before income taxes
    (70,511 )     (81,757 )     16,916       2,529       (5,233 )     5,567       832  
Net income (loss)
    (70,511 )     (81,757 )     16,916       2,529       (5,233 )     15,980       2,388  
                                                         
Deemed dividend on Series C convertible preferred shares
                                  (1,779 )     (266 )
                                                         
Net (loss) income attributable to common shareholders
    (70,511 )     (81,757 )     16,916       2,529       (5,233 )     14,201       2,122  
                                                         
Loss per common share:
                                                       
Basic
    (0.40 )     (0.47 )     (2)     (2)     (0.03 )     (2 )     (2 )
Diluted
    (0.40 )     (0.47 )     (2)     (2)     (0.03 )     (2 )     (2 )
Weighted average number of common shares used in per share calculations:
                                                       
Basic
    175,644,260       175,644,260       175,644,260       175,644,260       175,644,260       175,764,040       175,764,040  
Diluted
    175,644,260       175,644,260       175,644,260       175,644,260       175,644,260       175,764,040       175,764,040  
Pro forma earnings per common share—unaudited:
                                                       
Basic
                                            0.05       0.01  
Diluted
                                            0.04       0.01  


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    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for share and per share data)  
 
Weighted average number of common shares used in pro forma per share calculations—unaudited:
                                                       
Basic
                                            313,313,990       313,313,990  
Diluted
                                            332,956,840       332,956,840  
 
 
Notes:
 
(1) Share-based compensation expenses were allocated in operating expenses as follows:
 
                                                         
    For the Year Ended December 31,   For the Nine Months Ended September 30,
    2007   2008   2009   2009   2010
    RMB   RMB   RMB   US$   RMB   RMB   US$
    (in thousands)
 
Fulfillment
    517       469       764       114       556       784       117  
Marketing
    111       105       131       20       95       161       24  
Technology and content
    266       270       479       71       329       573       86  
General and administrative
    2,746       1,519       2,623       392       1,840       6,138       917  
                                                         
Total share-based compensation expenses
    3,640       2,363       3,997       597       2,820       7,656       1,144  
                                                         
 
(2) Each holder of series A, series B and series C convertible preferred shares is entitled to dividends at the rate of US$0.0112, US$0.0172 and US$0.0438 per share per annum (as adjusted for any stock dividends, combinations or splits with respect to such shares), respectively, prior and in preference to any declaration or payment of any dividend (payable other than in common shares) on the common shares. Prior to June 2010, each holder of series C convertible preferred shares was entitled to dividends at the rate of US$0.0534 per share per annum. For each of the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010, the basic and diluted losses per share were calculated using the two class method taking into consideration of the deemed dividends that each preferred shareholder is entitled to.
 
                                                                 
    As of December 31,   As of September 30,
    2007   2008   2009   2010
    RMB   RMB   RMB   US$   RMB   US$   US$   US$
                            Pro forma
  Pro forma
                            (Unaudited)(1)   as adjusted
                                (Unaudited)(2)
    (in thousands)
 
Summary Consolidated Balance Sheet Data:
                                                               
Cash and cash equivalents
    63,531       66,509       75,759       11,323       198,652       29,692       29,692       226,826  
Held-to-maturity investments
    102,000       50,000       90,000       13,452       95,000       14,199       14,199       14,199  
Inventories
    169,617       300,813       540,744       80,823       930,521       139,081       139,081       139,081  
Accounts receivable (net of allowance for doubtful accounts of nil as of December 31, 2007, 2008 and 2009 and September 30, 2010, respectively)
    7,925       8,025       11,764       1,758       13,224       1,977       1,977       1,977  
Total assets
    379,564       463,821       800,905       119,709       1,372,726       205,175       203,642       400,776  
Accounts payable
    235,818       372,253       618,062       92,379       1,112,770       166,321       166,321       166,321  
Convertible preferred shares:
                                                               
Series A
    51,314       51,314       51,314       7,670       51,314       7,670              
Series B
    57,001       57,001       57,001       8,520       57,001       8,520              
Series C
    209,716       209,716       209,716       31,345       211,495       31,611              
Common shares
    151       151       151       23                          
Class A common shares
                                              8  
Class B common shares
                            151       23       36       35  
Accumulated deficit
    (315,726 )     (397,483 )     (380,567 )     (56,882 )     (366,366 )     (54,760 )     (54,760 )     (54,760 )
Total shareholders’ (deficit) equity
    (210,768 )     (291,443 )     (270,543 )     (40,436 )     (245,675 )     (36,721 )     9,547       204,985  

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Notes:
 
(1) The consolidated balance sheet data as of September 30, 2010 are adjusted to give effect to the automatic conversion of all of our outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares immediately upon the completion of this offering.
 
(2) The consolidated balance sheet data as of September 30, 2010 are adjusted to give effect to (i) the automatic conversion of all of our outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares immediately upon the completion of this offering; and (ii) the issuance and sale of 66,000,000 Class A common shares in the form of ADSs by us in this offering, and the sale of 15,623,340 Class A common shares, which will be automatically converted from 15,623,340 Class B common shares immediately upon the completion of this offering, by certain selling shareholders, at the initial public offering price of US$16.00 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
                                                         
    For the Year Ended December 31,   For the Nine Months Ended September 30,
    2007   2008   2009   2009   2010
    RMB   RMB   RMB   US$   RMB   RMB   US$
    (in thousands)
 
Summary Cash Flow Data:
                                                       
Net cash (used in) provided by operating activities
    (39,660 )     (37,417 )     72,091       10,775       154,352       169,291       25,303  
Net cash (used in) provided by investing activities
    (114,812 )     41,675       (62,828 )     (9,391 )     (160,700 )     (45,610 )     (6,817 )
Net cash provided by (used in) financing activities
          166                         (619 )     (92 )
Net (decrease) increase in cash and cash equivalents
    (156,088 )     2,978       9,250       1,382       (6,367 )     122,893       18,369  
Cash and cash equivalents at beginning of year/period
    219,619       63,531       66,509       9,941       66,509       75,759       11,323  
Cash and cash equivalents at end of year/period
    63,531       66,509       75,759       11,323       60,142       198,652       29,692  


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RISK FACTORS
 
An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.
 
Risks Related to Our Business
 
Our business depends heavily on the market recognition and reputation of our dangdang.com brand, and any harm to our brand or failure to maintain and enhance our brand recognition may materially and adversely affect our business, financial condition and results of operations.
 
We believe that the market recognition and reputation of our dangdang.com brand have significantly contributed to the success of our business. Maintaining and enhancing the recognition and reputation of our brand are critical to our success and ability to compete. Many factors, some of which are beyond our control, are important to maintaining and enhancing our brand and may negatively impact our brand and reputation if not properly managed, such as:
 
  •      our ability to maintain a convenient and reliable user experience as consumer preferences evolve and as we expand into new product categories and new business lines;
 
  •      our ability to increase brand awareness among existing and potential customers through various means of marketing and promotional activities;
 
  •      the efficiency, reliability and service quality of our courier service providers;
 
  •      our ability to effectively control the product and service quality of third-party merchants and to monitor service performance of third parties as we continue to develop our marketplace program; and
 
  •      any negative media publicity about e-commerce or security or product quality problems of other e-commerce websites in China.
 
If we are unable to maintain our reputation, further enhance our brand recognition and increase positive awareness of our website, our results of operations may be materially and adversely affected.
 
We depend heavily on the continued success of our core business of selling books and other media products online, and any event that adversely affects our sales of books and other media products could harm our business and results of operations.
 
From our inception, we have primarily focused on the sale of books online and historically most of our net revenues have been derived from selling books and other media products online, which accounted for 91.5%, 91.1%, 89.0% and 84.2% of our total net revenues in 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively. We expect that sales of books and other media products will continue to grow and comprise a majority of our total net revenues in the near future. While we have increased the marketing of various general merchandise products and will continue to expand our product offerings to gradually diversify our revenue sources, sales of these new categories of products may not increase to a level that would reduce our dependence on books and other media products. In addition, customers who purchase books and other media products on our website also constitute a majority of customers who purchase general merchandise products. If we cannot successfully attract or retain our book and other media product customers, the number of our customers for, and sales of, general merchandise products may decline. Furthermore, the development and increasing popularity of electronic books and digital content, which have already achieved success in the U.S. and other countries, may negatively impact our book sales online. Our sales of books and other media products may also be materially and negatively affected by sales of pirated books or other media products, which is a continuing problem in China. Any event that results in a reduction in our sales of books and other media products could materially and adversely affect our business and results of operations.


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We have a history of net losses prior to 2009 and may experience earnings declines or losses in the future.
 
We incurred net losses in all periods prior to 2009. We cannot assure you that we can sustain profitability or avoid net losses in the future. Although we experienced significant revenue growth in recent periods, such growth rates may not be sustainable and may decrease in the future. In addition, our ability to be profitable depends on our ability to control our costs and operating expenses, which we expect will increase as we expand our business. We incurred in the past and expect to continue to incur in future periods share-based compensation expenses, which will reduce our net income and may result in future losses. If we fail to increase revenues at the rate we anticipate or if our costs and operating expenses increase without a commensurate increase in our revenues, our business, financial condition and results of operations will be negatively affected.
 
If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.
 
We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train, manage and motivate our workforce and manage our relationships with customers, suppliers, third-party service providers and third-party merchants. Our strategies also include broadening our general merchandise product offerings, which will require us to introduce new product categories and work with different groups of suppliers and address the needs of different kinds of consumers. Given our relative unfamiliarity with many of these new product offerings, we may incur significant costs in trying to expand our offerings into these new product categories or fail to successfully execute the roll-out of these new product offerings. All of these endeavors involve risks, and will require substantial management effort and significant additional expenditures. We cannot assure you that we will be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our business and prospects.
 
Our success depends on our ability to identify and respond to constantly changing consumer preferences.
 
The e-commerce and retail industries are subject to changing consumer preferences. Consequently, we must stay abreast of emerging lifestyle and consumer trends and anticipate trends that will appeal to existing and potential customers. If our customers cannot find their desired products on our website, they may stop purchasing products on our website, stop visiting our website or visit less often. If we do not anticipate, identify and respond effectively to consumer preferences or changes in consumer trends at an early stage, we may not be able to generate the desired level of sales. Such circumstances could materially and adversely affect our business, financial condition and results of operations.
 
We face intense competition, and if we do not compete successfully against existing and new competitors, we may lose market share and customers.
 
The online retail environment for our products is intensely competitive. Our current or potential competitors include: (1) other B2C e-commerce companies, such as Amazon.cn/Joyo and Taobao Mall; (2) physical retailers, catalog retailers, publishers, distributors and manufacturers of our products, many of which possess significant brand recognition, sales volume and customer bases, and some of which currently sell, or in the future may sell, products or services through the internet; and (3) a number of indirect competitors, including internet portals and internet search engines that are involved in e-commerce, either directly or in collaboration with other retailers. We may also in the future experience competition from the increasing popularity of electronic books and digital content, which have already impacted the book market in the U.S. and other countries.
 
We face a variety of competitive challenges including: sourcing products efficiently; pricing our products competitively; maintaining the quality of the products sold on our website; anticipating and quickly responding to changing customer demands; maintaining favorable brand recognition; providing quality services; and conducting strong and effective marketing activities. As we further develop our dangdang.com marketplace program, we will face increasing challenges to compete for and retain high quality third-party merchants. If we cannot properly address these challenges, our business and prospects would be materially and adversely affected.


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Some of our current and potential competitors have significantly greater financial, marketing and other resources than us. In addition, other online retailers may be acquired by, receive investment from or enter into strategic relationships with, well-established and well-financed companies or investors which would help enhance their competitive positions. Certain of our competitors may be able to secure merchandise from suppliers on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies and devote substantially more resources to website and system development than us. Increased competition may reduce our operating margins, market share and brand recognition, or force us to incur losses. There can be no assurance that we will be able to compete successfully against current and future competitors, and competitive pressures may have a material adverse effect on our business, prospects, financial condition and results of operations.
 
Our further expansion in the general merchandise business and third-party marketplace business may lower our profit margins. In addition, given the relatively short history of these new businesses, it may be difficult for you to evaluate our business and prospects.
 
Since our inception, we have focused on selling books online. In recent years, we have gradually expanded the product offerings on our website to include other media products and selected general merchandise categories. In 2009, we launched the dangdang.com marketplace program to allow third-party merchants to sell certain general merchandise products alongside our products. These new businesses involve risks and challenges different from those of book retailing. For example, compared with book suppliers, general merchandise suppliers usually give us shorter periods of payment credit, which requires us to upgrade our internal finance and accounting functions to adjust to such new payment cycles. In addition, general merchandise products typically come in different sizes and shapes and therefore require more flexible warehouse storage spaces and fulfillment capacity as compared to books. Furthermore, because of the variety of quality standards, shapes, sizes, colors and styles of many general merchandise products, such as electronics and apparel, it is more difficult for us to inspect and control the quality and ensure the proper handling of the general merchandise products sold on our website. We anticipate that we may experience a higher rate of return for, or complaints regarding, such products. The sale of general merchandise products may also expose us to risks related to product defects or other quality problems, which may result in costly product liability claims against us and harm to our brand and reputation. Pursuant to the relevant PRC laws and regulations, customers who have purchased general merchandise products at our website can seek indemnification from us for any damages caused by defective products that we sell. In addition, the relevant government authorities can initiate investigation, confiscate any products with quality problems or any illegal income generated from selling such products, impose penalties, or, in serious cases, suspend licenses of the parties involved. General merchandise products generally have lower profit margins than books and other media products and we may need to price aggressively to gain market share or remain competitive in this new business, which may further reduce our profit margins. We also face challenges to address changes in customer demands and preferences and the associated inventory risks.
 
We have a limited history of operating these new businesses, which makes predicting our future results of operations more difficult than it otherwise would be. Therefore, our past results of operations should not be taken as indicative of our future performance. Our ability to achieve satisfactory financial results in these new businesses is unproven.
 
Uncertainties regarding the growth and sustained profitability of B2C e-commerce in China could adversely affect our net revenues and business prospects and the trading price of our ADSs.
 
Substantially all of our net revenues are based on a B2C e-commerce business model. While B2C e-commerce has existed in China since the 1990s, only recently have certain companies, such as our company, become profitable and thus the long term viability and prospects of various B2C e-commerce business models, and e-commerce generally, in China remain relatively untested. Our future operating results will depend on numerous factors affecting the development of e-commerce in China, which may be beyond our control. These factors include:
 
  •      the growth of personal computer, internet and broadband usage and penetration in China, and the rate of any such growth;


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  •      the trust and confidence level of consumers in online shopping in China, as well as changes in customer demographics and consumers’ tastes and preferences;
 
  •      the selection, price and popularity of products that we and our competitors offer on websites;
 
  •      whether alternative retail channels or business models that better address the needs of consumers emerge in China;
 
  •      the development of fulfillment, payment and other ancillary services associated with online purchases; and
 
  •      general economic conditions, particularly economic conditions affecting discretionary consumer spending.
 
A decline in the popularity of shopping on the internet in general, or any failure by us to adapt our website and improve the online shopping experience of our customers in response to trends and consumer requirements, will adversely affect our net revenues and business prospects.
 
Our growth and profitability depend on the level of consumer confidence and spending in China.
 
Our results of operations are sensitive to changes in overall economic and political conditions that impact consumer spending. The retail industry, in particular, is very sensitive to broad economic changes, and retail purchases tend to decline during recessionary periods. Substantially all of our net revenues are derived from retail sales in China. Many factors outside of our control, including interest rates, volatility of the world’s stock markets, inflation and deflation, tax rates and other government policies, and unemployment rates can adversely affect consumer confidence and spending. The domestic and international political environments, including military conflicts and political turmoil or social instability, may also adversely affect consumer confidence and reduce spending, which could in turn materially and adversely affect our growth and profitability.
 
The proper functioning of our website is essential to our business and any failure to maintain the satisfactory performance, security and integrity of our website will materially and adversely affect our business, reputation, financial condition and results of operations.
 
The satisfactory performance, reliability and availability of our website, our transaction-processing systems and our network infrastructure are critical to our success and our ability to attract and retain customers and maintain adequate customer service levels. Our net revenues depend on the number of visitors who shop on our website and the volume of orders we fulfill. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or reduced order fulfillment performance would reduce the volume of products sold and the attractiveness of product offerings at our website. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. We may also experience interruptions caused by reasons beyond our control. In June 2010, due to a power outage at one of our data centers, our website did not function properly and we were unable to take customer orders for approximately three hours around midnight. There can be no assurance that such unexpected interruptions will not happen again, and future occurrences could damage our reputation and result in a material decrease in our revenues.
 
We use internally developed systems for our website and substantially all aspects of transaction processing, including order management, cash, debit card and credit card processing, purchasing, inventory management and shipping. We periodically upgrade and expand our systems, and in the future, we intend to further upgrade and expand our systems and to integrate newly developed or purchased software with our existing systems to support increased transaction volume. Any inability to add additional software and hardware or to develop and upgrade our existing technology, transaction-processing systems or network infrastructure to accommodate increased traffic on our website or increased sales volume through our transaction-processing systems may cause unanticipated system disruptions, slower response time, degradation in levels of customer service and impaired quality and speed of order fulfillment, which would have a material adverse effect on our business, reputation, financial condition and results of operations.


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If we fail to manage our relationships with our suppliers, our business and prospects may suffer.
 
We source our products from domestic Chinese publishers, manufacturers and distributors. We have strong relationships with a network of suppliers across China. For books and other media products, we have fostered long-term relationships with numerous suppliers, including some strategically important suppliers who, in some cases, give us exclusive rights to sell online certain popular or hard-to-find books and other media products within certain prescribed periods. As compared to our book suppliers, our relationships with general merchandise suppliers are relatively recent and still developing, and maintaining strong relationships with these suppliers is also important to the growth of our business. Maintaining good relationships with suppliers that compete with each other can be difficult. For example, suppliers of similar products may compete for desirable virtual shelf space or priority exposure of their products on our website to our customer base. There can be no assurance that our current suppliers will continue to sell merchandise to us on terms acceptable to us, or that we will be able to establish new or extend current supplier relationships to ensure a steady supply of merchandise in a timely and cost-efficient manner. If we are unable to develop and maintain good relationships with suppliers, it may inhibit our ability to offer products demanded by our customers, or to offer them in sufficient quantities and at prices acceptable to them. In addition, if our suppliers cease to provide us with favorable pricing or payment terms or return policies, our working capital requirements may increase and our operations may be materially and adversely affected. Any breakdown in our supplier relationships, or a failure to timely resolve disputes with or complaints from our suppliers, could materially and adversely affect our business, prospects and results of operations.
 
If we fail to successfully adopt new technologies or adapt our website and systems to customer requirements or emerging industry standards, our business, prospects and financial results may be materially and adversely affected.
 
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website. The internet and the online retail industry are characterized by rapid technological evolution, changes in user requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices that could render our existing proprietary technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospective customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of website and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to use new technologies effectively or adapt our website, proprietary technologies and transaction-processing systems to customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations would be materially adversely affected.
 
Any interruption in the operation of our data centers or logistics centers for an extended period may have an adverse impact on our business.
 
Our ability to process and fulfill orders accurately and provide high-quality customer service depends on the efficient and uninterrupted operation of our data centers and logistics centers. Our data centers and logistics centers may be vulnerable to damage caused by fire, flood, power loss, telecommunications failure, break-ins, earthquake, human error and other events. In addition, we do not currently have additional back-up systems or a formal disaster recovery plan and do not carry business interruption insurance to compensate for losses that may occur. The occurrence of any of the foregoing risks could have a material adverse effect on our business, prospects, financial condition and results of operations.
 
Failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brand and substantially harm our business and results of operations.
 
A significant challenge to online commerce and communications is the secure transmission of confidential information over public networks. Currently, all product orders and, in some cases, payments for products we


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offer, are made through our website. In addition, some online payments for our products are settled through third-party online payment services. In such transactions, maintaining complete security for the transmission of confidential information on our website, such as customers’ credit card numbers and expiration dates, personal information and billing addresses, is essential to maintain consumer confidence. We have limited influence over the security measures of third-party online payment service providers. In addition, we hold certain private information about our customers, such as their names, addresses, phone numbers and browsing and purchasing records. We may not be able to prevent third parties, such as hackers or criminal organizations, from stealing information provided by our customers to us through our website. In addition, our third-party merchants and delivery service providers may violate their confidentiality obligations and disclose information about our customers. Any compromise of our security or third-party service providers’ security could have a material adverse effect on our reputation, business, prospects, financial condition and results of operations. For example, we recently received more than 20 complaints from our customers in various parts of China regarding instances where they received phone calls from people trying to sell online gift cards to them by impersonating our company’s customer service representatives. A few customers were scammed and purchased fake gift cards that cannot be used on our website. In response to these complaints, we suggested that our customers report the incidents to the relevant local public security bureau. Although we do not believe that we are responsible for any wrongdoings, several Chinese newspapers and online media have reported these cases and accused us of negligence in safeguarding our customers’ personal information. Such negative publicity has adversely affected our public image and reputation. We cannot assure you that similar events out of our control will not occur in the future, which could cause serious harm to our brand and reputation.
 
In addition, significant capital and other resources may be required to protect against security breaches or to alleviate problems caused by such breaches. The methods used by hackers and others engaged in online criminal activity are increasingly sophisticated and constantly evolving. Even if we are successful in adapting to and preventing new security breaches, any perception by the public that online commerce and transactions, or the privacy of user information, are becoming increasingly unsafe or vulnerable to attack could inhibit the growth of e-commerce and other online services generally, which in turn may reduce the number of orders we receive.
 
We depend on numerous third-party delivery service providers to deliver our products, and their failure to provide high-quality delivery services to our customers may negatively impact the shopping experience of our customers, damage our market reputation and materially and adversely affect our business and results of operations.
 
We currently use a network of 104 third-party inter-city transportation companies and local third-party courier companies to deliver parcels to our customers. For customers in remote areas not covered by our delivery network, we use China’s postal services to deliver our products. Interacting with and coordinating the activities of so many delivery companies is complicated. Interruptions to or failures in these third parties’ shipping services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen events that are beyond our control or the control of these third-party delivery companies, such as inclement weather, natural disasters or labor unrest. In addition, in response to competition or for promotional purposes, we may from time to time promise even shorter delivery time to our customers, which will put increased pressure on our delivery network. If our products are not delivered on time or are delivered in a damaged state, customers may refuse to accept our products and have less confidence in our services. Thus, we may lose customers, and our financial condition and market reputation could suffer. In addition, as local courier companies tend to be small companies with limited capital resources, they may be more likely to go bankrupt, close down or encounter financial difficulties, in which case we may not be able to retrieve our products in their possession, arrange for delivery of those products by an alternative carrier, receive the payments the courier companies collect for us, or hold them accountable for the losses they cause us. Although the courier companies are generally required to provide cash deposits or payment guarantees to us before we let them provide services for us, such security may not be sufficient to cover the risks to which we are exposed. In addition, if the courier companies cease to provide cash deposits to us or significantly reduce the amounts of such deposits, our working capital requirements may increase and our operating cash flow may be materially and adversely affected. We also expect gradual consolidation in the logistics industry, and we may experience disruption to our delivery network in areas


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covered by the companies undergoing acquisitions or integration, or we may experience difficulty in negotiating favorable terms with such companies. The occurrence of any of these problems, alone or together, could damage our reputation and materially and adversely affect our business and results of operations.
 
Our legal right to lease certain properties could be challenged by property owners or other third parties, which may cause interruptions to our business operations.
 
We lease all of the premises used for our offices, warehouses and data centers. A majority of our lessors have not been able to provide the relevant housing ownership certificates for the properties leased by us. In particular, three of our warehouses are located on collectively-owned land or military land, respectively, and the lessors have not been able to provide the relevant title certificates and approvals in relation to the leases, including the approvals from the military authorities or collective members. Most of our leases of the properties have not been filed for registration with the relevant government authorities, as required under PRC law. In addition, two of our leased premises were mortgaged by the owners before we entered into lease agreements with them. As of the date of this prospectus, we are not aware of any actions, claims or investigations being contemplated by the competent government authorities with respect to the defects in our leased real properties or any challenges by third parties to our use of these properties. However, if third parties who purport to be property owners or beneficiaries of the mortgaged properties challenge our right to lease these properties, we may not be able to protect our leasehold interest and may be ordered to vacate the affected premises, which could in turn materially and adversely affect our business operations and results of operations.
 
Failure to renew our current leases or locate desirable alternatives for our facilities could materially and adversely affect our business.
 
All of our offices, warehouses and data centers are presently located on leased premises. At the end of each lease term, we may not be able to negotiate an extension of the lease and may therefore be forced to move to a different location, or the rent we pay may increase significantly. This could disrupt our operations and adversely affect our profitability. A number of our leases will expire in the near future and are subject to renewal at market prices, which could result in a substantial increase in the rent at the time of renewal. We compete with other businesses for premises at certain locations or of desirable sizes and some landlords may have entered into long-term leases with our competitors for such premises. As a result, we may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could materially and adversely affect our business.
 
We plan to expand our logistics center and distribution network. If we are not able to manage such expansion successfully, our growth potential, results of operations and business could be materially and adversely affected.
 
We believe our strategically located central and regional logistics centers and our extensive distribution network are essential to our success. We intend to expand our logistics centers and distribution network to accommodate more customer orders, provide better coverage of our target markets, and support our expansion into general merchandise products. We cannot assure you that we will be able to lease suitable facilities at commercially acceptable terms in accordance with our expansion plan. In addition, the expansion of our logistics centers and distribution network will put pressure on our managerial, financial, operational and other resources. If we are unable to secure new facilities or effectively manage our expanded logistics operations and control increasing costs, our growth potential, results of operations and business could be materially and adversely affected.
 
We may incur liability for counterfeit products, products sold at our website or content provided on our website that infringe on third-party intellectual property rights.
 
We source our products from over 1,000 suppliers across China. In connection with our dangdang.com marketplace program, third-party merchants are separately responsible for sourcing the products they sell on our website. Although we have adopted measures to verify the authenticity of products sold on our website and minimize potential infringement of third-party intellectual property rights in the course of sourcing and selling products, we may not always be successful. In the event that counterfeit or infringing products are sold on our website, we could face claims that we should be held liable for selling counterfeit products or infringing on others’ intellectual property rights. We have in the past received many intellectual property infringement claims, none of


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which have had a material adverse effect on our business or financial condition. Irrespective of the validity of such claims, we could incur significant costs and efforts in either defending against or settling such claims. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant products. Moreover, regardless of whether we successfully defend against such claims, our reputation could be severely damaged. Any of these events could have a material adverse effect on our business, results of operations or financial condition.
 
Under our agreements with suppliers and third-party merchants, we require our suppliers or third-party merchants to indemnify us for any losses we suffer or any costs that we incur due to any products we source from such suppliers or any products sold by third-party merchants. However, we may not be able to successfully enforce our contractual rights and may need to initiate costly and lengthy legal proceedings in China to protect our rights. See “—Risks Relating to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
 
Our business depends substantially on the continued efforts of our executive officers and our business may be severely disrupted if we lose their services.
 
Our future success depends substantially on the continued efforts of our executive officers named in this prospectus. If one or more of our executive officers were unable or unwilling to continue their employment with us, we might not be able to replace them easily, in a timely manner, or at all, and our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected. We may also incur additional expenses to recruit and retain qualified replacements. If any of our executive officers joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and other personnel. Each of our executive officers has entered into an employment agreement with us, which contains non-compete provisions. However, if any dispute arises between our executive officers and us, we cannot assure you that we would be able to enforce these non-compete provisions in China, where these executive officers reside, in light of uncertainties with China’s legal system. See “—Risks Relating to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
 
If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.
 
Our future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel, particularly management, technical and marketing personnel with expertise in the e-commerce industry. Since our industry is characterized by high demand and intense competition for talent, there can be no assurance that we will be able to attract or retain qualified staff or other highly skilled employees that we will need to achieve our strategic objectives. As we are still a relatively young company, our ability to train and integrate new employees into our operations may not meet the growing demands of our business. If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.
 
Implementation of new labor laws in China may adversely affect our business and results of operations.
 
Pursuant to a new PRC labor contract law that became effective in 2008, employers in China are subject to stricter requirements in terms of signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. The new labor contract law and related regulations impose greater liabilities on employers and may significantly increase the costs to an employer if it decides to reduce its workforce. In the event we decide to significantly change or reduce our workforce, the new labor contract law could adversely affect our ability to make such changes in a manner that is most favorable to our business or in a timely and cost effective manner. In early 2010, local labor authorities in several places where we have business operations, such as Beijing and Shanghai, significantly increased the minimum hourly wages for temporary workers. As we employ a large number of temporary employees through third-party contractors, the implementation of this new policy will significantly increase our operating expenses in 2010 and future periods if we continue to employ large number of temporary employees. In addition, under the new labor contract law, we are jointly liable with third-party contractors for their breach of the labor contract law and may be held liable for damages to the temporary employees as a result of any breach by any third-party contractors of the


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labor contracts between temporary employees and third-party contractors. All of these factors may adversely affect our business and results of operations.
 
Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.
 
Currently, our co-founders and directors, Mr. Guoqing Li and Ms. Peggy Yu Yu, who are husband and wife, together own an aggregate of 43.7% of our outstanding shares. Upon the completion of this offering, they will own an aggregate of 34.7% of our outstanding shares, representing 43.1% of the total voting power of our outstanding common shares after this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. As a result, Mr. Li and Ms. Yu have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. For more information regarding our principal shareholders and their affiliated entities, see “Principal and Selling Shareholders.”
 
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
 
We regard our trademarks, service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark law, trade secret protection and confidentiality and license agreements with our employees, suppliers, partners and others to protect our proprietary rights. As of September 30, 2010, we registered 50 domain names, including dangdang.com, dangdang.com.cn and dangdang.cn, and 33 trademarks and service marks in China. Our trademarks and service marks may be invalidated, circumvented, or challenged. Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discovered by competitors. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach.
 
It is often difficult to create and enforce intellectual property rights in China. Even where adequate laws exist in China, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a court judgment or an arbitration award delivered in another jurisdiction, and accordingly, we may not be able to effectively protect our intellectual property rights or enforce agreements in China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our technologies.
 
We incur significant costs on a variety of marketing efforts designed to increase sales of our products and some marketing campaigns and methods may turn out to be ineffective.
 
We rely on a variety of different marketing efforts tailored to our targeted customers to increase sales of our products. Our marketing activities, which often involve significant costs, may not be well received by customers and may not result in the levels of product sales that we anticipate. Marketing approaches and tools in the consumer products market in China are evolving. This further requires us to enhance our marketing approaches and experiment with new marketing methods to keep pace with industry developments and customer preferences. Failure to refine our existing marketing approaches or to introduce new effective marketing approaches in a cost-effective manner could reduce our market share, cause our net revenues to decline and negatively impact our profitability.
 
We may suffer losses if we are unable to efficiently manage our inventory risks, particularly when expanding into the general merchandise business.
 
We must anticipate the popularity of products and purchase them before selling them to our customers. Under some of our current supply agreements, we enjoy flexible policies for returning the unsold items to our suppliers. In order to secure more favorable business terms, we have entered into and plan to continue to enter into purchase arrangements with our suppliers with more restrictive return policies. For example, some of our


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contracts with suppliers contain restrictions on our ability to return products, such as caps on the amount of products that can be returned, and we may lose preferential pricing terms for such products if we exceed these caps, which could materially affect our profit margins. In addition, under this business model, we will also incur increased inventory risks if we are unable to return unsold products to our suppliers. Return policies in our general merchandise supply agreements may have more restrictive terms. If we are unable to correctly predict demand for the products that we are committed to purchase, we will be responsible for covering the cost of the products that we are unable to sell, and our financial condition and results of operations would be adversely affected.
 
Our results of operations are subject to quarterly fluctuations due to a number of factors that could adversely affect our business and the trading price of our ADSs.
 
We experience seasonality in our business, reflecting a combination of seasonal fluctuations in internet usage and traditional retail seasonality patterns. We generally experience less user traffic and acquire fewer customers during national holidays in China, in particular during the first quarter of each year due to the slow-down of businesses during the Chinese New Year holiday season that effectively lasts more than half a month. Furthermore, sales in the traditional retail industry are significantly higher in the fourth quarter of each calendar year than in the preceding three quarters.
 
Due to the foregoing factors, our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. In such event, the trading price of our ADSs may be materially and adversely affected.
 
Future strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations.
 
We may in the future enter into strategic alliances with various third parties. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counter-party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor their actions. To the extent strategic third parties suffer negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.
 
In addition, although we have no current acquisition plans, if we are presented with appropriate opportunities, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. Future acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect. In addition, acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from the relevant government authorities in the PRC for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased costs and delay.
 
We may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders.
 
We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and


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financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
 
If we fail to implement and maintain an effective system of internal controls or fail to remediate the material weakness in our internal control over financial reporting that has been identified, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.
 
Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of and for the year ended December 31, 2009, we and our independent registered public accounting firm identified one “material weakness” in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. The material weakness identified related to the lack of personnel with U.S. GAAP expertise in the preparation of our financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements. We have implemented a number of measures to address the material weakness that has been identified, including hiring our chief financial officer, a senior financial reporting director and a financial reporting manager with U.S. GAAP and SEC reporting experience in 2010. We will continue to recruit experienced personnel to build a strong accounting and finance team. However, we cannot assure you that these and other remedial measures will fully address the material weakness or other control deficiencies.
 
Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2011. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.
 
During the course of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, we may identify other deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
 
We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.
 
As the insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business insurance products. We do not have any product liability insurance or business interruption insurance. As we continue to expand our general merchandise product offerings, we may be increasingly exposed to product liability claims related to product defects in the design or manufacture of such general merchandise. Any product liability claims or business disruption, natural disaster could result in our


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incurring substantial costs and diversion of resources, which would have an adverse effect on our business and results of operations.
 
Risks Relating to Our Corporate Structure and Restrictions on Our Industry
 
Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC laws and regulations relating to online commerce and the distribution of internet content in China. If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations, we could be subject to severe penalties, including the shutting down of our website.
 
Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership in PRC companies that provide internet content distribution services. Specifically, foreign investors are not allowed to own more than 50% of the equity interests in any entity conducting an internet content distribution business.
 
We are a Cayman Islands company and our PRC subsidiary, Dangdang Information, is considered a foreign invested enterprise. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into between our PRC subsidiary, Dangdang Kewen, our affiliated PRC entity, and our affiliated PRC entity’s shareholders. Our affiliated PRC entity holds the licenses that are essential to the operation of our business. For a detailed description of these licenses and permits, see “PRC Regulation.” Our affiliated PRC entity is a PRC limited liability company 50% owned by Mr. Guoqing Li and 50% owned by Ms. Peggy Yu Yu, husband and wife, both of whom are major shareholders, co-founders and directors of our company, and PRC citizens. As a result of these contractual arrangements, we exert control over our affiliated PRC entity and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see “Our Corporate History and Structure.”
 
In the opinion of our PRC counsel, Commerce & Finance Law Offices, our current ownership structure, the ownership structure of our subsidiary and our affiliated PRC entity, the contractual arrangements between our subsidiary, our affiliated PRC entity and its shareholders, and our business operations, as described in this prospectus, are in compliance with existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to the opinion of our PRC legal counsel.
 
Accordingly, if our ownership structure, contractual arrangements and businesses of our company, our PRC subsidiary or our affiliated PRC entity are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiaries or affiliated PRC entities, revoking the business licenses or operating licenses of our PRC subsidiaries or affiliated PRC entities, shutting down our servers or blocking our website, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.
 
We rely on contractual arrangements with our affiliated PRC entity and its shareholders for the operation of our business, which may not be as effective as direct ownership. If our affiliated PRC entity and its shareholders fail to perform their obligations under these contractual arrangements, we may have to resort to litigation to enforce our rights, which may be time-consuming, unpredictable, expensive and damaging to our operations and reputation.
 
Because of PRC restrictions on foreign ownership of internet-based businesses in China, we depend on contractual arrangements with our affiliated PRC entity, Dangdang Kewen, in which we have no ownership


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interest, to engage in the online retailing business. These contractual arrangements are intended to provide us with effective control over this entity and allow us to obtain economic benefits from it. Although we have been advised by our PRC counsel, Commerce & Finance Law Offices, that these contractual arrangements are valid, binding and enforceable under current PRC laws, these contractual arrangements may not be as effective in providing control as direct ownership. For example, Dangdang Kewen and its shareholders could breach their contractual arrangements with us by, among other things, failing to operate our online retailing business in an acceptable manner or taking other actions that are detrimental to our interests. If we were the controlling shareholder of our affiliated PRC entity with direct ownership, we would be able to exercise our rights as shareholders to effect changes to its board of directors, which in turn could implement changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if Dangdang Kewen or its shareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract remedies, which may not be sufficient or effective. In addition, since each of the two shareholders of our affiliated PRC entity holds a 50% interest in such entity, any conflict between them as to the operations of the affiliated PRC entity would result in a deadlock that may be detrimental to our business. If we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business and operations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
 
The shareholders of our affiliated PRC entity have potential conflicts of interest with us, which may adversely affect our business.
 
Mr. Guoqing Li and Ms. Peggy Yu Yu are husband and wife, and co-founders and directors of our company. They are also the shareholders of our affiliated PRC entity, each holding 50% in such entity. Thus, conflicts of interest between their duties to our company and their interests as the controlling shareholders of our affiliated PRC entity may arise. We cannot assure you that they will act entirely in our interests when conflicts of interest arise or that conflicts of interest will be resolved in our favor. In addition, Mr. Li and Ms. Yu could violate their non-competition or employment agreements with us or their legal duties by diverting business opportunities from us, resulting in our loss of corporate opportunities. If we are unable to resolve any such conflicts, or if we suffer significant delays or other obstacles as a result of such conflicts, our business and operations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
 
We may lose the ability to use and enjoy assets held by our affiliated PRC entity that are important to the operation of our business if such entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
 
As part of our contractual arrangements with our affiliated PRC entity, such entity holds certain assets that are important to the operation of our business. If our affiliated PRC entity goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If our affiliated PRC entity undergoes a voluntary or involuntary liquidation proceeding, the unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
 
Our contractual arrangements with our affiliated PRC entity may result in adverse tax consequences to us.
 
As a result of our corporate structure and the contractual arrangements between us and our affiliated PRC entity, we are effectively subject to the 5% PRC business tax on net revenues derived from our contractual arrangements with our affiliated PRC entity. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our affiliated PRC entity were not on an arm’s length basis and therefore constitute a favorable transfer pricing arrangements. If this occurs, the PRC tax


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authorities could request that our affiliated PRC entity adjust its taxable income, if any, upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by increasing our affiliated PRC entity’s tax expenses without reducing our tax expenses, which could subject our affiliated PRC entity to late payment fees and other penalties for underpayment of taxes. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. As a result, our contractual arrangements with our affiliated PRC entity may result in adverse tax consequences to us. As our affiliated PRC entity suffered accumulated loss since its inception, it has not paid any PRC income tax so far. If it generates net income from transactions with our PRC subsidiaries pursuant to the contractual arrangements in the future and the PRC tax authorities decide to make transfer pricing adjustments on its net income, our consolidated net income may be adversely affected.
 
If our affiliated PRC entity fails to obtain and maintain the requisite assets, licenses and approvals required under the complex regulatory environment for internet-based businesses in China, our business, financial condition and results of operations may be materially and adversely affected.
 
The internet industry in China is highly regulated by the PRC government and numerous regulatory authorities of the central PRC government are empowered to issue and implement regulations governing various aspects of the internet industry. See “PRC Regulation.” Our affiliated PRC entity is required to obtain and maintain certain assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide its current services. These assets and licenses are essential to the operation of our business and are generally subject to annual review by the relevant governmental authorities. Furthermore, our affiliated PRC entity may be required to obtain additional licenses. If it fails to obtain or maintain any of the required, assets, licenses or approvals, its continued business operations in the internet industry may subject it to various penalties, such as confiscation of illegal net revenues, fines and the discontinuation or restriction of its operations. Any such disruption in the business operations of our affiliated PRC entity will materially and adversely affect our business, financial condition and results of operations.
 
Regulation and censorship of information distribution over the internet in China may adversely affect our business, and we may be liable for information displayed on, retrieved from or linked to our website.
 
China has enacted laws and regulations governing internet access and the distribution of products, services, news, information, audio-video programs and other content through the internet. In the past, the PRC government has prohibited the distribution of information through the internet that it deems to be in violation of PRC laws and regulations. If any of our internet content were deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or users of our website or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be prevented from operating our website in China.


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Risks Relating to Doing Business in China
 
Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.
 
The Chinese legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in China. Our PRC subsidiaries are foreign-invested enterprises and are subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese laws and regulations generally applicable to companies in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
 
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. For example, in December 2009, the State Administration of Taxation issued a circular, commonly referred to as Circular 698, to strengthen the PRC tax authorities’ scrutiny over any indirect transfer of equity interests in a PRC tax resident enterprise by a non-resident enterprise, which became effective retroactively on January 1, 2008. Circular 698 specifies that the PRC State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed for tax-avoidance purposes and without reasonable commercial purpose and impose a PRC withholding tax at the rate of up to 10% to gains derived from such indirect transfer. There is little guidance and practical experience regarding the application of this relatively new tax circular. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
 
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
 
Substantially all of our assets and almost all of our customers are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.
 
The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
 
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. The Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic


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growth. These measures may cause decreased economic activity in China, which could in turn reduce the demand for our services and adversely affect our results of operations and financial condition.
 
Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.
 
Under the PRC Enterprise Income Tax Law that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.
 
Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. However, it remains unclear how the PRC authorities will treat overseas enterprises controlled by PRC individuals, as in our case.
 
If the PRC tax authorities determine that our Cayman holding company is a PRC resident enterprise for PRC enterprise income tax purposes, then our worldwide income could be subject to PRC tax at a rate of 25%. Although we have had net operating losses to date, if we expand our business overseas and generate significant revenues and profits outside China in the future, the imposition of 25% PRC tax on our worldwide income could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.
 
Furthermore, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the enterprise income tax law, we cannot assure you that dividends by our PRC subsidiaries to our Cayman holding company will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
 
Finally, foreign ADS holders that are enterprises may be subject to PRC withholding tax on dividends payable by us and gains realized on the sale or other disposition of ADSs or Class A common shares, if such income is sourced from within the PRC. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether dividends received and gains realized by our foreign ADS holders that are enterprises will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.
 
PRC laws and regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
 
PRC laws and regulations, such as the M&A Rules promulgated by six PRC regulatory agencies in 2006 and the Anti-Monopoly Law promulgated by the PRC National People’s Congress in 2007, establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors and companies more time-consuming and complex, including requirements in some instances that various governmental authorities be notified in advance of any change-of-control transaction in which a foreign investor takes


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control of a PRC domestic enterprise. We may expand our business in part by acquiring complementary businesses. Complying with the requirements of the relevant PRC laws and regulations to complete such transactions could be time-consuming, and any required approval processes may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
 
The inability of our PRC resident shareholders to complete their registrations with SAFE may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability and penalties under PRC law.
 
The PRC State Administration of Foreign Exchange, or SAFE, promulgated regulations in October 2005 that require PRC citizens or residents to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. Subsequent regulations further clarified that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise the filing of SAFE registrations in a timely manner by the offshore holding company’s shareholders who are PRC citizens or residents. We can not assure you that our shareholders who are PRC citizens or residents will make, obtain or update any applicable registration. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE branches. If our shareholders who are PRC citizens or residents do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability and penalties under PRC law for evasion of applicable foreign exchange restrictions.
 
Despite various interpretations issued by SAFE, some of the terms and provisions in the SAFE regulations remain unclear and implementation by central SAFE and local SAFE branches of the SAFE regulations has been inconsistent since its adoption in 2005. For example, shortly after its promulgation in 2005, many PRC resident shareholders of companies that appeared to fall within the scope of the regulations inquired with SAFE about the registration procedures, and based on the different circumstances in each case, different companies often received differing guidance on how and whether to register under the regulations. In 2006, our PRC resident shareholders voluntarily inquired about and attempted to comply with the relevant SAFE regulations. However, the local SAFE branch was not certain about whether the registration requirements applied to our shareholders, inhibiting their ability to make their registration applications. During the process of preparing for this offering, we and our PRC resident shareholders, Ms. Peggy Yu Yu and Mr. Guoqing Li, have consulted with relevant SAFE officials about how to comply with the SAFE registration requirements and have submitted the registration application to the competent local SAFE. Because of uncertainty over how the SAFE regulations will be interpreted and implemented, and how SAFE will apply them to us, we cannot predict how these regulations will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE regulations by our PRC resident shareholders. In addition, in some cases, we may have little control over either our present or prospective direct or indirect PRC resident shareholders or the outcome of such registration procedures. A failure by our PRC resident shareholders or future PRC resident shareholders to comply with the SAFE regulations, if SAFE requires it, could subject us to penalties or other legal sanctions, restrict our cross-border investment activities, restrict our ability to contribute additional capital into our PRC subsidiaries, including the transfer of the proceeds from this offering into our PRC subsidiaries, or limit our subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
 
In March 2007, SAFE issued further regulations requiring Chinese citizens who are granted share options by an overseas publicly-listed company to register with SAFE through a Chinese agent (including without limitation a Chinese subsidiary of the overseas publicly-listed company) and complete certain other procedures.


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We and our PRC employees who have been granted share options and restricted shares will be subject to these regulations upon the completion of this offering. Failure of our PRC share option holders or restricted share holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limited our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.
 
PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries.
 
Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiaries, including from the proceeds of this offering, are subject to PRC regulations. For example, none of our loans to our PRC subsidiaries may exceed the difference between its total amount of investment and its registered capital approved under relevant PRC laws, and the loans must be registered with the local branch of SAFE. Our capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce or its local counterpart. We cannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our PRC subsidiaries’ liquidity and its ability to fund its working capital and expansion projects and meet its obligations and commitments.
 
Our PRC subsidiaries and affiliated PRC entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.
 
We are a holding company incorporated in the Cayman Islands and rely on, in part, dividends paid from our PRC subsidiaries. Current PRC regulations permit our subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of its accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Since Dangdang Information and Dangdang Kewen were in an accumulated loss position in the three years ended December 31, 2007, 2008 and 2009, no such reserve fund was established for these three years. Further, if our PRC subsidiaries and affiliated PRC entities incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which may restrict our ability to satisfy our liquidity requirements.
 
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
 
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. In July 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. Since reaching a high against the U.S. dollar in July 2008, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies. In June 2010, the PRC government announced that it would increase Renminbi exchange rate flexibility. However, it remains unclear how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
 
As we may rely on dividends and other fees paid to us by our subsidiary and affiliated PRC entity, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we


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would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
 
Risks Relating to Our ADSs and This Offering
 
An active trading market for our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.
 
Our ADSs have been approved for listing on the New York Stock Exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our shares underlying the ADSs, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation between us and the underwriters based upon several factors, including general market factors that are not related to our business fundamentals or financial condition, and thus the initial public offering price of our ADSs does not necessarily reflect our business fundamentals or financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Share-Based Compensation.” We can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.
 
The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.
 
The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.
 
In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
 
  •      variations in our net revenues, earnings and cash flows;
 
  •      announcements of new investments, acquisitions, strategic partnerships or joint ventures;
 
  •      announcements of new services and product category expansions by us or our competitors;
 
  •      fluctuations in market prices of our products;
 
  •      changes in financial estimates by securities analysts;
 
  •      additions or departures of key personnel;
 
  •      release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
 
  •      potential litigation or regulatory investigations.
 
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.


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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
 
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.
 
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
 
Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 17,000,000 ADSs (equivalent to 85,000,000 Class A common shares) outstanding immediately after this offering, or 19,550,000 ADSs (equivalent to 97,750,000 Class A common shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we and our officers, directors and existing shareholders, and certain of our option holders have agreed not to sell any common shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.
 
Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.
 
If you purchase ADSs in this offering, you will pay more for each ADS than the corresponding amount paid by existing shareholders for their common shares. As a result, you will experience immediate and substantial dilution of approximately US$13.30 per ADS (assuming that no outstanding options to acquire Class A common shares are exercised). This number represents the difference between our pro forma net tangible book value per ADS of US$2.70 as of September 30, 2010 after giving effect to this offering and the initial public offering price of US$16.00 per ADS. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.
 
We may be classified as a passive foreign investment company under U.S. tax law, which could result in adverse United States federal income tax consequences to U.S. holders of our ADSs.
 
Depending upon the value of our assets based on the market value of our Class A common shares and ADSs and the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Based on our current income and assets and projections as to the value of our Class A common shares and ADSs pursuant to this offering, we do not expect to be classified as a PFIC for the current taxable year. While we do not anticipate becoming a PFIC for the current taxable year, fluctuations in the market price of our ADSs or Class A common shares may cause us to become a PFIC for the current or any subsequent taxable year.
 
We will be classified as a PFIC for any taxable year if either (i) 75% or more of our gross income for the taxable year is passive income or (ii) 50% or more of the value of our assets (determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production of passive income. Although the law in this regard is unclear, we treat Dangdang Kewen as being owned by us for United States


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federal income tax purposes, not only because we exercise effective control over the operation of Dangdang Kewen but also because we are entitled to substantially all of its economic benefits, and, as a result, we consolidate its results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of Dangdang Kewen for United States federal income tax purposes, we would likely be treated as a PFIC for our current taxable year and any subsequent taxable year. Because of the uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. The overall level of our passive assets will be affected by how, and how quickly, we spend our liquid assets and the cash raised in this offering. Under circumstances where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC would substantially increase. In connection with filing an annual report with the U.S. Securities and Exchange Commission, we expect to disclose to our shareholders whether or not we expect to be a PFIC for the relevant year.
 
If we were to be or become classified as a PFIC, a U.S. Holder (as defined in “Taxation—Material United States Federal Income Tax Considerations—General”) may be subject to reporting requirements and may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or Class A common shares and on the receipt of distributions on the ADSs or Class A common shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules. Further, if we were a PFIC for any year during which a U.S. Holder held our ADSs or Class A common shares, we would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our ADSs or Class A common shares. Each U.S. Holder is urged to consult its tax advisors concerning the United States federal income tax consequences of acquiring, holding, and disposing of ADSs or Class A common shares if we are or become classified as a PFIC. For more information see “Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”
 
Our dual-class common share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A common shares and ADSs may view as beneficial.
 
Our common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote per share, while holders of Class B common shares are entitled to ten votes per share. We will issue Class A common shares represented by our ADSs in this offering. All of our existing shareholders as of September 30, 2010, including our founders, hold our Class B common shares, and our outstanding preferred shares will be automatically converted into Class B common shares upon the completion of this offering. We intend to maintain the dual-class common share structure after the closing of this offering. Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B common shares under any circumstances. Upon any transfer of Class B common shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B common shares shall be automatically and immediately converted into the equal number of Class A common shares. In addition, if at any time Ms. Peggy Yu Yu and Mr. Guoqing Li and their affiliates collectively own less than 5% of the total number of the issued and outstanding Class B common shares (taking into account all of the issued and outstanding preferred shares on an as-converted basis), each issued and outstanding Class B common share shall be automatically and immediately converted into one share of Class A common share, and we shall not issue any Class B common shares thereafter.
 
Due to the disparate voting powers attached to these two classes, we anticipate that our existing shareholders will collectively own approximately 97.2% of the voting power of our outstanding common shares after this offering and will have considerable influence over matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. In particular, Ms. Peggy Yu Yu and Mr. Guoqing Li, will own approximately 34.7% of our outstanding common shares, representing 43.1% of our total voting power after this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A common shares and ADSs may view as beneficial.


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Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our Class A common shares and ADSs.
 
We have adopt our sixth amended and restated articles of association that will become effective immediately upon completion of this offering. Our new articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A common shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our Class A common shares and ADSs may be materially and adversely affected.
 
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
 
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law of the Cayman Islands (2010 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
 
The Cayman Islands courts are also unlikely:
 
  •      to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
 
  •      to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.
 
U.S. shareholders may be able to originate actions against us in the Cayman Islands under Cayman Islands laws. However, we do not have any substantial assets other than certain corporate documents and records in the Cayman Islands and it may be difficult for shareholders to enforce a judgment obtained in a Cayman Islands court in China, where substantially all of our operations are conducted.
 
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
 
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands (2010 Revision) and the laws


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applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”
 
Certain judgments obtained against us by our shareholders may not be enforceable.
 
We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the China. In addition, a majority of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”
 
We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.
 
We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.
 
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A common shares.
 
As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A common shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying Class A common shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our sixth amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting is seven calendar days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, we will give the depositary notice of any such meeting and details concerning the matters to be voted upon at least 30 days in advance of the meeting date and the depositary will send a notice to you about the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
 
The depositary for our ADSs will give us a discretionary proxy to vote our Class A common shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
 
Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our Class A common shares underlying your ADSs at shareholders’ meetings unless:
 
  •      we have failed to timely provide the depositary with notice of meeting and related voting materials;
 
  •      we have instructed the depositary that we do not wish a discretionary proxy to be given;


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  •      we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
 
  •      a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
 
  •      the voting at the meeting is to be made on a show of hands.
 
The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our Class A common shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our Class A common shares are not subject to this discretionary proxy.
 
You may not receive dividends or other distributions on our Class A common shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
 
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A common shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A common shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, Class A common shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class A common shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A common shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
 
You may experience dilution of your holdings due to inability to participate in rights offering or as a result of additional securities issued under our share-based compensation plans.
 
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parities, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result. In addition, we adopted a share-based compensation plan in 2004, or the 2004 plan, and have granted options to purchase substantially all of the common shares reserved under the 2004 plan. We adopted a new share incentive plan in 2010, or the 2010 plan. Upon effectiveness of the 2010 plan, no options or other incentive shares may be granted under the 2004 plan. The additional securities we may issue under the 2010 plan or other share-based compensation plans we may adopt in future will dilute the ownership interests of our shareholders, including holders of our ADSs.
 
You may be subject to limitations on transfer of your ADSs.
 
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on


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weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
 
We will incur increased costs as a result of being a public company.
 
Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, and the New York Stock Exchange, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
 
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA
 
This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
 
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
 
  •      our growth strategies;
 
  •      our future business development, results of operations and financial condition;
 
  •      trends and competition in China’s B2C e-commerce market;
 
  •      expected changes in our revenues and certain cost and expense items;
 
  •      our proposed use of proceeds from this offering; and
 
  •      assumptions underlying or related to any of the foregoing.
 
You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
 
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by third-party market research firms, including a consumer survey conducted by iResearch in May 2010 at our request and commissioned by us for the purposes of this offering, and publicly available data. Although we believe that the publications, reports and surveys are reliable, we have not independently verified the data.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately US$193.9 million, or approximately US$198.4 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon the initial offering price of US$16.00 per ADS. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
 
The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We plan to use net proceeds of this offering as follows:
 
  •      approximately US$25.0 million to US$30.0 million to broaden our product categories;
 
  •      approximately US$25.0 million to US$30.0 million to expand our fulfillment capabilities;
 
  •      approximately US$25.0 million to US$30.0 million to further enhance our technology infrastructure; and
 
  •      the balance for general corporate purposes, including working capital and funding potential acquisitions of complementary businesses, although we are not currently negotiating any such transactions.
 
The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, and the rate of growth of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.
 
In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries.”
 
Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.


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DIVIDEND POLICY
 
We have not previously declared or paid cash dividends and we have no plans to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
 
We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “PRC Regulation—Regulations on Dividend Distribution.”
 
Our board of directors has discretion as to whether to distribute dividends, subject to the approval of our shareholders and applicable laws. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our Class A common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our Class A common shares, if any, will be paid in U.S. dollars.


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CAPITALIZATION
 
The following table sets forth our capitalization as of September 30, 2010:
 
  •      on an actual basis;
 
  •      on a pro forma basis to reflect the automatic conversion of all of our outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares immediately upon the completion of this offering; and
 
  •      on a pro forma as adjusted basis to reflect (i) the automatic conversion of all of our outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares immediately upon the completion of this offering and (ii) the issuance and sale of 66,000,000 Class A common shares in the form of ADSs by us in this offering, and the sale of 15,623,340 Class A common shares, which will be automatically converted from 15,623,340 Class B common shares immediately upon the completion of this offering, by certain selling shareholders, at the initial public offering price of US$16.00 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised).
 
You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                         
    As of September 30, 2010  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
    US$     US$     US$  
    (in thousands, except share and per share data)  
 
Preferred Shares
                       
Series A convertible preferred shares (US$0.0001 par value; 44,285,710 shares authorized, 44,285,710 shares issued and outstanding)
    7,670              
Series B convertible preferred shares (US$0.0001 par value; 43,995,740 shares authorized, 43,995,740 shares issued and outstanding)
    8,520              
Series C convertible preferred share (US$0.0001 par value; 49,268,500 shares authorized, 49,268,500 shares issued and outstanding)
    31,611              
Shareholders’ (Deficit) Equity
                       
Class A common shares (US$0.0001 par value; 324,055,740 shares authorized, nil shares issued and outstanding)
                8  
Class B common shares (US$0.0001 par value; 175,944,260 shares authorized, 175,944,260 shares issued and outstanding)
    23       36       35  
Additional paid-in capital
    20,004       66,259       261,690  
Accumulated other comprehensive loss
    (1,988 )     (1,988 )     (1,988 )
Accumulated deficit
    (54,760 )     (54,760 )     (54,760 )
Total shareholders’ (deficit) equity
    (36,721 )     9,547       204,985  
Total capitalization
    11,180       9,547       204,985  
                         


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DILUTION
 
Our net tangible book value as of September 30, 2010 was approximately US$0.06 per common share and US$0.31 per ADS. Net tangible book value per common share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of common shares outstanding. Dilution is determined by subtracting net tangible book value per common share from the assumed public offering price per common share.
 
Without taking into account any other changes in such net tangible book value after September 30, 2010, other than to give effect to (1) the conversion of all of our series A, series B and series C convertible preferred shares into Class B common shares, which will occur automatically upon the completion of this offering, and (2) our issuance and sale of 13,200,000 ADSs in this offering, at the initial public offering price of US$16.00 per ADS, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised), our pro forma net tangible book value at September 30, 2010 would have been US$0.54 per outstanding common share, including Class A common shares underlying our outstanding ADSs, or US$2.70 per ADS. This represents an immediate increase in net tangible book value of US$0.48 or 757.7% per common share, or US$2.39 or 757.7% per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$2.66 or 83.1% per common share, or US$13.30 or 83.1% per ADS, to purchasers of ADSs in this offering.
 
The following table illustrates the dilution on a per common share basis based on the initial public offering price per common share of US$3.20 and all ADSs are exchanged for Class A common shares:
 
         
Assumed initial public offering price per common share
  US$ 3.20  
Net tangible book value per common share
  US$ 0.06  
Pro forma net tangible book value per common share after giving effect to the automatic conversion of all of our outstanding preferred shares
  US$ 0.04  
Pro forma net tangible book value per common share as adjusted to give effect to the automatic conversion of all of our outstanding preferred shares and this offering as of September 30, 2010
  US$ 0.54  
Amount of dilution in net tangible book value per common share to new investors in the offering
  US$ 2.66  
Amount of dilution in net tangible book value per ADS to new investors in the offering
  US$ 13.30  
         
 
Assuming the underwriters’ over-allotment option is exercised in full , our pro forma net tangible book value at September 30, 2010 would have been US$0.55 per outstanding common share, including Class A common shares underlying our outstanding ADSs, or US$2.75 per ADS. This represents an immediate increase in net tangible book value of US$0.49 or 773.0% per common share, or US$2.43 or 773.0% per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$2.65 or 82.8% per common share, or US$13.25 or 82.8% per ADS, to purchasers of ADSs in this offering.
 
The following table summarizes, on a pro forma basis as of September 30, 2010, the differences between the shareholders as of September 30, 2010 and the new investors with respect to the number of Class A common shares purchased from us, the total consideration paid and the average price per common share paid at the initial public offering price of US$16.00 per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses.
 
                         
    Common Shares
          Average Price
  Average
    Purchased   Total Consideration   Per Common
  Price Per
    Number   Percent   Amount   Percent   Share   ADS
 
Existing shareholders
  313,494,210   82.6%   43,871,906   17.2%   0.14   0.70
New investors
  66,000,000   17.4%   211,200,000   82.8%   3.20   16.00
                         
Total
  379,494,210   100.0%   255,071,906   100.0%        
                         


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The discussion and tables above also assume no exercise of any outstanding stock options outstanding as of the date of this prospectus. As of the date of this prospectus, there were 32,823,600 Class A common shares issuable upon exercise of outstanding stock options at a weighted average exercise price of US$0.604 per Class A common share, and there were 10,362,270 Class A common shares available for future issuance upon the exercise of future grants under our 2010 share incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.


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EXCHANGE RATE INFORMATION
 
Our reporting currency is the Renminbi because our business is primarily conducted in China and substantially all of our revenues are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this prospectus is based on the rate certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.8259 to US$1.00, the rate in effect as of December 31, 2009. For conversion of data in the “Industry Overview” section, translations from Renminbi to U.S. dollars were made at a rate of RMB6.7815 to US$1.00, the rate in effect as of June 30, 2010. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On December 3, 2010, the rate was RMB6.6628 to US$1.00.
 
The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.
 
                                 
    Certified Exchange Rate
Period
  Period End   Average(1)   Low   High
    (RMB per US$1.00)
 
2005
    8.0702       8.1826       8.2765       8.0702  
2006
    7.8041       7.9579       8.0702       7.8041  
2007
    7.2946       7.5806       7.8127       7.2946  
2008
    6.8225       6.9193       7.2946       6.7800  
2009
    6.8259       6.8295       6.8470       6.8176  
2010
                               
June
    6.7815       6.8184       6.8323       6.7815  
July
    6.7735       6.7762       6.7807       6.7709  
August
    6.8069       6.7873       6.8069       6.7670  
September
    6.6905       6.7396       6.8102       6.6869  
October
    6.6705       6.6675       6.6912       6.6397  
November
    6.6670       6.6538       6.6892       6.6330  
December (through December 3)
    6.6628       6.6622       6.6630       6.6609  
 
 
Source: Federal Reserve Statistical Release
 
(1) Annual averages are calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month.


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ENFORCEABILITY OF CIVIL LIABILITIES
 
We were incorporated in the Cayman Islands in order to enjoy the following benefits:
 
  •      political and economic stability;
 
  •      an effective judicial system;
 
  •      a favorable tax system;
 
  •      the absence of exchange control or currency restrictions; and
 
  •      the availability of professional and support services.
 
However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:
 
  •      the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and
 
  •      Cayman Islands companies may not have standing to sue before the federal courts of the United States.
 
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.
 
All of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. A majority of our officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
 
We have appointed Law Debenture Corporate Services Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
 
Maples and Calder, our counsel as to Cayman Islands law, and Commerce & Finance Law Offices, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to how and whether the courts of the Cayman Islands and China, respectively, would:
 
  •      recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
 
  •      entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
 
Maples and Calder has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.
 
Commerce & Finance Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other agreements with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it


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is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands.
 
In addition, it will be difficult for U.S. shareholders to originate actions against us in China under PRC law, because we are incorporated under the laws of the Cayman Islands and it is difficult for U.S. shareholders, by virtue only of holding our ADSs or Class A common shares, to establish a connection to China for a PRC court to have subject matter jurisdiction as required by the PRC Civil Procedures Law. U.S. shareholders may be able to originate actions against us in the Cayman Islands under Cayman Islands law. However, we do not have any substantial assets other than certain corporate documents and records in the Cayman Islands and it may be difficult for shareholders to enforce a judgment obtained in a Cayman Islands court in China, where substantially all of our operations are conducted.


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CORPORATE HISTORY AND STRUCTURE
 
Ms. Peggy Yu Yu and Mr. Guoqing Li, our co-founders, incorporated our holding company, E-Commerce China Co. Ltd., in the Cayman Islands in preparation for overseas fund raising in January 2000. We changed the Cayman holding company’s name to E-Commerce China Dangdang Inc. in June 2010. We refer to this entity in this prospectus as Dangdang Holding. In April 2000, Dangdang Holding obtained control of Dangdang Information.
 
Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates internet access, the distribution of online information and the conduct of online commerce through strict business licensing requirements and other government regulations. We are a Cayman Islands company and our PRC subsidiary, Dangdang Information, is considered a foreign invested enterprise. As a wholly foreign-owned enterprise, Dangdang Information is restricted from holding the licenses that are essential to the operation of our business, such as licenses for operating our website and for sales of audio and video products in China. We approved a corporate structure plan and instructed Ms. Peggy Yu Yu and Mr. Guoqing Li, our co-founders, both of whom are PRC citizens, to establish Dangdang Kewen in August 2004 in order to apply for and hold such licenses. To gain effective control over Dangdang Kewen and its subsidiaries, Dangdang Information entered into a series of contractual arrangements with Dangdang Kewen and its shareholders. Dangdang Information conducts a substantial portion of our business in China, including, for example, handling our product procurement and fulfillment operations and holding lease title to our warehouse facilities across China, while Dangdang Kewen holds the licenses for operating our website and the sales of audio and video products that Dangdang Information is restricted from undertaking under PRC law. To further develop our business, Dangdang Information established a subsidiary, Wuxi Dangdang Information, in Wuxi, China in August 2010. Wuxi Dangdang Information will support Dangdang Information in conducting our B2C e-commerce business in China. Dangdang Kewen established a wholly owned subsidiary, Wuxi Dangdang Kewen, in Wuxi in September 2010. Wuxi Dangdang Kewen will support Dangdang Kewen to conduct our B2C e-commerce business in China.
 
The following diagram illustrates our corporate structure:
 
(FLOW CHART)
 
 
(1) Each of Ms. Peggy Yu Yu and Mr. Guoqing Li, wife and husband, owns 50% of the equity interests in Dangdang Kewen.
 
We have entered into contractual arrangements with Dangdang Kewen and its shareholders described below, through which we exercise effective control over the operations of Dangdang Kewen and receive


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economic benefits generated from shareholders’ equity interests in this entity. Accordingly, we consolidate its financial results in our consolidated financial statements in accordance with U.S. GAAP. See the several risks discussed under “Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry” for a comprehensive description of the various material risks related to our corporate structure. In particular, see “Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry—Substantial uncertainties and restrictions exist with respect to the interpretation and application of PRC laws and regulations relating to online commerce and the distribution of internet content in China. If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC laws and regulations, we could be subject to severe penalties, including the shutting down of our website.”
 
Loan Agreement.  The shareholders of Dangdang Kewen, namely Ms. Peggy Yu Yu and Mr. Guoqing Li, entered into a loan agreement with Dangdang Information in December 2004, as amended and restated in July 2010. Under this loan agreement, Dangdang Information has granted an interest-free loan of RMB2.0 million to the Dangdang Kewen shareholders solely for their capital contributions to Dangdang Kewen. The term of the loan is from December 2004 until the date when Dangdang Information requests repayment. Dangdang Information may request early repayment of the loan with 30 days’ advance notice and may decide the loan to be repaid in cash or in other forms.
 
Exclusive Call Option Agreement.  The shareholders of Dangdang Kewen entered into an exclusive call option agreement with Dangdang Information in December 2004, as amended and restated in July 2010, under which the shareholders jointly and severally granted to Dangdang Information an option to purchase their equity interests in Dangdang Kewen at a purchase price equal to the capital contribution amount, unless otherwise required by PRC law or agreed in writing by the relevant parties. The purchase price can be set off against the loan repayment under the loan agreement. Dangdang Information may exercise such option at any time until it has acquired all equity interests of Dangdang Kewen, subject to applicable PRC laws.
 
Exclusive Technical Support Service Agreement.  Dangdang Information and Dangdang Kewen entered into an exclusive technical support service agreement in May 2006, as amended and restated in July 2010, under which Dangdang Kewen, including its subsidiaries or any companies or entities under its control, agrees to engage Dangdang Information as its exclusive provider of technical platform and technical support, maintenance and other services. Dangdang Kewen shall pay to Dangdang Information service fees determined based on the revenues of Dangdang Kewen. Dangdang Information shall exclusively own any intellectual property arising from the performance of this agreement. This agreement may be terminated by the parties thereto in written agreement at any time.
 
Power of Attorney.  Each shareholder of Dangdang Kewen executed an irrevocable power of attorney in July 2010 to appoint Dangdang Information as the attorney-in-fact to act on his or her behalf on all matters pertaining to Dangdang Kewen and to exercise all of his or her rights as a shareholder of Dangdang Kewen, including the right to attend shareholders meeting, to exercise voting rights and to transfer all or a part of his or her equity interests in Dangdang Kewen pursuant to the Exclusive Call Option Agreement. The power of attorney with each shareholder expires when the shareholder ceases to hold any equity interests in Dangdang Kewen.
 
Equity Pledge Agreement.  The shareholders of Dangdang Kewen entered into an equity pledge agreement with Dangdang Information in December 2004, as amended and restated in July 2010, under which the shareholders pledged all of their equity interests in Dangdang Kewen to Dangdang Information as collateral for all of their payments due to Dangdang Information and to secure performance of all obligations of Dangdang Kewen and its shareholders under the above exclusive technical support service agreement and the exclusive call option agreement. Dangdang Kewen is prohibited from declaring any dividend during the term of the pledge. If any event of default as provided for therein occurs, Dangdang Information, as the pledgee, will be entitled to request immediate repayment of the loan or to dispose of the pledged equity interests through transfer or assignment.


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Our Shareholding Structure
 
In September 2010, our shareholders approved a dual-class common share structure, pursuant to which all common shares held by our existing shareholders as of September 10, 2010, including our founders, were re-designated as Class B common shares, and our outstanding preferred shares will be automatically converted into Class B common shares upon the completion of this offering. All common shares issued thereafter, including common shares issued upon exercise of vested options or other incentive shares and common shares to be issued in this offering, will be designated as Class A common shares. We intend to maintain the dual-class common share structure after the completion of this offering. The two classes of common shares have different voting rights; each Class A common share issued and outstanding will be entitled to one vote per share and each Class B common share issued and outstanding will be entitled to ten votes per share. Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B common shares under any circumstances. Upon any transfer of Class B common shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B common shares shall be automatically and immediately converted into the equal number of Class A common shares. We do not have any outstanding Class A common shares prior to this offering.
 
The following diagram illustrates our shareholding structure immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters:
 
(CHART)


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following selected consolidated statements of operations and cash flow data for the years ended December 31, 2007, 2008 and 2009 and the selected balance sheet data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our selected consolidated balance sheet data as of December 31, 2007 has been derived from our audited consolidated financial statements not included in this prospectus. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP.
 
The selected consolidated statement of operations data for the nine months ended September 30, 2009 and 2010 and the selected consolidated balance sheet data as of September 30, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented.
 
We have not included financial information for the years ended December 31, 2005 and 2006, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2007, 2008 and 2009, and cannot be provided on a U.S. GAAP basis without unreasonable effort or expense. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following selected financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                                                         
          For the Nine Months
 
    For the Year Ended December 31,     Ended September 30,  
    2007     2008     2009     2009     2010  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for share and per share data)  
 
Selected Consolidated Statement of Operations Data:
                                                       
Net revenues:
                                                       
Product revenue
                                                       
Media
    409,023       697,681       1,297,120       193,875       915,397       1,322,065       197,603  
General merchandise
    36,894       66,829       152,976       22,865       90,908       236,162       35,298  
                                                         
      445,917       764,510       1,450,096       216,740       1,006,305       1,558,227       232,901  
Other revenue
    947       1,550       7,556       1,129       3,315       12,550       1,876  
                                                         
Total net revenues
    446,864       766,060       1,457,652       217,869       1,009,620       1,570,777       234,777  
Cost of revenues
    (365,284 )     (638,817 )     (1,129,961 )     (168,890 )     (795,380 )     (1,223,963 )     (182,940 )
                                                         
Gross profit
    81,580       127,243       327,691       48,979       214,240       346,814       51,837  
Operating expenses(1):
                                                       
Fulfillment
    (85,802 )     (120,837 )     (201,270 )     (30,083 )     (143,274 )     (198,961 )     (29,738 )
Marketing
    (35,503 )     (40,766 )     (38,473 )     (5,750 )     (27,290 )     (55,485 )     (8,293 )
Technology and content
    (17,202 )     (26,436 )     (38,989 )     (5,828 )     (26,917 )     (44,151 )     (6,599 )
General and administrative
    (20,931 )     (26,991 )     (38,021 )     (5,683 )     (26,255 )     (46,583 )     (6,963 )
                                                         
Income (loss) from operations
    (77,858 )     (87,787 )     10,938       1,635       (9,496 )     1,634       244  
                                                         
Income (loss) before income taxes
    (70,511 )     (81,757 )     16,916       2,529       (5,233 )     5,567       832  
Net income (loss)
    (70,511 )     (81,757 )     16,916       2,529       (5,233 )     15,980       2,388  
                                                         
Deemed dividend on Series C convertible preferred shares
                                  (1,779 )     (266 )
                                                         
Net (loss) income attributable to common shareholders
    (70,511 )     (81,757 )     16,916       2,529       (5,233 )     14,201       2,122  
                                                         
Loss per common share:
                                                       
Basic
    (0.40 )     (0.47 )     (2)     (2)     (0.03 )     (2)     (2)
Diluted
    (0.40 )     (0.47 )     (2)     (2)     (0.03 )     (2)     (2)


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          For the Nine Months
 
    For the Year Ended December 31,     Ended September 30,  
    2007     2008     2009     2009     2010  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for share and per share data)  
 
Weighted average number of common shares used in per share calculations:
                                                       
Basic
    175,644,260       175,644,260       175,644,260       175,644,260       175,644,260       175,764,040       175,764,040  
Diluted
    175,644,260       175,644,260       175,644,260       175,644,260       175,644,260       175,764,040       175,764,040  
Pro forma earnings per common share—unaudited:
                                                       
Basic
                                            0.05       0.01  
Diluted
                                            0.04       0.01  
Weighted average number of common shares used in pro forma per share calculations—unaudited:
                                                       
Basic
                                            313,313,990       313,313,990  
Diluted
                                            332,956,840       332,956,840  
 
 
Notes:
 
(1) Share-based compensation expenses were allocated in operating expenses as follows:
 
                                                         
    For the Year Ended December 31,   For the Nine Months Ended September 30,
    2007   2008   2009   2009   2010
    RMB   RMB   RMB   US$   RMB   RMB   US$
    (in thousands)
 
Fulfillment
    517       469       764       114       556       784       117  
Marketing
    111       105       131       20       95       161       24  
Technology and content
    266       270       479       71       329       573       86  
General and administrative
    2,746       1,519       2,623       392       1,840       6,138       917  
                                                         
Total share-based compensation expenses
    3,640       2,363       3,997       597       2,820       7,656       1,144  
                                                         
 
(2) Each holder of series A, series B and series C convertible preferred shares is entitled to dividends at the rate of US$0.0112, US$0.0172 and US$0.0438 per share per annum (as adjusted for any stock dividends, combinations or splits with respect to such shares), respectively, prior and in preference to any declaration or payment of any dividend (payable other than in common shares) on the common shares. Prior to June 2010, each holder of series C convertible preferred shares was entitled to dividends at the rate of US$0.0534 per share per annum. For each of the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010, the basic and diluted losses per share were calculated using the two class method taking into consideration of the deemed dividends that each preferred shareholder is entitled to.
 

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    As of December 31,     As of September 30,  
    2007     2008     2009     2010  
    RMB     RMB     RMB     US$     RMB     US$     US$
    US$
 
                                        Pro forma
    Pro forma
 
                                        (Unaudited)(1)     as adjusted
 
                                              (Unaudited)(2)  
    (in thousands)  
 
Selected Consolidated Balance Sheet Data:
                                                               
Cash and cash equivalents
    63,531       66,509       75,759       11,323       198,652       29,692       29,692       226,826  
Held-to-maturity investments
    102,000       50,000       90,000       13,452       95,000       14,199       14,199       14,199  
Inventories
    169,617       300,813       540,744       80,823       930,521       139,081       139,081       139,081  
Accounts receivable (net of allowance for doubtful accounts of nil as of December 31, 2007, 2008 and 2009 and September 30, 2010, respectively)
    7,925       8,025       11,764       1,758       13,224       1,977       1,977       1,977  
Total assets
    379,564       463,821       800,905       119,709       1,372,726       205,175       203,642       400,776  
Accounts payable
    235,883       372,253       618,062       92,379       1,112,770       166,321       166,321       166,321  
Convertible preferred shares:
                                                               
Series A
    51,314       51,314       51,314       7,670       51,314       7,670              
Series B
    57,001       57,001       57,001       8,520       57,001       8,520              
Series C
    209,716       209,716       209,716       31,345       211,495       31,611              
Common shares
    151       151       151       23                          
Class A common shares
                                              8  
Class B common shares
                            151       23       36       35  
Accumulated deficit
    (315,726 )     (397,483 )     (380,567 )     (56,882 )     (366,366 )     (54,760 )     (54,760 )     (54,760 )
Total shareholders’ (deficit) equity
    (210,768 )     (291,443 )     (270,543 )     (40,436 )     (245,675 )     (36,721 )     9,547       204,985  
 
 
Notes:
 
(1) The consolidated balance sheet data as of September 30, 2010 are adjusted to give effect to the automatic conversion of all of our outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares immediately upon the completion of this offering.
 
(2) The consolidated balance sheet data as of September 30, 2010 are adjusted to give effect to (i) the automatic conversion of all of our outstanding series A, series B and series C convertible preferred shares into 137,549,950 Class B common shares immediately upon the completion of this offering; and (ii) the issuance and sale of 66,000,000 Class A common shares in the form of ADSs by us in this offering, and the sale of 15,623,340 Class A common shares, which will be automatically converted from 15,623,340 Class B common shares immediately upon the completion of this offering, by certain selling shareholders, at the initial public offering price of US$16.00 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
                                                         
    For the Year Ended December 31,   For the Nine Months Ended September 30,
    2007   2008   2009   2009   2010
    RMB   RMB   RMB   US$   RMB   RMB   US$
    (in thousands)
 
Selected Cash Flow Data:
                                                       
Net cash (used in) provided by operating activities
    (39,660 )     (37,417 )     72,091       10,775       154,352       169,291       25,303  
Net cash (used in) provided by investing activities
    (114,812 )     41,675       (62,828 )     (9,391 )     (160,700 )     (45,610 )     (6,817 )
Net cash provided by (used in) financing activities
          166                         (619 )     (92 )
Net (decrease) increase in cash and cash equivalents
    (156,088 )     2,978       9,250       1,382       (6,367 )     122,893       18,369  
Cash and cash equivalents at beginning of year/period
    219,619       63,531       66,509       9,941       66,509       75,759       11,323  
Cash and cash equivalents at end of year/period
    63,531       66,509       75,759       11,323       60,142       198,652       29,692  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We are a leading B2C e-commerce company in China. We launched our website dangdang.com in 1999. On our website, we sell books and other media products and general merchandise that we source from suppliers in China and operate the dangdang.com marketplace program, through which third-party merchants sell general merchandise alongside our products.
 
We have developed a large and loyal customer base through our continuing focus on creating a user-friendly online shopping experience for our customers. We had six million active customers in 2009. Our average daily unique visitors increased from approximately 910,000 in 2009 to 1,240,000 in the nine months ended September 30, 2010. Our average daily unique visitors further increased to 1,610,000 in September 2010.
 
We generate product revenues from selling books and other media products and general merchandise products to customers. Product revenues constituted most of our net revenues in the three years ended December 31, 2009 and the nine months ended September 30, 2010. Since our inception, we have focused on selling books online. As of September 30, 2010, we offered approximately 590,000 book titles on our website, including more than 570,000 Chinese language titles, which we believe is the largest selection of Chinese language titles available both online and offline from a single retailer in China. We currently generate most of our product revenues from selling books and other media products. In 2005, we began to sell general merchandise products and have gradually expanded our general merchandise product offerings to beauty and personal care products, home and lifestyle products, and baby, children and maternity products and other products. Product revenues from selling general merchandise to our customers have comprised a relatively small portion of our product revenues in the past. In July 2009, we launched the dangdang.com marketplace program whereby we charge third-party merchants service fees for selling their general merchandise on our website.
 
We have grown significantly since we commenced our operations. Our total net revenues increased from RMB446.9 million in 2007 to RMB1,457.7 million (US$217.9 million) in 2009, representing a CAGR of 80.6%. For the nine months ended September 30, 2010, our total net revenues amounted to RMB1,570.8 million, representing a 55.6% increase from RMB1,009.6 million for the nine months ended September 30, 2009. We incurred a net loss of RMB70.5 million in 2007 and a net loss of RMB81.8 million in 2008. We achieved a net profit of RMB16.9 million (US$2.5 million) in 2009 and a net profit of RMB16.0 million (US$2.4 million) for the nine months ended September 30, 2010.
 
Factors Affecting Our Results of Operations
 
Our business and operating results are affected by general factors affecting China’s B2C e-commerce market, which include China’s overall economic growth, per capita disposable income and consumer spending, growth of internet penetration and B2C e-commerce, and government policies and initiatives affecting online commerce. Unfavorable changes in any of these general industry conditions could negatively affect demand for products and negatively and materially affect our results of operations.
 
Our operating results are more directly affected by company-specific factors, including:
 
  •      our ability to obtain new customers at reasonable cost;
 
  •      our ability to increase spending per customer;
 
  •      our ability to control product sourcing costs, fulfillment and other operating expenses;


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  •      our product selection and pricing; and
 
  •      our ability to compete effectively.
 
Total net revenues
 
We generate product revenues primarily through the sale of books and other media products, and to a lesser extent, the sale of general merchandise products directly to customers by us through our dangdang.com website. Sales revenues from these products are recorded less discounts and return allowances. We also generate revenues from service fees charged to third-party merchants under our dangdang.com marketplace program. Our revenues are net of value-added and business taxes.
 
To understand product revenues generated from our product sales, we monitor and strive to improve the following key business metrics:
 
  •      Total number of active customers.  We define active customers for a given period as customers who have purchased products offered by us at dangdang.com at least once during that period.
 
  •      Total number of orders.  We closely monitor the total number of orders as an indicator of revenue trends.
 
Our revenues from product sales are classified into two categories: (1) media products, which includes books and other media products, and (2) general merchandise. The following table sets forth our revenues derived from each of these categories as well as other revenues from third-party merchants, both in absolute amount and as a percentage of total net revenues, for the periods presented.
 
                                                                                                 
    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  
 
Net revenues:
                                                                                               
Product revenue
                                                                                               
Media
    409,023       91.5       697,681       91.1       1,297,120       193,875       89.0       915,397       90.7       1,322,065       197,603       84.2  
General merchandise
    36,894       8.3       66,829       8.7       152,976       22,865       10.5       90,908       9.0       236,162       35,298       15.0  
Other revenue
    947       0.2       1,550       0.2       7,556       1,129       0.5       3,315       0.3       12,550       1,876       0.8  
                                                                                                 
Total net revenues
    446,864       100.0       766,060       100.0       1,457,652       217,869       100.0       1,009,620       100.0       1,570,777       234,777       100.0  
                                                                                                 
 
Since our inception, we have primarily focused on selling books online and historically most of our total net revenues have been derived from the sale of books and other media products. We expect that sales of books and other media products will continue to grow and comprise a majority of our total net revenues in the near future. In the meantime, we have increased the marketing of various general merchandise products and will continue to expand our product offerings to gradually diversify our revenue sources. Our revenues from sales of general merchandise products increased at a higher rate than our revenues from sales of media products in each of the three years ended December 31, 2009 and in the nine months ended September 30, 2010. As a result, our revenues from sales of media products, as a percentage of our total net revenues, have decreased in each of the relevant fiscal periods, while our revenues from sales of general merchandise products, as a percentage of our total net revenues, increased over the same periods. We expect that this trend will continue in the near future as we further expand our general merchandise business.
 
Cost of Revenues
 
Our cost of revenues consists primarily of the cost of products sold by us and packaging material costs. We receive from certain of our suppliers’ cash consideration, including rebates for products we sell over a period of time as well as fees paid by the suppliers during the year. We record these amounts as reductions to cost of revenues. We anticipate that our cost of revenues will continue to increase as we further expand our business operations and product offerings.


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Operating Expenses
 
Our operating expenses consist of fulfillment expenses, marketing expenses, technology and content expenses and general and administrative expenses. Share-based compensation expenses are included in our operating expenses when incurred. Our operating expenses have been growing in absolute terms but have decreased as a percentage of our net revenues due to increased economies of scale. We expect that operating expenses will increase as we expand our product offerings, further promote our general merchandise products, further improve our information technology systems, hire additional personnel and incur costs related to the anticipated growth of our business and our operation as a public company upon completion of this offering.
 
Fulfillment
 
Fulfillment expenses represent those costs incurred in our outbound shipping operations, and costs associated with our fulfillment and customer service centers including (1) buying, receiving, inspecting and warehousing inventory, (2) picking, packing and preparing customer orders for shipment, and (3) operating our customer service center. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations.
 
Marketing
 
Marketing expenses consist primarily of advertising costs, promotion costs, payroll and related expenses for personnel engaged in marketing, business development and selling activities.
 
Technology and Content
 
Technology and content expenses consist primarily of payroll and related expenses for employees involved in editorial content and system support, as well as costs and depreciation expenses associated with the computing, storage and telecommunications infrastructure for internal use that supports our web services.
 
General and Administrative
 
General and administrative expenses consist primarily of payroll and related expenses for employees involved in general corporate functions, including (1) accounting, finance, tax, legal and human relations, (2) expenses associated with use by these functions of facilities and equipment, such as depreciation expenses and rentals, and (3) professional fees and other general corporate expenses.
 
Taxation
 
Cayman Islands.  Our holding company in the Cayman Islands is not subject to income or capital gains tax.
 
PRC.  Until the end of 2007, our PRC subsidiaries and affiliated entities were generally subject to PRC income tax at the statutory rate of 33% on their PRC taxable income, absent preferential tax treatment. Beginning in 2008, the new PRC Enterprise Income Tax Law applied a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. Our PRC subsidiaries and affiliated entities are both subject to income tax at a rate of 25% since 2008.
 
Dividends.  Under the PRC Enterprise Income Tax Law, dividends from our PRC subsidiaries out of earnings generated after the new law came into effect on January 1, 2008, are subject to a withholding tax of 20%, although under the detailed implementation rules to the PRC Enterprise Income Tax Law promulgated by the State Council of the PRC the withholding tax rate is currently 10%. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Dividend payments are not subject to withholding tax in the Cayman Islands.


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Tax residence.  Under the PRC Enterprise Income Tax Law, enterprises that are established under the laws of foreign countries or regions and whose “de facto management bodies” are located within PRC territory are considered PRC resident enterprises and are subject to the PRC enterprise income tax at the rate of 25% on their worldwide income. “De facto management bodies” are defined under the implementation rules as the bodies that have material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. We cannot assure you that we will not be deemed to be a PRC resident enterprise and subject to the PRC enterprise income tax at the rate of 25% on our worldwide income. See “Risk Factors—Risks Related to Doing Business in China—Under the PRC enterprise income tax law, we may be classified as a PRC ’resident enterprise,’ which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.”
 
Internal Control Over Financial Reporting
 
Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of and for the year ended December 31, 2009, we and our independent registered public accounting firm identified one “material weakness” in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified related to the lack of personnel with U.S. GAAP expertise in the preparation of our financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements. We have implemented a number of measures to address the material weakness that has been identified, including hiring a chief financial officer, a senior financial reporting director and a financial reporting manager with U.S. GAAP and SEC reporting experience in 2010. We will continue to recruit experienced personnel to build a strong accounting and finance team. However, we cannot assure you that we will complete such implementation in a timely manner. See “Risk Factors—Risks Related to Our Business—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.”
 
Critical Accounting Policies
 
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
 
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies, and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus.


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Inventories
 
Inventories, consisting primarily of products available for sale and packaging materials, are accounted for using the first-in first-out method, and are valued at the lower of cost or market. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product suppliers, or liquidations, and expected recoverable values of each disposition category.
 
We provide fulfillment-related services in connection with certain of our dangdang.com marketplace program. Under this program, third-party sellers maintain ownership of their inventory, regardless of whether fulfillment is provided by us or the third-party seller, and therefore these products are not included in our inventories.
 
Share-Based Compensation
 
We have adopted FASB Accounting Standards Codification (“ASC”) 718, “Compensation-Stock Compensation,” to account for employee share-based compensation. In accordance with ASC 718, we determine whether a share option should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employees classified as equity awards are recognized in the financial statements based on their grant date fair values which are calculated using an option pricing model. We have elected to recognize compensation expense using the straight-line method for all employee equity awards granted with graded vesting based on service conditions. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest.
 
We have adopted two share incentive plans in 2004 and 2010, respectively. Under the 2004 plan, we may issue option awards to our directors, employees and other eligible persons. The exercise price, vesting and other conditions of individual awards are determined by the board of directors of our company and our executive chairwoman within the scope authorized by the board. Typically the awards are subject to three to four years’ service vesting condition and expire approximately 10 years after the grant date. Upon effectiveness of the 2010 plan, no options or other incentive shares may be granted under the 2004 plan. Under the 2010 plan, we may issue restricted share units, restricted shares and options awards to our directors, employees and other eligible persons. As of the date of this prospectus, no share-based awards have been granted under the 2010 plan.
 
We had the following option grants in 2008, 2009 and for the nine months ended September 30, 2010:
 
                         
            Fair Value Per
    Number of Class A
  Exercise Price
  Class A
    Common Shares Underlying
  Per Share
  Common Share at
Grant Date
  Options Grant   (US$)   the Grant Date (US$)
 
January 10, 2008—April 25, 2008
    4,830,000       0.466       0.221  
September 2, 2008
    380,000       0.822       0.328  
February 12, 2009—May 21, 2009
    2,940,000       0.822       0.573  
July 7, 2009—December 31, 2009
    3,795,000       0.822       0.709  
March 31, 2010
    4,320,000       0.822       0.894  
June 30, 2010
    6,250,500       1.20       0.894  
 
The fair value of each option award was estimated by us using the binomial option pricing model, with assistance from an independent third-party appraiser. We estimated the fair value of the options awarded on March 31, 2010 with reference to that of the options awarded on June 30, 2010, which was determined based on the valuation performed by the independent third-party appraiser. We believe the fair value of the options granted on June 30, 2010 is a good estimation of the fair value of the options awarded on March 31, 2010. We are ultimately responsible for the determination of all amounts related to share-based compensation recorded in the financial statements. The volatility assumption was estimated based on the price volatility of the shares of


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comparable companies because our company was not a public company at the grant date and therefore did not have data to calculate expected volatility of the price of the underlying Class A common shares over the expected term of the option. The risk-free rate was based on the market yield of U.S. dollar denominated PRC government bonds with maturity terms equal to the term of the option awards. The sub optimal early exercise factor was estimated based on the vesting and contractual terms of the awards and management’s expectation of exercise behavior of the grantees. Forfeitures were estimated based on historical experience.
 
The following table presents the assumptions used to estimate the fair values of the share options granted in the periods presented:
 
                 
                For the nine months
                ended September 30,
    2007   2008   2009   2010
 
Expected volatility range
  73.8%   76.4%—76.3%   77.8%—74.5%   70.5%
Risk-free interest rate
  3.0%   4.6%—4.1%   3.1%—3.7%   4.1%
Dividend yield
  0%   0%   0%   0%
Sub optimal early exercise factor
  1.5   1.5   1.5   1.5
 
The total share-based compensation expense during the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010 was RMB3.6 million, RMB2.4 million, RMB4.0 million (US$0.6 million) and RMB7.7 million (US$1.1 million), respectively.
 
In our determination of share-based compensation expenses for options granted for the two years ended December 31, 2009 and the nine months ended September 30, 2010 under the 2004 plan, we used the discounted cash flow method of the income approach as the primary approach and market approach as a second check to determine the fair value of our common shares at each grant date. This is consistent with the recommendations of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation (the “Practice Aid”). As our securities are not publicly traded or subject to any market evaluation of fair market value, we utilized valuation methodologies commonly used in the valuation of private company equity securities.
 
For the discounted cash flow method, we forecasted our free cash flows annually through the five years commencing from the valuation date and discounted them to their present value using discount rates of 25.5% to 18% to reflect the risks associated with achieving those forecasts as well as the time value of money. To reflect our business’s going-concern nature, we also considered a terminal value by assuming a terminal growth rate.
 
We used the option pricing method to allocate equity value to preferred and common shares, taking into account the guidance prescribed by the Practice Aid. The method treats common shares and preferred shares as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred shares. We considered the rights and privileges of each security, including such factors as liquidation rights, conversion rights, and the manner in which each security affects the others. We used two scenarios to value the Class A common shares. One scenario assumed an initial public offering in which the preferred shares would lose their liquidation preference and participation rights upon automatic conversion. A second scenario assumed there would be no initial public offering and the preferred shares would retain their rights and privileges. The probability of the two scenarios represents our expectations in addition to other outside factors such as the condition of the capital markets and the potential for our receiving a competitive merger and acquisition offer in lieu of an initial public offering. These estimates are consistent with the plans and estimates that we use to manage the business. We applied a marketability discount rate from 32% to 13% to reflect the lack of marketability of our Class A common shares.
 
Determining the fair value of our common shares required us to make complex and subjective judgments, assumptions, and estimates, which involved inherent uncertainty. Had our management used different assumptions and estimates, the resulting fair value of our common shares and the resulting share-based compensation expenses could have been different.


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We believe that the increase in the fair value of our Class A common shares from US$0.573 per Class A common share as of May 21, 2009 to US$0.709 per Class A common share as of December 31, 2009 was primarily attributable to the following factors:
 
  •      We reached profitability for the first time by the end of 2009, a key milestone in our history.
 
  •      Our actual performance in 2009 demonstrated the execution capabilities of our management in achieving our internal forecasts. This reduced the perceived risk of realizing the financial forecast going forward and thus a reduced discount rate was used in the valuation as of December 31, 2009.
 
We believe that the increase in the fair value of our Class A common shares from US$0.709 per Class A common share as of December 31, 2009 to US$0.894 per Class A common share as of June 30, 2010 was primarily attributable to the following factors:
 
  •      Our total net revenues reached RMB964.1 million in the six months ended June 30, 2010, representing a 55.4% increase in net revenues for the same period in 2009.
 
  •      We experienced steady improvements in our business operations from December 31, 2009 to June 30, 2010, including our acquiring two million new customers, increasing the average daily unique visitors by approximately 350,000 and opening three new distribution centers during this period.
 
  •      We hired Roger Huang, who has over 20 years’ experience in retail and e-commerce industry in China, as our chief operating officer and Conor Chia-hung Yang, who has over 15 years’ experience in finance, as our chief financial officer in March 2010.
 
We used the discounted cash flow method of the income approach to determine the fair value of our Class A common shares, consistent with the Practice Aid, for the purposes of assessing the grant date fair value of the share options for the three years ended December 31, 2009 and the six months ended June 30, 2010. As we have not had any option or other equity issuance or other events that would require a fair value assessment of our common shares since June 30, 2010, we did not engage the independent third-party appraiser to perform a fair value assessment as of a recent date. For the purposes of pricing our Class A common shares to be offered in this offering, we employed the guideline company method of market approach, which is commonly used by similar companies in pricing their common shares for initial public offerings. We compare our trading multiples with the trading multiples of publicly traded guideline companies and take into consideration the macroeconomic environment, market sentiment and equity market performance to derive the fair value of our Class A common shares. The trading performance of the guideline companies has also improved significantly since June 30, 2010, resulting in the expansion in their respective trading multiples and the increase in the fair value of our common shares since June 30, 2010. In addition, our improved operating and financial performance subsequent to June 30, 2010 provided more visibility and credibility in our valuation metrics based on future financial periods. Therefore, we believe that the guideline company method of market approach appropriately reflects the fair market value of our common shares at the time of the initial public offering. However, the fair market value of our common shares at the time of our initial public offering does not necessarily reflect our business fundamentals or financial condition. See “Risk Factors—Risks Relating to Our ADSs and This Offering—An active trading market for our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.” We believe that the increase in the fair value of our Class A common shares from US$0.894 per Class A common share as of June 30, 2010 to the initial public offering price of US$3.20 per Class A common share, or US$16.00 per ADS, was primarily attributable to the following market factors:
 
  •      U.S. publicly traded companies with operations primarily in China have recently benefited from the positive economic outlook, improved U.S. and global capital markets and strong investor demand. The number of initial public offerings in the U.S. by China-based issuers increased by nearly three times from the first half of 2010 to the period from July 1, 2010 to December 2010, and the share prices of these issuers generally showed significant improvements since July 1, 2010, significantly outperforming the overall stock performance of all issuers listed in the U.S. in recent months.


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  •      Investors have shown strong demand for our ADSs during our offering process as we are a leading B2C e-commerce company in China focused on selling books and other media products as well as selected general merchandise categories solely online and there is no other China-based internet company listed in the U.S. with a business model substantially similar as ours. In addition, other high profile China-based internet companies with different business models have experienced substantial increases in their market capitalization since their initial public offerings. For example, the trading price of ADSs of Baidu, Inc., the leading Chinese language internet search provider listed on NASDAQ, has increased by over 40 times since its initial public offering five years ago.
 
  •      Improvement in the overall global economic outlook and the performance of the U.S. and global capital markets since June 30, 2010 has contributed to the increase in value of our Class A common shares. For example, the NASDAQ Composite Index increased by 22.9% from June 30, 2010 to December 3, 2010, following a decline of over 7.0% from January 1, 2010 to June 30, 2010. The stock price of Amazon.com, which we consider as our guideline company in the U.S., increased from US$109.26 as of June 30, 2010 to US$175.68 as of December 3, 2010, representing an increase of 60.8%.
 
In addition, the increase in the fair value of our Class A common shares from US$0.894 per Class A common share as of June 30, 2010 to US$3.20 per Class A common share was, to a much lesser extent, attributable to the following developments of our company:
 
  •      Our net revenues increased by 17.7% to RMB606.7 million in the third quarter of 2010 from RMB515.7 million in the previous quarter.
 
  •      During the third quarter of 2010, we acquired 1.4 million new customers, representing an approximately 28% sequential quarter-over-quarter increase, compared to 1.1 million during the previous quarter. The significant increase in new customers evidenced our ability to continuously expand our active customer base and achieve revenue growth.
 
  •      We have launched a number of business initiatives since June 30, 2010, including warehouse space upgrades, distribution center expansion and next-day delivery services, that contributed to the further enhancement of the overall user experience of our services. In addition, we began to formulate our electronic book development plans in October 2010 in light of recent industry developments.
 
  •      The imminent launch of this offering will provide us with additional capital and enhance our ability to access capital markets to grow our business, raise our profile and provide our shareholders with greater liquidity.
 
Income Taxes
 
We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
 
On January 1, 2007, we adopted ASC 740, Income taxes (Pre-codification: FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109), to account for uncertainties in income taxes. There was no cumulative effect of the adoption of ASC 740 to beginning retained earnings. Interest and penalties recognized in accordance with ASC 740 is classified in the consolidated statements of operations as income tax expense.
 
In accordance with the provisions of ASC 740, we recognize in our financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are


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measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. Our estimated liability for unrecognized tax benefits, which have not affected the income tax expenses for the three years ended December 31, 2009 and the nine months ended September 30, 2010 due to tax losses carried forward, may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.
 
Results of Operations
 
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.
 
                                                                                         
    For the Year Ended December 31,     For the Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
          % of
          % of
                % of
                      % of
 
          Total Net
          Total Net
                Total Net
                      Total Net
 
    RMB     Revenues     RMB     Revenues     RMB     US$     Revenues     RMB     RMB     US$     Revenues  
                                              (unaudited)  
    (in thousands, except percentages)  
 
Net revenues:
                                                                                       
Product revenue
                                                                                       
Media
    409,023       91.5 %     697,681       91.1 %     1,297,120       193,875       89.0 %     915,397       1,322,065       197,603       84.2 %
General merchandise
    36,894       8.3 %     66,829       8.7 %     152,976       22,865       10.5 %     90,908       236,162       35,298       15.0 %
                                                                                         
      445,917       99.8 %     764,510       99.8 %     1,450,096       216,740       99.5 %     1,006,305       1,558,227       232,901       99.2 %
Other revenue
    947       0.2 %     1,550       0.2 %     7,556       1,129       0.5 %     3,315       12,550       1,876       0.8 %
                                                                                         
Total net revenues
    446,864       100.0 %     766,060       100.0 %     1,457,652       217,869       100.0 %     1,009,620       1,570,777       234,777       100.0 %
Cost of revenues
    (365,284 )     (81.7 )%     (638,817 )     (83.4 )%     (1,129,961 )     (168,890 )     (77.5 )%     (795,380 )     (1,223,963 )     (182,940 )     (77.9 )%
                                                                                         
Gross profit
    81,580       18.3 %     127,243       16.6 %     327,691       48,979       22.5 %     214,240       346,814       51,837       22.1 %
Operating expenses(1):
                                                                                       
Fulfillment
    (85,802 )     (19.2 )%     (120,837 )     (15.8 )%     (201,270 )     (30,083 )     (13.8 )%     (143,274 )     (198,961 )     (29,738 )     (12.7 )%
Marketing
    (35,503 )     (8.0 )%     (40,766 )     (5.3 )%     (38,473 )     (5,750 )     (2.6 )%     (27,290 )     (55,485 )     (8,293 )     (3.5 )%
Technology and content
    (17,202 )     (3.8 )%     (26,436 )     (3.5 )%     (38,989 )     (5,828 )     (2.7 )%     (26,917 )     (44,151 )     (6,599 )     (2.8 )%
General and administrative
    (20,931 )     (4.7 )%     (26,991 )     (3.5 )%     (38,021 )     (5,683 )     (2.6 )%     (26,255 )     (46,583 )     (6,963 )     (3.0 )%
                                                                                         
Total operating expenses
    (159,438 )     (35.7 )%     (215,030 )     (28.1 )%     (316,753 )     (47,344 )     (21.7 )%     (223,736 )     (345,180 )     (51,593 )     (22.0 )%
                                                                                         
Income (loss) from operations
    (77,858 )     (17.4 )%     (87,787 )     (11.5 )%     10,938       1,635       0.8 %     (9,496 )     1,634       244       0.1 %
Interest income
    6,570       1.5 %     7,740       1.0 %     5,418       810       0.4 %     3,122       5,719       855       0.3 %
Other income (expenses), net
    777       0.2 %     (1,710 )     (0.2 )%     560       84       0.0 %     1,141       (1,786 )     (267 )     (0.1 )%
                                                                                         
Total non-operating income
    7,347       1.7 %     6,030       0.8 %     5,978       894       0.4 %     4,263       3,933       588       0.3 %
                                                                                         
Income (loss) before income taxes
    (70,511 )     (15.7 )%     (81,757 )     (10.7 )%     16,916       2,529       1.2 %     (5,233 )     5,567       832       0.3 %
Income tax benefit
                                                      10,413       1,556       0.7 %
Net income (loss)
    (70,511 )     (15.7 )%     (81,757 )     (10.7 )%     16,916       2,529       1.2 %     (5,233 )     15,980       2,388       1.0 %
                                                                                         
Deemed dividend on Series C convertible preferred shares
                                                    (1,779 )     (266 )     (0.1 )%
                                                                                         
Net (loss)\income attributable to common shareholders
    (70,511 )     (15.7 )%     (81,757 )     (10.7 )%     16,916       2,529       1.2 %     (5,233 )     14,201       2,122       0.9 %
                                                                                         


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(1)
Includes share-based compensation expenses as follows:
                                                                                         
    For the Year Ended December 31,   For the Nine Months Ended September 30,
    2007   2008   2009   2009   2010
        % of
      % of
          % of
              % of
        Total Net
      Total Net
          Total Net
              Total Net
    RMB   Revenues   RMB   Revenues   RMB   US$   Revenues   RMB   RMB   US$   Revenues
    (in thousands, except percentages)
 
Fulfillment
    517       0.1 %     469       0.1 %     764       114       0.1 %     556       784       117       0.1 %
Marketing
    111       0.0 %     105       0.0 %     131       20       0.0 %     95       161       24       0.0 %
Technology and content
    266       0.0 %     270       0.0 %     479       71       0.0 %     329       573       86       0.0 %
General and administrative
    2,746       0.6 %     1,519       0.2 %     2,623       392       0.2 %     1,840       6,138       917       0.4 %
                                                                                         
Total share-based compensation expenses
    3,640       0.7 %     2,363       0.3 %     3,997       597       0.3 %     2,820       7,656       1,144       0.5 %
                                                                                         
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
Total net revenues.  Our total net revenues increased by 55.6% from RMB1,009.6 million for the nine months ended September 30, 2009 to RMB1,570.8 million (US$234.8 million) for the nine months ended September 30, 2010. This increase was primarily attributable to increases in product revenues from sales of our media and general merchandise products.
 
Revenues from sales of books and other media products increased by 44.4% from RMB915.4 million for the nine months ended September 30, 2009 to RMB1,322.1 million (US$197.6 million) for the nine months ended September 30, 2010 and product revenues from sales of general merchandise products increased by 159.8% from RMB90.9 million to RMB236.2 million (US$35.3 million) during the same period. Other revenues increased by 278.6% from RMB3.3 million for the nine months ended September 30, 2009 to RMB12.6 million (US$1.9 million) for the nine months ended September 30, 2010, primarily as a result of the increase of revenues generated from the dangdang.com marketplace program which was launched in July 2009.
 
The increase in revenues was primarily attributable to the increased number of active customers and orders. The total number of active customers and orders amounted to 6.8 million and 20.8 million, respectively, for the nine months ended September 30, 2010, as compared to 4.8 million and 15.6 million, respectively, for the nine months ended September 30, 2009. The increase in the number of active customers was largely due to an increase in the number of new customers from 2.8 million for the nine months ended September 30, 2009 to 3.4 million for the nine months ended September 30, 2010 and the enlarged active customer base as a result of our ability to retain existing customers.
 
Cost of revenues.  Our cost of revenues increased by 53.9% from RMB795.4 million for the nine months ended September 30, 2009 to RMB1,224.0 million (US$182.9 million) for the nine months ended September 30, 2010, primarily due to increases in the volume of media and general merchandise products we sold.
 
Gross profit.  Our gross profit increased by 61.9% from RMB214.2 million for the nine months ended September 30, 2009 to RMB346.8 million (US$51.8 million) for the nine months ended September 30, 2010 and our gross margin increased from 21.2% to 22.1% during the same periods. The increase was primarily attributable to the recognition of promotion fees charged to suppliers for services provided during the nine-month period ended September 30, 2010. In 2009, promotion fees were an annual program which were contractually agreed with suppliers and recognized in the fourth quarter. Starting from 2010, promotion fees became a quarterly arrangement and were contractually agreed with suppliers in the third quarter of the year.
 
Fulfillment expenses.  Our fulfillment expenses increased by 38.9% from RMB143.3 million for the nine months ended September 30, 2009 to RMB199.0 million (US$29.7 million) for the nine months ended September 30, 2010, primarily due to increased sales volume. Our fulfillment expenses as a percentage of total net revenues decreased from 14.2% to 12.7% during the same period, primarily due to the significant increase in the number of orders which enabled us to negotiate better pricing terms with third-party couriers.
 
Marketing expenses.  Our marketing expenses increased by 103.3% from RMB27.3 million for the nine months ended September 30, 2009 to RMB55.5 million (US$8.3 million) for the nine months ended September 30, 2010. Our marketing expenses as a percentage of total net revenues increased from 2.7% to


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3.5% during the same periods, primarily due to our increased spending on marketing activities in line with our business expansion.
 
Technology and content expenses.  Our technology and content expenses increased by 64.0% from RMB26.9 million for the nine months ended September 30, 2009 to RMB44.2 million (US$6.6 million) for the nine months ended September 30, 2010. Our technology and content expenses as a percentage of total net revenues increased slightly from 2.7% to 2.8% during the same periods. The increase in our technology and content expenses was primarily due to the increased headcount in our technology department from 120 as of September 30, 2009 to 202 as of September 30, 2010 and the upgrade of our technology infrastructure.
 
General and administrative expenses.  Our general and administrative expenses increased by 77.4% from RMB26.3 million for the nine months ended September 30, 2009 to RMB46.6 million (US$7.0 million) for the nine months ended September 30, 2010. Our general and administrative expenses as a percentage of total net revenues increased from 2.6%to 3.0% during the same periods. The increase in general and administrative expenses was primarily due to an increase in the number of personnel performing general and administrative functions, especially senior management personnel, from 74 as of September 30, 2009 to 128 as of September 30, 2010.
 
Interest income.  Our interest income increased by 83.2% from RMB3.1 million for the nine months ended September 30, 2009 to RMB5.7 million (US$0.9 million) for the nine months ended September 30, 2010, primarily due to the increased amount of bank deposits.
 
Net income (loss).  As a result of the above, we had net income of RMB16.0 million (US$2.4 million), or 1.0% of total net revenues, for the nine months ended September 30, 2010, as compared to a net loss of RMB5.2 million for the nine months ended September 30, 2009.
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Total net revenues.  Our total net revenues increased by 90.3% from RMB766.1 million in 2008 to RMB1,457.7 million (US$217.9 million) in 2009. This increase was primarily due to increased product revenues from sales of our media and general merchandise products.
 
Revenues from sales of books and other media products increased by 85.9% from RMB697.7 million in 2008 to RMB1,297.1 million (US$193.9 million) in 2009 and product revenues from sales of general merchandise products increased by 129.0% from RMB66.8 million in 2008 to RMB153.0 million (US$22.9 million) in 2009. Other revenues increased by 387.5% from RMB1.6 million in 2008 to RMB7.6 million (US$1.1 million) as we launched our dangdang.com marketplace program in 2009.
 
The increases in revenues resulted primarily from increases in the number of our active customers and the total number of orders. The number of active customers increased from 3.4 million in 2008 to 6.0 million in 2009 and the total number of orders increased from 9.8 million in 2008 to 22.2 million in 2009. The increase in the number of our active customers was largely attributable to an increase in the number of new customers from 2.3 million in 2008 to 3.9 million in 2009.
 
Cost of revenues.  Our cost of revenues increased by 76.9% from RMB638.8 million in 2008 to RMB1,130 million (US$168.9 million) in 2009, due primarily to increases in the volume of books and other products we sold.
 
Gross profit.  Our gross profit increased by 157.6% from RMB127.2 million in 2008 to RMB327.7 million (US$49.0 million) in 2009. Our gross margin increased from 16.6% in 2008 to 22.5% in 2009. This increase was primarily due to a decrease in our product procurement costs as a percentage of our product revenues as we received better pricing due to larger purchase volumes of media and general merchandise products in 2009.
 
Fulfillment expenses.  Our fulfillment expenses increased by 66.6% from RMB120.8 million in 2008 to RMB201.3 million (US$30.1 million) in 2009, due primarily to increased sales volume. Our fulfillment expenses as a percentage of total net revenues decreased from 15.8% in 2008 to 13.8% in 2009 due primarily to the better pricing terms that we negotiated with third-party couriers.


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Marketing expenses.  Our marketing expenses decreased by 5.6% from RMB40.8 million in 2008 to RMB38.5 million (US$5.8 million) in 2009, due primarily to our decreased advertising spending in 2009. Marketing expenses as a percentage of total net revenues decreased from 5.3% in 2008 to 2.6% in 2009 due primarily to improved effectiveness of our web-based advertising campaigns.
 
Technology and content expenses.  Our technology and content expenses increased by 47.7% from RMB26.4 million in 2008 to RMB39.0 million (US$5.8 million) in 2009, but decreased as a percentage of total net revenues, from 3.5% in 2008 to 2.7% in 2009. The increase in our technology and content expenses was due primarily to increased headcount in our technology department from 93 as of December 31, 2008 to 140 as of December 31, 2009.
 
General and administrative expenses.  Our general and administrative expenses increased by 40.9% from RMB27.0 million in 2008 to RMB38.0 million (US$5.7 million) in 2009, but decreased as a percentage of total net revenues, from 3.5% in 2008 to 2.6% in 2009. The increase in general and administrative expenses was due primarily to an increase in the number of personnel performing general and administrative functions from 70 as of December 31, 2008 to 93 as of December 31, 2009. The decrease of our general and administrative expenses as a percentage of our total net revenues was due to our improved operating leverage in 2009.
 
Interest income.  Our interest income decreased from RMB7.7 million in 2008 to RMB5.4 million (US$0.8 million) in 2009, due to decreases in the rates of our held-to-maturity investments in 2009.
 
Net income (loss).  As a result of the above, we had net income of RMB16.9 million (US$2.5 million) in 2009, or 1.2% of total net revenues, as compared to a net loss of RMB81.8 million in 2008.
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Total net revenues.  Our total net revenues increased by 71.4% from RMB446.9 million in 2007 to RMB766.1 million in 2008. This increase was primarily due to increased product revenues from sales of our media and general merchandise products.
 
Revenues from sales of books and other media products increased by 70.6% from RMB409.0 million in 2007 to RMB697.7 million in 2008 and product revenues from sales of general merchandise products increased by 81.0% from RMB36.9 million in 2007 to RMB66.8 million in 2008. Other revenues increased by 77.8% from RMB0.9 million in 2007 to RMB1.6 million in 2008.
 
The increase in revenues resulted primarily from increases in the number of our active customers and the total number of orders. The number of active customers increased from 1.9 million in 2007 to 3.4 million in 2008 and the total number of orders increased from 5.3 million in 2007 to 9.8 million in 2008. The increase in the number of our active customers was largely attributable to an increase in the number of new customers from 1.4 million in 2007 to 2.3 million in 2008.
 
Cost of revenues.  Our cost of revenues increased by 74.9% from RMB365.3 million in 2007 to RMB638.8 million in 2008, due to increases in the volumes of books and other products we sold.
 
Gross profit.  Our gross profit increased from RMB81.6 million in 2007 to RMB127.2 million in 2008, due to our higher total net revenues. Our gross margin decreased from 18.3% in 2007 to 16.6% in 2008 primarily because of our strategy to offer better pricing terms to our customers to obtain more market share.
 
Fulfillment expenses.  Our fulfillment expenses increased by 40.8% from RMB85.8 million in 2007 to RMB120.8 million in 2008, due primarily to increased sales volume. Our fulfillment expenses as a percentage of total net revenues decreased from 19.2% in 2007 to 15.8%, due to more effective utilization of our warehouse facilities.
 
Marketing expenses.  Our marketing expenses increased by 14.9% from RMB35.5 million in 2007 to RMB40.8 million in 2008, due primarily to our increased advertising spending in 2008. Our marketing expenses as a percentage of total net revenues decreased from 8.0% in 2007 to 5.3% in 2008, due to improved effectiveness of our web-based advertising campaigns.


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Technology and content expenses.  Our technology and content expenses increased by 53.5% from RMB17.2 million in 2007 to RMB26.4 million in 2008, but decreased as a percentage of total net revenues, from 3.8% in 2007 to 3.5% in 2008. This increase in our technology and content expenses was due primarily to expansion and upgrade of our information technology infrastructure in 2008 to accommodate increasing number of website users.
 
General and administrative expenses.  Our general and administrative expenses increased by 29.2% from RMB20.9 million in 2007 to RMB27.0 million in 2008, but decreased as a percentage of total net revenues, from 4.7% in 2007 to 3.5% in 2008. The increase in general and administrative expenses was due primarily to the increase in the number of personnel performing general and administrative functions from 58 as of December 31, 2007 to 70 as of December 31, 2008 and renovation of our office in 2008. The decrease of our general and administrative expenses as a percentage of our total net revenues was due to our improved operating leverage in 2008.
 
Interest income.  Our interest income increased by 16.7% from RMB6.6 million in 2007 to RMB7.7 million in 2008, due to increases in the rates of our held-to-maturity investments in 2008.
 
Net loss.  As a result of the above, we had a net loss of RMB81.8 million in 2008 as compared to net loss of RMB70.5 million in 2007.
 
Selected Quarterly Results of Operations
 
The following table presents our unaudited consolidated results of operations for the three-month periods ended on the dates indicated. You should read the following table in conjunction with our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated quarterly financial information on the same basis as our audited consolidated financial statements. This unaudited consolidated financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair representation of our financial position and operating results for the quarters presented.
 
                                                                 
    For the Three Months Ended  
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
 
    2008     2009     2009     2009     2009     2010     2010     2010  
    (RMB in thousands)  
 
Revenues
                                                               
Product revenue
    265,264       285,800       333,200       387,305       443,791       445,602       511,806       600,819  
Other revenue
    545       662       683       1,970       4,241       2,770       3,876       5,904  
                                                                 
Total net revenues
    265,809       286,462       333,883       389,275       448,032       448,372       515,682       606,723  
Cost of revenues
    (220,899 )     (229,519 )     (261,060 )     (304,801 )     (334,581 )     (357,958 )     (413,344 )     (452,661 )
                                                                 
Gross profit
    44,910       56,943       72,823       84,474       113,451       90,414       102,338       154,062  
Operating expenses
                                                               
Fulfillment
    (41,212 )     (46,165 )     (46,646 )     (50,463 )     (57,996 )     (54,684 )     (67,793 )     (76,484 )
Marketing
    (12,955 )     (9,515 )     (8,893 )     (8,882 )     (11,183 )     (11,289 )     (20,303 )     (23,893 )
Technology and content
    (7,258 )     (8,406 )     (8,571 )     (9,940 )     (12,072 )     (11,928 )     (14,352 )     (17,871 )
General and administrative
    (8,394 )     (8,440 )     (8,443 )     (9,372 )     (11,766 )     (11,789 )     (16,959 )     (17,835 )
                                                                 
(Loss) income from operations
    (24,909 )     (15,583 )     270       5,817       20,434       724       (17,069 )     17,979  
                                                                 
Interest income
    1,785       649       1,081       1,392       2,296       1,276       2,352       2,091  
Other (expenses) income, net
    (149 )     11       48       1,082       (581 )     (987 )     (3,030 )     2,231  
                                                                 
(Loss) income before income taxes
    (23,273 )     (14,923 )     1,399       8,291       22,149       1,013       (17,747 )     22,301  
Income tax benefit
                                              10,413  
                                                                 
Net (loss) income
    (23,273 )     (14,923 )     1,399       8,291       22,149       1,013       (17,747 )     32,714  
                                                                 
Deemed dividend on Series C convertible preferred shares
                                        (1,779 )      
                                                                 
Net (loss) income attributable to common shareholders
    (23,273 )     (14,923 )     1,399       8,291       22,149       1,013       (19,526 )     32,714  
                                                                 


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The following table sets forth our historical unaudited consolidated selected quarterly results of operations for the periods indicated, as a percentage of total net revenues.
 
                                                                 
    For the Three Months Ended  
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
 
    2008     2009     2009     2009     2009     2010     2010     2010  
 
Revenues
                                                               
Product revenue
    99.8 %     99.8 %     99.8 %     99.5 %     99.1 %     99.4 %     99.2 %     99.0 %
Other revenue
    0.2 %     0.2 %     0.2 %     0.5 %     0.9 %     0.6 %     0.8 %     1.0 %
                                                                 
Total net revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Cost of revenues
    (83.1 %)     (80.1 %)     (78.2 %)     (78.3 %)     (74.7 %)     (79.8 %)     (80.1 %)     (74.6 %)
                                                                 
Gross profit
    16.9 %     19.9 %     21.8 %     21.7 %     25.3 %     20.2 %     19.9 %     25.4 %
Operating expenses
                                                               
Fulfillment
    (15.5 %)     (16.1 %)     (14.0 %)     (13.0 %)     (12.9 %)     (12.2 %)     (13.2 %)     (12.6 %)
Marketing
    (4.9 %)     (3.3 %)     (2.7 %)     (2.3 %)     (2.5 %)     (2.5 %)     (3.9 %)     (3.9 %)
Technology and content
    (2.7 %)     (2.9 %)     (2.6 %)     (2.6 %)     (2.7 %)     (2.7 %)     (2.8 %)     (3.0 %)
General and administrative
    (3.2 %)     (3.0 %)     (2.4 %)     (2.3 %)     (2.7 %)     (2.6 %)     (3.3 %)     (2.9 %)
                                                                 
(Loss) income from operations
    (9.4 %)     (5.4 %)     0.1 %     1.5 %     4.5 %     0.2 %     (3.3 %)     3.0 %
                                                                 
Interest income
    0.7 %     0.2 %     0.3 %     0.4 %     0.5 %     0.3 %     0.5 %     0.3 %
Other (expense) income, net
    (0.1 %)     0.0 %     0.0 %     0.3 %     (0.1 %)     (0.2 %)     (0.6 %)     0.4 %
                                                                 
(Loss) income before income taxes
    (8.8 %)     (5.2 %)     0.4 %     2.2 %     4.9 %     0.3 %     (3.4 %)     3.7 %
Income tax expense
                                              1.7 %
                                                                 
Net (loss) income
    (8.8 %)     (5.2 %)     0.4 %     2.2 %     4.9 %     0.3 %     (3.4 %)     5.4 %
                                                                 
Deemed dividend on Series C convertible preferred shares
                                        (0.4 %)      
                                                                 
Net (loss) income attributable to common shareholders
    (8.8 %)     (5.2 %)     0.4 %     2.2 %     4.9 %     0.3 %     (3.8 %)     5.4 %
                                                                 
 
We have experienced continued growth in our quarterly total net revenues for the eight quarters in the period from October 1, 2008 to September 30, 2010. The growth was mainly driven by the steady increase in the product revenues from sales of our media and general merchandise products. During these quarters, we experienced continued increases in both the number of active customers and orders in each quarter except for a decrease in the first quarter of 2010 as compared to the fourth quarter of 2009 due to seasonality. Our business is affected by seasonality. We generally experience less user traffic and acquire fewer new customers during holiday periods in China, in particular during the first quarter of each year due to the slowdown of business during the Chinese New Year holiday season that effectively lasts more than half a month. Similar to other e-commerce companies in China, we normally have higher sales volume in the fourth quarter of each year.
 
Our cost of revenues have also increased continuously during the eight quarters in the period from October 1, 2008 to September 30, 2010, primarily due to steady increases in the volume of media and general merchandise products sold. Our cost of revenues as a percentage of total revenues decreased slightly in the three months ended December 31, 2009 and September 30, 2009 compared with other quarters in the corresponding year due to our recognition of promotion fees charged to suppliers for services provided during these periods. In 2009, promotion fees were an annual program which were contractually agreed with suppliers and recognized in the fourth quarter. Starting from 2010, promotion fees became a quarterly arrangement and were contractually agreed with suppliers in the third quarter of the year.
 
Liquidity and Capital Resources
 
To date, we have financed our operations primarily through investments from our shareholders and, beginning in 2009, cash flows from operations. We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the 12 months following this offering.
 
As of December 31, 2007, 2008 and 2009 and September 30, 2010, we had RMB63.5 million, RMB66.5 million, RMB75.8 million (US$11.3 million) and RMB198.7 million (US$29.7 million), respectively, in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash on hand, bank deposits that are unrestricted as to withdrawal and use, and highly liquid investments with original stated maturities of 90 days or less. In addition, we had RMB102.0 million, RMB50.0 million, RMB90.0 million (US$13.5 million) and RMB95.0 million (US$14.2 million) in held-to-maturity investments.


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Held-to-maturity investments are investments with maturity terms of three to six months, which are subject to limited risks of principal loss.
 
The following table sets forth a summary of our cash flows for the periods indicated:
 
                                                         
    For the Year Ended December 31,   For the Nine Months Ended September 30,
    2007   2008   2009   2009   2010
        RMB   RMB   US$            
    RMB               RMB   RMB   US$
    (in thousands)
 
Net cash provided by (used in) operating activities
    (39,660 )     (37,417 )     72,091       10,775       154,352       169,291       25,303  
Net cash provided by (used in) investing activities
    (114,812 )     41,675       (62,828 )     (9,391 )     (160,700 )     (45,610 )     (6,817 )
Net cash provided by (used in) financing activities
          166                         (619 )     (92 )
Net increase (decrease) in cash and cash equivalents
    (156,088 )     2,978       9,250       1,382       (6,367 )     122,893       18,369  
Cash and cash equivalents at beginning of year/period
    219,619       63,531       66,509       9,941       66,509       75,759       11,323  
Cash and cash equivalents at end of year/period
    63,531       66,509       75,759       11,323       60,142       198,652       29,692  
 
Operating Activities
 
Net cash generated from operating activities amounted to RMB169.3 million (US$25.3 million) for the nine months ended September 30, 2010, which was primarily attributable to a net income of RMB16.0 million, adjusted for certain non-cash expenses consisting principally of depreciation expense of RMB13.4 million and share-based compensation expense of RMB7.7 million, and decrease in working capital. The decrease in working capital was primarily attributed to the increase in trade payables of RMB494.7 million and the increase in accrued expenses and other payables amounting to RMB36.8 million, partially offset by the increase in inventories of RMB389.8 million as a result of the increased purchases in line with our business expansion.
 
Net cash generated from operating activities amounted to RMB72.1 million (US$10.8 million) in 2009, which was primarily attributable to a net income of RMB16.9 million, adjusted for certain non-cash expenses consisting principally of depreciation expense of RMB12.7 million and share-based compensation expense of RMB4.0 million, and decrease in working capital. The decrease in working capital was primarily attributed to the increase in trade payables of RMB245.8 million, partially offset by the increase in inventories of RMB239.9 million as a result of the increase in purchases for business expansion and the increase in accrued bonus and other payables amounting to RMB10.1 million and RMB24.3 million, respectively.
 
Net cash used in operating activities amounted to RMB37.4 million in 2008, which was primarily attributable to a net loss of RMB81.8 million, adjusted for certain non-cash expenses consisting principally of depreciation expense of RMB8.1 million and share-based compensation expense of RMB2.4 million, and a decrease in working capital. The decrease in working capital was primarily attributed to the increase in trade payables of RMB136.4 million, partially offset by the increase in inventories of RMB131.2 million as a result of the increase in purchases for business expansion and the increase of other payables amounting to RMB7.6 million.
 
Net cash used in operating activities amounted to RMB39.7 million in 2007, which was primarily attributable to a net loss of RMB70.5 million, adjusted for certain non-cash expenses consisting principally of depreciation expense of RMB4.6 million and share-based compensation expense of RMB3.6 million, and decrease in working capital. The decrease in working capital was primarily attributed to the increase in trade payables of RMB106.7 million, partially offset by the increase in inventories of RMB76.4 million as a result of the increase in purchases for business expansion.


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Investing Activities
 
Net cash used in investing activities amounted to RMB45.6 million (US$6.8 million) for the nine months ended September 30, 2010, which was primarily attributable to (1) purchases of held-to-maturity investments of RMB1,126.5 million (US$168.4 million) and (2) purchases of plant and equipment of RMB40.6 million (US$6.1 million), partially offset by proceeds of RMB1,121.5 million (US$167.6 million) received from maturity of held-to-maturity investments.
 
Net cash used in investing activities amounted to RMB62.8 million (US$9.4 million) in 2009, which was primarily attributable to (1) purchases of held-to-maturity investments of RMB863.0 million (US$129.0 million) and (2) purchases of plant and equipment of RMB22.8 million (US$3.4 million), partly offset by proceeds of RMB823.0 million (US$123.0 million) received from maturity of held-to-maturity investments.
 
Net cash generated from investing activities amounted to RMB41.7 million in 2008, which was primarily attributable to proceeds of RMB639.0 million received from maturity of held-to-maturity investments, partly offset by (1) purchases of held-to-maturity investments of RMB587.0 million and (2) purchases of plant and equipment of RMB10.3 million.
 
Net cash used in investing activities amounted to RMB114.8 million in 2007, which was primarily attributable to (1) purchases of held-to-maturity investments of RMB505.0 million and (2) purchases of plant and equipment of RMB12.8 million, partly offset by proceeds of RMB403.0 million received from maturity of held-to-maturity investments.
 
Financing Activities
 
Net cash used in financing activities amounted to RMB0.6 million (US$0.1 million) for the nine months ended September 30, 2010, primarily attributable to the initial public offering costs paid of RMB3.8 million (US$0.6 million), partially offset by proceeds we received from employees’ exercise of share options of RMB3.2 million (US$0.5 million).
 
Net cash provided by financing activities amounted to RMB166,000 in 2008, reflecting the proceeds we received from employees’ exercise of share options in 2008. We did not have any financing activities in 2007 or 2009.
 
Capital Expenditures
 
Our capital expenditures amounted to RMB12.8 million, RMB10.3 million, RMB22.8 million (US$3.4 million) and RMB40.6 million (US$6.1 million) in 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively. In the past, our capital expenditures consisted principally of expansion and updates of our fulfillment network and IT infrastructure. We expect to increase our capital expenditures in these areas in the rest of 2010 and 2011.
 
Contractual Obligations and Commercial Commitments
 
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2009:
                                         
    Payment Due by Period
        Less than
  1-3
  3-5
  More than
    Total   1 Year   Years   Years   5 Years
    (in RMB thousands)
 
Operating lease obligations
    99,846       36,295       55,184       8,367        


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The following table sets forth our contractual obligations and commercial commitments as of September 30, 2010:
 
                                         
    Payment Due by Period
        Less than
  1-3
  3-5
  More than
    Total   1 Year   Years   Years   5 Years
 
Operating lease obligations
    355,411       61,007       89,579       49,972       154,853  
 
Our operating lease obligations increased significantly from December 31, 2009 to September 30, 2010 primarily because of the new warehouses that we rented or entered into lease agreements to rent in the nine months ended September 30, 2010.
 
Off-balance Sheet Commitments and Arrangements
 
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
Inflation
 
Over the past several years, inflation in China has fluctuated, but has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China increased 4.8% and 5.9% in 2007 and 2008, respectively, and decreased 0.7% in 2009. In the first five months of 2010, the consumer price index increased 2.5%.
 
Market Risks
 
Interest Rate Risk
 
Our exposure to interest rate risk primarily relates to the interest income generated by bank deposits, which are unrestricted as to withdrawal and use, and held-to-maturity investments. As of September 30, 2010, we held RMB95.0 million (US$14.2 million) held-to-maturity investments, all of which will mature by the end of 2010. These held-to-maturity investments paid interest ranging from 2.5% to 3.0% per annum upon maturity. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.
 
Foreign Exchange Risk
 
Substantially all of our revenues and expenses are denominated in Renminbi. Our exposure to foreign exchange risk primarily relates to the U.S. dollar proceeds of this offering, most or substantially all of which we expect to convert into Renminbi over time for the uses discussed elsewhere under “Use of Proceeds.” As the impact of foreign currency risk on our operations was not material in the past, we have not used any forward contracts, currency borrowings or derivative instruments to hedge our exposure to foreign currency exchange risk.
 
The value of your investment in our ADSs may be affected by the foreign exchange rate between U.S. dollars and Renminbi, because we use Renminbi as our functional and reporting currency while the ADSs will be traded in U.S. dollars.
 
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. In July 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated significantly against the U.S. dollar over the following several years. However, the


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People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. Since reaching a high against the U.S. dollar in July 2008, the Renminbi has traded within a