China’s online retail revolution yields big rewards
By now you must all have heard about Alibaba, China’s leading e-commerce company. Its upcoming listing in New York will probably be the largest IPO in US history, raising about 20 billion USD, with estimates for the valuation of Alibaba ranging between 140 to 200 billion USD.
Hangzhou-based Alibaba is the world’s largest online retailer by merchandise volume. Its two main businesses are consumer-to-consumer platform Taobao and business-to-consumer platform T-mall. Indeed Taobao is so dominant, it is estimated to have a 90% market share of the consumer-to-consumer market in China. The business is valued so highly because online shopping is becoming increasingly popular in China, growing by around 40% each year and already accounting for 8% of the country’s total consumer goods retail sales.
China usually impresses with numbers as the sheer size of its population inflates figures. The Internet is no different, with more than 630 million Internet users and the world’s largest e-commerce market. Alibaba’s active buyers do no less than 49 online orders per year on average. The Chinese have taken to online shopping both because it is quite often cheaper, but also because it saves time. While living in Shanghai, a huge city with long commuting times and where people work long hours, I understood why anything that could save time was so precious. Interestingly, Chinese internet users are increasingly using their mobile phone to access the Internet. In 2009, there were 233 million people in China using their phones to go online. Now there are more than 500 million. And they also increasingly shop online (55% of Internet users vs 19% in the US). Clothing represents the largest proportion of online sales, with 35%; while recreation and education come second with 20%. Last week, one of my Chinese friends came to visit me in Hong Kong from Shanghai and surprised me when she explained that she had already bought her Hong Kong transportation card, her ticket to an entertainment park and the ride to the Great Buddha online. It was just cheaper and more convenient, she said.
The Internet in China is a fascinating eco-system that keeps developing with new innovations, alliances and services almost on a daily basis. What is remarkable –and quite symptomatic to the speed of adaptability of Chinese consumers – is how fast some sectors have transformed due to the Internet. What is important to us as investors is what the Internet means in terms of changing consumption patterns and how companies are positioned to take up these opportunities or challenges. The numbers of visitors to department stores decline, consumer companies ramp up capital expenditure for their online strategy, property developers develop discount systems based on TaoBao shopping amounts, petrol stations network enter partnerships with social media platforms, and so on. Yu’e Bao, which was launched in June 2013, as a fund product collecting outstanding amounts in AliPay, Alibaba’s group payment service, has grown exponentially and has emerged as the world’s fourth largest money-market fund, with assets exceeding 93 billion USD.
Tencent, our largest holding in the China fund, has emerged as another giant in the field of gaming, social media and e-commerce, with its WeChat application reaching 600 million users. The stock is up 27% this year. Earlier this year we bought into Yahoo, a stakeholder in Alibaba, to get an indirect exposure. We, like many other investors in Hong Kong, are now looking forward to hearing more details from Alibaba’s IPO roadshow.
