Credit Suisse eCommerce Research 2013

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Credit Suisse eCommerce Research 2013

  1. 1. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 28 May 2013 Asia Pacific Equity Research APAC E-Commerce Primer Connections Series An evolutionary force Figure 1: APAC to drive more than 50% of global e-commerce sales growth $317 $429 $539 $655 $768 $884 40% 45% 50% 55% 60% 65% $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 2011 2012 2013E 2014E 2015E 2016E APAC E-commerce sales (US$ bn) APAC Share of Global E-commerce Growth Historical APAC CAGR = 18% Forward APAC CAGR = 20% RoW Forward CAGR = 11% Source: eMarketer, IDC, iResearch, Credit Suisse estimates ■ E-commerce in emerging Asia is not a disruptive force. It is an evolutionary force that will underpin the rise and weight of domestic consumption within the overall economy. In contrast to developed markets where e-commerce has been and will continue to be a disruptive force to incumbent commerce/retail merchants, the debate in emerging Asia should centre on what the magnitude will be in stimulating incremental economic and socioeconomic growth. When viewed as an evolutionary force rather than a disruptive force, the implications are largely positive because e- commerce creates consumption through a new economic model. ■ China coming of age. China will emerge as the largest e-commerce market in the world in 2013E, but this is not a reflection of a late-cycle industry. E- commerce is a nascent industry where penetration of the key enablers (broadband, smartphone, electronic payment systems, logistics) is remarkably low. Investment in infrastructure should drive 20% annual growth in online buyers and China will represent 45-50% of global e-commerce growth. ■ E-commerce is not an afterthought. Emerging APAC economies have a unique opportunity to develop e-commerce in parallel with bricks-and-mortar retail, and we believe China will become the first major market globally where penetration exceeds that of modern format retail. Online and e-commerce penetration today is reminiscent of that in the US in 2000. Although future growth rates may be similar, composition of growth and development will look much different than that of developed market precedents. The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts Head of Regional Consumer: Karim P. Salamatian, CFA 852 2101 7996 karim.salamatian@credit-suisse.com Japan Internet: Yuki Nakayasu 81 3 4550 9966 yuki.nakayasu@credit-suisse.com US Internet: Stephen Ju 212 325 8662 stephen.ju@credit-suisse.com China Consumer: Vivian Zhao 852 2101 7472 vivian.zhao@credit-suisse.com China Consumer: Kevin Yin 852 2101 7655 kevin.yin@credit-suisse.com Rebecca Kwee 852 2101 7951 rebecca.kwee@credit-suisse.com
  2. 2. 28 May 2013 APAC E-Commerce Primer 2 Table of contents Focus charts 4 An evolutionary force 5 APAC e-commerce: The world’s #1 5 China’s shining moment 5 A fundamentally different supply chain model 5 Developed market precedents 5 APAC e-commerce: The world’s #1 8 Largest driver of global e-commerce growth 8 Low penetration drives long-term growth appeal 10 Number of online buyers is the key driver of industry growth 11 China presents the single largest opportunity 13 Connecting the mega trend with investment 14 Credit Suisse APAC E-commerce investment basket (Bloomberg: CSAPECOM) 16 China’s shining moment 18 Enablers of growth 19 Broadband penetration 20 Internet usage 21 Mobile network build-out 21 Smartphone penetration 22 Reach of e-commerce will drive future growth 24 Single largest driver of overall retail sales growth 26 Driving incremental demand 27 China e-commerce landscape 28 C2C market still dominates… 30 …with B2C catching up fast but extremely fragmented 30 Latest trends, key metrics 31 E-commerce service providers also a crowded arena 35 Why consumers use e-commerce 37 Cheaper goods, ease of price comparison 37 Merchandise richness: Physical retail’s Achilles’ heel 37 Convenience 38 Key products and services Chinese consumers buy online 39 Apparel 39 3C Products 42 Travel 42 From a shopper’s eyes: E-commerce limitations… and what do they want 43 Trustworthiness and payment security are of a paramount concern 43 Delivery and return: Coverage, reliability and timing 45 When ‘freshness’ is on demand 45 Essentially, what do consumers want? 46 Rural market continues to be the new driver 48 Young users are the most ‘frequent buyers’ 49 45-55-year olds are ‘big-ticket shoppers’ online 50 Geographic areas of early consumer adoption and heavy usage 50 Retailers’ coping strategies 51 Brands are growing multi-channel 51 Shopping centres are growing multi-functional 52 A fundamentally different supply chain model 53 Logistics at the forefront with the rise of e-commerce 53 New logistical issues caused by e-commerce 53 Trajectory of China’s logistics industry: Stairway to heaven or highway to hell? 54 Logistics key bottleneck to e-commerce growth 54 Key logistics providers in China 55
  3. 3. 28 May 2013 APAC E-Commerce Primer 3 Transport and delivery in China: Logistical nightmare 56 Industry consolidation inevitable amid headwinds 57 An optimal logistics model for Chinese e-commerce firms 59 Traditional retailers: Logistics implications with entering e-commerce 61 Case study: Dangdang Inc 62 Developed market precedents 64 Déjà vu to 2000 – 2004 in the US 64 Evolution of US E-commerce 65 Price, convenience, and content discovery lead to wallet share gains 65 First mover categories—where we have been 69 Emerging categories—where we will go 69 Convenience as an added consumer value proposition 71 Leveraging data for content discovery and enhanced merchandising 73 From mail-order to modern day 73 A brief history of Japan’s mail-order market 73 Current e-commerce market and entry status 75 Infrastructure upgrade 75 Regulatory easing 77 Internet retailers enhance services 77 Rakuten set to bolster logistics and adopt a direct sales model 78 Retailers moving into e-commerce, strengthening online services 78 New entrant 79
  4. 4. 28 May 2013 APAC E-Commerce Primer 4 Focus charts Figure 2: APAC is the leading force behind global e- commerce growth... Figure 3: …with rising online buyer penetration in the region as the key driver (mn) $317 $429 $539 $655 $768 $884 40% 45% 50% 55% 60% 65% $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 2011 2012 2013E 2014E 2015E 2016E APAC E-commerce sales (US$ bn) APAC Share of Global E-commerce Growth Forward APAC CAGR = 20% RoW Forward CAGR = 11% 242 286 337 398 469 73 76 77 78 79 23 24 25 26 27 20 32 37 42 45 19 25 30 36 42 2012 2013E 2014E 2015E 2016E Indonesia Australia India Rest of APAC Korea Japan China 391 654 592 523 458 Source: eMarketer, iResearch, IDC, Credit Suisse estimates Source: eMarketer, iResearch, IDC, Credit Suisse estimates Figure 4: China e-commerce stands out with the largest market and second-highest forward growth rates… Figures in bubble denotes size of industry in 2012 (US$ bn) Figure 5: …as infrastructure roll-out in the next 3-5 years will create new demand and lead to a much higher share of retail sales % of total retail sales from e-commerce China Japan India Indonesia Korea Australia RoAPAC 0% 2% 4% 6% 8% 10% 12% 14% 16% 0% 10% 20% 30% 40% 50% E-commerceas%ofretailsales E-commerce spending CAGR (2012-2016E) $210 $36 $39 $113 $20 $12 $1 0% 2% 4% 6% 8% 10% 12% China US Japan Source: CEIC, eMarketer, IDC, iResearch, Credit Suisse estimates Source: iResearch, Forrester, CEIC, Credit Suisse estimates Figure 6: E-commerce is not only the main driver of total retail sales growth in China, but also key to a domestic- driven economy… Figure 7: …however, lagging logistics development in China remains a bottleneck to further growth 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2003 2005 2007 2009 2011 2013E % of Retail Sales Growth from E-Commerce (lhs) E-Commerce Sales as % of Retail Sales (rhs) Nearly 1/5th of total retail 0% 50% 100% 150% 200% 250% 300% 350% China consumer goods logistics value (% YoY) China e-commerce market size (% YoY) Source: CEIC, iResearch, Credit Suisse estimates Source: iResearch, CEIC
  5. 5. 28 May 2013 APAC E-Commerce Primer 5 An evolutionary force In this primer on the APAC e-commerce industry, we collaborate with Credit Suisse’s research analysts from across the region and the globe to support our overall thesis that the industry is an integral evolutionary force behind consumption and retail sales growth in emerging Asian economies. Rather than being disruptive, as is the case in developed markets, e-commerce is not a substitute or second thought to modern format/bricks-and- mortar retail. Instead, it will grow and evolve in parallel with traditional retail formats, and will likely surpass penetration rates of modern format retail. Even with a unique life-cycle, we can learn from developed market precedents namely the US and Japan. We have created an investable basket (BBG: CSAPECOM) of regional and global companies that should benefit directly from the mega trend of APAC’s e-commerce evolution. APAC e-commerce: The world’s #1 APAC is the largest e-commerce region, globally accounting for 40% of the US$1.3 tn in global sales, and is expected to grow at nearly 2x the rate of the rest of the world over the coming four years. Growth in APAC will account for more than 50% of global e-commerce growth over the next four years. A nascent industry that comprises 45% of the world’s online buyers but spending per buyer being 30% lower than the global average is the ideal combination for the fastest growing region for quite some time. Evolution of e-commerce in emerging Asia Pacific will occur at a faster pace than what we have seen in developed markets such as the US, the UK and Japan since 1998. The highest annual growth rates are expected in Indonesia (36%), China (29%) and India (26%); however, China is the most powerful force as it surpasses the US in 2013 as the world’s largest e-commerce market. China’s shining moment Despite emerging as the largest e-commerce market globally in 2013E, it is still a nascent industry where low penetration rates of online users, broadband, smartphones, electronic payment systems and online buyers will drive 30% annual growth going forward. E- commerce is creating demand in both urban and rural consumers and contributing ~20% of total retail sales growth in China. China is a consumer-to-consumer market dominated by marketplaces such as Taobao, which has a 95% market share. Business-to-consumer/online retailing is 30% of the industry with rapid growth—again largely controlled by the Alibaba Group with Tmall’s 57% share. However, for online retailers to prove successful, they will need to rely on key enablers evolving and address the limiting perceptions held by many consumers such as trust, logistics, payment, merchandising and integrity. A fundamentally different supply chain model Logistics is not simply the last mile of delivery for e-commerce, but rather the entire customer experience spanning online, offline and mobile. The game has changed where multi-channel retailing is an imperative to fulfilling consumers’ ultimate demand. China has an advantage because modern format bricks-and-mortar retail penetration is low; thereby allowing multi-channel retail development from the early stages. The companies that can embrace this and build logistics systems to efficiently service demand will have clear advantages over the long term. Developed market precedents We employ the expertise of our Internet analysts in the US and Japan because historical precedents from these markets provide unique insights into the evolution of e-commerce across APAC. Enablers of growth are the same irrespective of the market or the stage of economic development. Data supports the view that China today is just like the US in 2000 where the next four years of increased online and online buyer penetration led to an annual growth of 30%. Japan provides a proxy for how e-commerce ignited broad-based consumption from mail order to traditional retail to modern consumerism of e-commerce. E-commerce evolution in APAC will be in parallel with modern format retail, driving incremental overall demand APAC is the largest e- commerce region globally and will account for more than 50% of global growth going forward China is on the verge of becoming the largest e- commerce market globally but is still a nascent industry with 30% annual growth expected
  6. 6. 28May2013 APACE-CommercePrimer6 Figure 8: Credit Suisse APAC e-commerce basket (Bloomberg Code: CSAPECOM) Symbol Company Domicile E-commerce Vertical Company Description CS Rating Market Cap (US$ mn) % to TP 12M Share Perf. 2013E P/E 2013E EV/EBITDA 2013E P/B 2013E ROE Revenue CAGR ('12-15E) EPS CAGR ('12- 15E) AMZN Amazon com Inc. USA B2C retailer World's largest online retailer with significant Japan and China exposure. O 119,155 22% 26% 115.8 27.8 12.9 11% 21% 353% 0700.HK Tencent Holdings China B2C, Online Payment Provier, Social Media Tencent is a leading internet service provider with E-commerce exposure through QQ Buy (5% share of B2C), Tenpay (20% share of online payments) and leading social media player that is becoming increasingly more integral in E-commerce O 71,689 0% 40% 28.2 19.1 7.8 28% 29% 29% EBAY eBay Inc. USA C2C C2C platform with Korea exposure. Subsidiary PayPal has cross border exposure with China, Korea, modest amount in Japan. Company has some India exposure via Baazee and Snapdeal. N 70,911 1% 41% 19.9 11.8 3.8 19% 16% 18% BIDU Baidu Inc China Search/ Generation Baidu is the leading Chinese language internet search provider and directs nearly 20% of the upstream traffic to the leading B2C and C2C sites U 33,687 -17% -15% 17.9 13.4 5.5 31% 22% 10% 4755 Rakuten Japan B2C retailer Largest E-commerce company in Japan providing a variety of products with a wide range of services. O 15,876 -2% 45% 29.3 12.6 5.2 18% 16% 55% 2371.T Kakaku.com Japan Operating price comparison website with word-of-mouth and user reviews N 2,674 -13% 102% 40.0 20.6 11.8 30% 23% 24% VIPS Vipshop Holdings China B2C retailer China's leading online discount retailer for brands. NR 1,875 518% 40.5 29.2 13.5 37% 63% 152% 3064.T Monotaro Japan B2B High growth company providing tools and supplies for construction. NR 1,662 268% 66.3 n.a. 22.3 34% 27% 46% 3092.T Start Today Japan B2C retailer One of the largest E-commerce companies specializing in apparel in Japan O 1,707 27% 45% 31.7 18.1 13.9 43% 14% 32% 2678.T Askul Japan B2C retailer One of the largest E-commerce companies specializing in office supplies. Tied-up with Yahoo Japan. NR 848 85% 17.8 3.6 1.6 9% 7% 7% DANG Dangdang Inc. China B2C retailer Largest public E-commerce company in China, dominant book and media online retailer. N 503 -13% 34% -6.8 -3.5 17.4 -61% 25% -25% 3182.T Oisix Japan B2C retailer Very young E-commerce company specializing in food supplies, specifically vegetables. NR 318 n.a. n.a. n.a. n.a. n.a. n.a. 035600.KQ KGinicis Korea Online Payment Provider, C2C Develops and provides e-commerce settlement processing services in Korea, operates online marketplace. NR 293 n.a. n.a. n.a. n.a. n.a. n.a. 046440.KQ KGMobilians Korea Online Payment Provider E-payment company in Korea engaged in the development and provision of wired and wireless (online, mobile) payment services. NR 286 265% 19.2 n.a. 2.8 17% 14% n.a. 064260.KQ Danal Korea Mobile Payment Provider Mobile payment provider in Korea engaging in mobile small lot transactions (~10% of online shopping transactions). NR 226 98% 27.4 n.a. 2.3 9% n.a. n.a. 3325.T Kenko.com Japan B2C retailer E-commerce company specializing in healthy food and medicines. Tied-up with Rakuten. NR 157 341% n.a. n.a. n.a. n.a. n.a. n.a. 060250.KQ KCP Co. Ltd. Korea Back-end Services Develops enterprise-wide technology solutions to the retail industry (incl. online retail) NR 170 16.6 8.9 5.1 n.a. n.a. n.a. Source: Company data, Credit Suisse estimates for covered companies, I/B/E/S, Bloomberg
  7. 7. 28May2013 APACE-CommercePrimer7 Figure 9: China’s e-commerce landscape Percentages represent market share of e-commerce vertical China E-commerce Online retailers (B2C) RMB 387bn Amazon China (Amazon.com, AMZN.OQ) - 2.7% Suning (002024.SZ) - 5.5% 360Buy (Private) - 19.6% Tmall (Alibaba Group, Private) - 56.7% Coo8 (Gome, 0493.HK) - 1.4% QQ Buy (Tencent, 0700.HK) - 4.7% Dangdang (DANG.N) - 1.9% Vancl (Private) - 1.2% Vipshop (VIPS.N) - 1.4% Marketplaces (C2C) RMB 917bn eBay China (eBay Inc, EBAY.OQ) - 0.01% Paipai (Tencent, 0700.HK) - 9.46% Taobao (Alibaba Group, Private) - 94.53% Logistics providers EMS (China Post, State-owned) SF Express (Private) ShenTong Express (Private) Yuantong Express (Private) ZJS Express (Private) Yunda Express (Private)Huitong Express (Private) ZTO Express (Private) Online payment providers RMB 3.8tn Alipay (Alibaba Group, Private) - 47.4% IPS (Private) - 2.7% China Unionpay (Private) - 12.7% Yeepay (Private) - 3.1% Huifutianxia/China PnR (Private) - 5.6% 99Bill (Private) - 5.9% Tenpay (Tencent, 0700.HK) - 20.3% Other service providers RMB 28bn (search engine mkt) Baidu (BIDU.OQ) - 79.5% Soso (Tencent, 0700.HK) - 1.5% Sogou (Sohu, SOHU.OQ) - 3.0% Youdao (Netease, NTES.OQ) - 0.3% Sina (SINA.OQ) Allyes (Private) Source: Company data, Credit Suisse
  8. 8. 28 May 2013 APAC E-Commerce Primer 8 APAC e-commerce: The world’s #1 Largest driver of global e-commerce growth E-commerce in APAC is a nascent industry that will emerge as the largest region in terms of sales in 2013. What this implies is that the “laws of big numbers” need not apply because as the industry evolves from its infancy today, abnormally high growth rates can be expected for the next three to five years or more. This will have profound implications on how consumption evolves in emerging Asia Pacific markets because e-commerce is an evolutionary force by creating demand rather than being a destructive force and cannibalising existing retail sales activity. As e-commerce evolves in emerging Asia Pacific markets, it will be incremental to overall GDP growth. Later in this report, we discuss how the e-commerce’s reach and ability to drive lower prices for consumers is ~20% incremental to personal consumption in China (the largest e-commerce market in APAC). But some simple empirical evidence to highlight this is that while e-commerce has grown 56% annually in China, traditional retail sales have continued to post a high rate of growth of 17%. Contrast to developed markets such as the US where e-commerce is cannibalising traditional retail, the ratio of e-commerce sales growth to traditional retail sales growth is 7-to-1 or 14% vs. 2%. APAC is not only the largest region globally for aggregate e-commerce sales, but going forward we expect it to account for more than 50% of global e-commerce growth (Figure 10). In 2016 more than 60% of global industry sales growth will come from APAC. This mega trend in e-commerce comes at a time when emerging Asian traditional/bricks- and-mortar retail penetration is still in its infancy. What this means is that e-commerce is a powerful trend in APAC that will evolve in parallel with traditional retail channels rather than be a disruptive force as we have seen in developed western markets. Figure 10: APAC is the leading force behind global e-commerce growth $317 $429 $539 $655 $768 $884 40% 45% 50% 55% 60% 65% $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 2011 2012 2013E 2014E 2015E 2016E APAC E-commerce sales (US$ bn) APAC Share of Global E-commerce Growth Historical APAC CAGR = 18% Forward APAC CAGR = 20% RoW Forward CAGR = 11% Source: eMarketer, iResearch, IDC, Credit Suisse estimates Global e-commerce sales are expected to reach US$1.3 tn in 2013 with Asia Pacific’s share being 42% and rising to 47% in 2016E (Figure 11). This implies global e-commerce sales of US$1.9 tn in 2016E or a 14% CAGR from 2013. Asia Pacific e-commerce sales are expected to grow 18% annually from 2013 to 2016 or 400 bp faster than global e- commerce. If we strip out the developed Asia Pacific markets of Japan and Australia, emerging Asia Pacific e-commerce growth is expected to be higher at 22% annually through 2016 (Figure 12 and Figure 13). E-commerce growth will be incremental to overall retail sales and GDP growth Ratio of e-commerce growth to retail sales ex. e- commerce growth suggests a strong complimentary relationship More than 50% of global e- commerce growth will come from APAC over the next four years E-commerce will grow in parallel with bricks-and- mortar in emerging APAC Emerging APAC is expected to post annual e-commerce growth of 22% or 1.5x higher than global growth
  9. 9. 28 May 2013 APAC E-Commerce Primer 9 Figure 11: APAC’s share of global e-commerce gains at the expense of the US and Europe Share of global e-commerce sales 40% 42% 44% 46% 47% 23% 22% 21% 20% 19% 27% 26% 25% 24% 23% 4% 4% 4% 4% 4% 3% 4% 4% 4% 4% 2% 2% 2% 2% 2% 2012 2013E 2014E 2015E 2016E ME & Africa LATAM E. Europe W. Europe N.A. APAC US$1.07 tn US$1.87 tnUS$1.68 tnUS$1.48 tnUS$1.27 tn Source: eMarketer, iResearch, IDC, Credit Suisse estimates Figure 12: Emerging APAC growing fastest 2013-16E e-commerce sales CAGR Figure 13: Indonesia and China leading the way 2013-16E e-commerce sales CAGR 22.1% 19.8% 19.0% 14.9% 13.7% 12.6% 9.5% 9.3% Emerging APAC APAC ME & Africa LATAM Total E. Europe W. Europe N.A. 35.6% 24.8% 22.8% 17.9% 10.8% 10.5% 8.6% 5.8% Indonesia China India APAC Total Rest of APAC Korea Australia Japan Source: eMarketer, iResearch, IDC, Credit Suisse estimates Source: eMarketer, iResearch, IDC, Credit Suisse estimates Given its sheer size and strong base of infrastructure (broadband, PC, smartphone penetration), China is the most attractive e-commerce market in APAC and globally for that matter. Despite Chinese buyer penetration being a remarkably low 18% and spending per online buyer being only 42% of the developed market average for Japan, the US, UK and Australia, e-commerce sales are nearly 2x larger than the second largest country in APAC (Figure 14). In 2016, China is expected to be 4x larger than the second-largest e- commerce market in APAC (Figure 15). By 2016, China’s e- commerce sales will be 4x more than that of the next largest in APAC
  10. 10. 28 May 2013 APAC E-Commerce Primer 10 Figure 14: China’s e-commerce industry is already nearly 2x that of Japan… Figure 15: …and expected to be more than 4x larger in four years China 49% Japan 26% India 2% Indonesia 0.1% Korea 4% Australia 8% Others 11% Total 2012 E-commerce Sales = US$432 bn China 66% Japan 16% India 3% Indonesia 0.5% Korea 4% Australia 6% Others 5% Total 2016E E-commerce Sales = US$883 bn Source: eMarketer, iResearch, IDC, Credit Suisse estimates Source: eMarketer, iResearch, IDC, Credit Suisse estimates Within APAC, Australia has the highest e-commerce penetration rate to retail sales of 14% versus the region average of 6.4% (Figure 16). China is surprisingly at the regional average, but with the second-highest forward growth rate expected, it should surpass Japan and Korea before the end of 2013. Clearly India and Indonesia have enormous potential ahead whereby e-commerce can be a driver of incremental growth in both urban and rural regions. Figure 16: E-commerce contribution to overall retail trade the highest in Australia % of total retail sales from e-commerce 13.6% 6.6% 6.5% 6.4% 6.2% 2.4% 0.9% Australia Korea Japan APAC China India Indonesia Source: eMarketer, iResearch, IDC, Credit Suisse Low penetration drives long-term growth appeal E-commerce growth potential in APAC is enormous because online buyer penetration rates are well below 20% and annual amounts spent per buyer are 68% lower than developed markets US$668 vs. US$2,088 (Figure 17). This combination sets the stage for two-pronged growth of rising penetration (developed market average penetration of online buyers is 56% of total population) and rising spend per online buyer. If we assume emerging APAC reaches developed market averages within the next decade, the total e- commerce market in APAC would be in excess of US$5 tn. Clearly, such a simple India and Indonesia should experience the largest increases in e-commerce sales relevance The key driver of growth will be rising penetration of online buyers from the low rate of 20% today— developed market average is 56%
  11. 11. 28 May 2013 APAC E-Commerce Primer 11 extrapolation is not possible as the determining enablers behind e-commerce penetration are largely infrastructure based. We discuss this in more detail later in this report. China, India, Indonesia and other sizeable markets such as the Philippines and Thailand all present very strong potential e-commerce growth rates because penetration rates and spend per online buyer rates are well below both APAC and developed market averages. Figure 17: E-commerce growth in APAC to come from rising penetration of online buyers and higher annual per spend Penetration of online buyers = online buyers / total population APAC China Japan India Indonesia Korea Australia Others $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 0% 10% 20% 30% 40% 50% 60% Avg.salesperOnlineBuyer(US$) Penetration of Online Buyers Source: eMarketer, iResearch, IDC, Credit Suisse Number of online buyers is the key driver of industry growth The primary driver to e-commerce growth in emerging APAC economies is penetration of online buyers. We estimate that nearly two-thirds of the growth in e-commerce sales over the next four years will be driven by a 14% annual increase in the number of online buyers from 391 mn in 2012 to 654 mn in 2016E (Figure 18). Indonesia, India and China are expected to have the largest annual increases in online buyers of 29%, 22% and 18% over the next four years, respectively (Figure 19). Figure 18: APAC online buyer penetration drives growth mn Figure 19: Emerging APAC has the penetration upside 2012-16E online buyer CAGR 242 286 337 398 469 73 76 77 78 79 23 24 25 26 27 20 32 37 42 45 19 25 30 36 42 2012 2013E 2014E 2015E 2016E Indonesia Australia India Rest of APAC Korea Japan China 391 654 592 523 458 1.9% 3.0% 3.7% 13.7% 16.3% 18.0% 21.5% 22.4% 29.4% Source: eMarketer, iResearch, IDC, Credit Suisse estimates Source: eMarketer, iResearch, IDC, Credit Suisse estimates Spend per online buyer should increase exponentially in India and Indonesia as penetration increases off an incredibly low base Number of online buyers is expected to increase 14% annually from 391 mn in 2012 to 654 mn in 2016E
  12. 12. 28 May 2013 APAC E-Commerce Primer 12 The key enablers to online buyer penetration are infrastructure such as PC, Internet, high- speed broadband, electronic payment systems, logistics and smartphone penetration. Developed APAC e-commerce markets already have this infrastructure in place; therefore, online buyer penetration is already close to 50% of total population and forward sales growth rates are expected to be one-third those of emerging APAC markets. Growth in late-stage e-commerce markets in APAC is primarily a function of spending per online user. Growth is derived from either cannibalising other retail channels (bricks-and- mortar, primarily) or higher nominal rates of economic and retail sales growth. Given the latter has been non-existent for the past six years, growth has and likely will remain disruptive to other retail channels. Late-stage e-commerce markets have nearly double the Internet penetration, 30% greater broadband penetration, 60-178% higher Internet-enabled devices, 3-5x higher smartphone penetration and 2-3x higher online payment penetration than that of China. It is no wonder that China’s online buyer penetration is nearly 70% lower (Figure 20). Figure 20: Infrastructure penetration enables e-commerce usage and spending All data for 2012 China Japan US Total e-commerce sales (US$ bn) 206.7 112.8 226.3 Forecast 2012-2016E CAGR 29.5% 5.8% 9.6% e-commerce spending per user (US$) $875 $1,743 $1,231 Internet users (mn) 600.4 105.0 258.0 Internet penetration (% of total population) 45% 82% 82% Home Broadband users (mn households) 238.6 35.3 85.8 Broadband penetration 54% 69% 71% Internet enabled: PCs (mn) 318.6 68.9 310.0 Mobile devices (mn) 297.5 86.3 375.8 IADs (mn) 23.0 15.3 71.7 Total Internet enabled devices (mn) 639.1 170.6 757.5 Internet devices per user 1.06 1.62 2.94 Hours spent online per user per month 120.5 120.3 120 Smartphone penetration 12% 33% 48% Online payment users (mn) 234 67 184 Online payment penetration (% of total population) 17% 53% 59% Online buyers (mn) 286 73 184 Online buyer penetration (% of total population) 18% 48% 59% Online buyer penetration (% of online population) 43% 68% 58% Wireline Internet users as buyers 32% 60% 74% Wireless Internet users as buyers 7% 27% 27% Source: CEIC, comScore, eMarketer, iResearch, IDC, IMF, Credit Suisse estimates In early-stage e-commerce APAC markets, cannibalisation is less of an issue because industry growth is predominately a function of online buyer penetration. Figure 21 below highlights that 60-80% of forward e-commerce CAGRs across emerging APAC will be generated by higher online buyer penetration. Japan and Australia have online buyer penetration > 50% because infrastructure is in place Late stage growth depends on cannibalising bricks-and- mortar retail to drive spending per online buyer Smartphone penetration key to mobile commerce A 60-80% of emerging APAC e-commerce CAGR comes from online buyer penetration
  13. 13. 28 May 2013 APAC E-Commerce Primer 13 Figure 21: E-commerce industry growth in emerging APAC markets is primarily driven by rising penetration of online buyers % of e-commerce 2012-16E CAGR from increased online buyer penetration 22.2% 32.6% 32.9% 58.4% 61.1% 64.3% 69.1% 82.7% 86.9% Source: eMarketer, iResearch, IDC, Credit Suisse estimates The precedents have been set whereby as infrastructure penetration continues to increase in early-stage e-commerce markets, so too will online buyers and total e-commerce sales. What took 12-15 years in developed markets such as Japan, Australia and the US is likely to take place over the next three to five years in China given the pace of infrastructure investment and the existence of smartphones. India and Indonesia will take longer, but there will come a point in time over the next five years where advancement in the e- commerce industry will leapfrog because infrastructure penetration reaches a critical level as is the case for China today. APAC will be the single greatest source for global e-commerce spending growth over the next four years. We estimate that 57% of global e-commerce spending growth will be generated in APAC between 2012 and 2016. China presents the single largest opportunity Given its sheer size, low penetration rates and upside potential, China is the most appealing e-commerce market in APAC in terms of absolute volume and demand creation (Figure 22). Figure 22: China presents the largest market and second-highest forward growth rates Figures in bubble denotes size of industry in 2012 (US$ bn) China Japan India Indonesia Korea Australia RoAPAC 0% 2% 4% 6% 8% 10% 12% 14% 16% 0% 10% 20% 30% 40% 50% E-commerceas%ofretailsales E-commerce spending CAGR (2012-2016E) $210 $36 $39 $113 $20 $12 $1 Source: CEIC, eMarketer, IDC, iResearch, Credit Suisse estimates Infrastructure will reach critical level in the next three to five years to drive e- commerce growth in emerging APAC APAC is arguably the most important e-commerce region globally Within APAC, China has the greatest potential
  14. 14. 28 May 2013 APAC E-Commerce Primer 14 Connecting the mega trend with investment E-commerce evolution in APAC is a mega trend that will have multi-cycle investment implications across the region. And as the primary driver of global growth in e-commerce sales, international names from the developed markets will have increasingly large exposure to APAC and share price performance will likely become more linked to performance in the region over the long term. Given that it is a nascent industry in all APAC countries other than Japan and Australia, the available investment options are rather scarce. Relative to income levels across the globe, it is clear that emerging APAC countries (including Korea) have multi-years of high growth ahead (Figure 23). Therefore, we expect direct investment options to broaden over the years, coinciding with the evolution and maturing nature of the industry. But as the charts below can attest to, e-commerce is a very early-stage industry in emerging APAC, so the duration to the maturity stage is >seven years away. Figure 23: E-commerce spending S-curve—emerging APAC at the start of the curve Annual spending per buyer 2013E, GDP/capita 2012 China US Japan Korea Australia France Germany Canada Brazil Argentina Mexico RussiaIndia Indonesia Spain UK Italy Middle East Sweden Denmark Finland 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 0 10,000 20,000 30,000 40,000 50,000 60,000 AnnualSpendingperOnlineBuyer(US$) GDP/Capita PPP (US$) Source: World Bank, eMarketer, IDC, iResearch, Credit Suisse estimates The evolution of online buyer penetration is a more direct driver of online spending versus GDP/capita because it better encompasses the connection between industry enablers (see page 21) and adoption of e-commerce by Internet users. Again, this shows that emerging Asia countries are at the beginning of a multi-year cycle of high growth in e- commerce spending. China, India and Indonesia are at very early stages with Korea not too far along, whereas Japan’s growth in spending per buyer is slowing due to its high penetration rate of online buyers (Figure 24). E-commerce is a mega trend that will have material investment implications over multiple cycles Status as a nascent industry leads to few direct investment options currently for e-commerce Emerging Asia at very early stages of lifecycle when considering online buyer penetration vs spending per online buyer
  15. 15. 28 May 2013 APAC E-Commerce Primer 15 Figure 24: Versus online buyer penetration, the curve encompasses key enablers of e- commerce growth All figures 2013E China US Japan Korea Australia France Germany Canada Brazil Argentina Mexico Russia IndiaIndo. Spain UK Italy M. East Sweden Denmark Finland 0% 10% 20% 30% 40% 50% 60% 70% - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 OnlineBuyerPenetrationtoTotalPopulation Annual Spending per Online Buyer (US$) Source: eMarketer, iResearch, IDC, Credit Suisse Forward growth rates are reflective of where countries reside on the curve between penetration rates and spending per online buyer. China, India and Indonesia are at the cusp of the steepest section of the curve and this should last well beyond the next five years. Korea likely has three to five years of double-digit growth before penetration levels reach closer to 60% and growth in spending per online users begins to slow. As we discuss later in this report, the primary catalyst to China’s growth is the increase in online buyers resulting from increased development of the infrastructure enablers. Figure 25 highlights that growth expectations for spending per online buyer in China are rather benign and this could potentially be a large source of positive surprise potential. Figure 25: Climbing the curve—Three-year evolution of online buyer and spending per buyer penetration across APAC All figures 2013E China '13E Japan '13E Korea '13E Australia '13E India '13EIndo. '13E Japan '16E China '16E Korea '16E Australia '16E Indo. '16E India '16E 0% 10% 20% 30% 40% 50% 60% 70% - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 OnlineBuyerPenetrationtoTotalPopulation Annual Spending per Online Buyer (US$) E-commerce CAGR = 25% E-commerce CAGR = 9% E-commerce CAGR = 6% Indo. E-commerce CAGR = 44% India E-commerce CAGR = 27% E-commerce CAGR = 12% Source: eMarketer, iResearch, IDC, Credit Suisse estimates China’s high growth rate is a reflection of it lying on the steepest section of the lifecycle curve
  16. 16. 28 May 2013 APAC E-Commerce Primer 16 Credit Suisse APAC E-commerce investment basket (Bloomberg: CSAPECOM) Above we highlight that there are clear evolution curves for e-commerce spending globally and that emerging APAC countries are at the very early stages of multi-cycle high growth rates. Because of the early stage of development, it is incredibly difficult to pick the sole long-term winners from a small set of available public market investment options. At this stage of development, the entire chain from search engines to logistics providers to website developers to payment providers and to online marketplaces/merchants should demonstrate high growth rates and improving margins that come along with the greater scale. Therefore, we believe the best approach to capitalising on the mega trend of e- commerce growth in APAC is through a basket of stocks that provide exposure to the key verticals in the industry. We are introducing the Credit Suisse APAC e-commerce basket (Bloomberg ticker: CSAPECOM) as an investable security that leverages off the multi- cycle mega trend of e-commerce evolution. Credit Suisse APAC e- commerce basket is a group of 17 stocks that have exposure to e-commerce evolution across the region
  17. 17. 28May2013 APACE-CommercePrimer17 Figure 26: Credit Suisse APAC e-commerce basket Symbol Company Domicile E-commerce Vertical Company Description CS Rating Market Cap (US$ mn) % to TP 12M Share Perf. 2013E P/E 2013E EV/EBITDA 2013E P/B 2013E ROE Revenue CAGR ('12-15E) EPS CAGR ('12- 15E) AMZN Amazon com Inc. USA B2C retailer World's largest online retailer with significant Japan and China exposure. O 119,155 22% 26% 115.8 27.8 12.9 11% 21% 353% 0700.HK Tencent Holdings China B2C, Online Payment Provier, Social Media Tencent is a leading internet service provider with E-commerce exposure through QQ Buy (5% share of B2C), Tenpay (20% share of online payments) and leading social media player that is becoming increasingly more integral in E-commerce O 71,689 0% 40% 28.2 19.1 7.8 28% 29% 29% EBAY eBay Inc. USA C2C C2C platform with Korea exposure. Subsidiary PayPal has cross border exposure with China, Korea, modest amount in Japan. Company has some India exposure via Baazee and Snapdeal. N 70,911 1% 41% 19.9 11.8 3.8 19% 16% 18% BIDU Baidu Inc China Search/ Generation Baidu is the leading Chinese language internet search provider and directs nearly 20% of the upstream traffic to the leading B2C and C2C sites U 33,687 -17% -15% 17.9 13.4 5.5 31% 22% 10% 4755 Rakuten Japan B2C retailer Largest E-commerce company in Japan providing a variety of products with a wide range of services. O 15,876 -2% 45% 29.3 12.6 5.2 18% 16% 55% 2371.T Kakaku.com Japan Operating price comparison website with word-of-mouth and user reviews N 2,674 -13% 102% 40.0 20.6 11.8 30% 23% 24% VIPS Vipshop Holdings China B2C retailer China's leading online discount retailer for brands. NR 1,875 518% 40.5 29.2 13.5 37% 63% 152% 3064.T Monotaro Japan B2B High growth company providing tools and supplies for construction. NR 1,662 268% 66.3 n.a. 22.3 34% 27% 46% 3092.T Start Today Japan B2C retailer One of the largest E-commerce companies specializing in apparel in Japan O 1,707 27% 45% 31.7 18.1 13.9 43% 14% 32% 2678.T Askul Japan B2C retailer One of the largest E-commerce companies specializing in office supplies. Tied-up with Yahoo Japan. NR 848 85% 17.8 3.6 1.6 9% 7% 7% DANG Dangdang Inc. China B2C retailer Largest public E-commerce company in China, dominant book and media online retailer. N 503 -13% 34% -6.8 -3.5 17.4 -61% 25% -25% 3182.T Oisix Japan B2C retailer Very young E-commerce company specializing in food supplies, specifically vegetables. NR 318 n.a. n.a. n.a. n.a. n.a. n.a. 035600.KQ KGinicis Korea Online Payment Provider, C2C Develops and provides e-commerce settlement processing services in Korea, operates online marketplace. NR 293 n.a. n.a. n.a. n.a. n.a. n.a. 046440.KQ KGMobilians Korea Online Payment Provider E-payment company in Korea engaged in the development and provision of wired and wireless (online, mobile) payment services. NR 286 265% 19.2 n.a. 2.8 17% 14% n.a. 064260.KQ Danal Korea Mobile Payment Provider Mobile payment provider in Korea engaging in mobile small lot transactions (~10% of online shopping transactions). NR 226 98% 27.4 n.a. 2.3 9% n.a. n.a. 3325.T Kenko.com Japan B2C retailer E-commerce company specializing in healthy food and medicines. Tied-up with Rakuten. NR 157 341% n.a. n.a. n.a. n.a. n.a. n.a. 060250.KQ KCP Co. Ltd. Korea Back-end Services Develops enterprise-wide technology solutions to the retail industry (incl. online retail) NR 170 16.6 8.9 5.1 n.a. n.a. n.a. Source: Company data, Credit Suisse estimates for covered companies, I/B/E/S, Bloomberg
  18. 18. 28 May 2013 APAC E-Commerce Primer 18 China’s shining moment The shining moment for China’s e-commerce industry has arrived as it is not only set to become the largest online market in the world, but the contribution to overall retail sales growth is expected to become more profound. The next three to five years are the coming of age period for e-commerce in China where growth is not primarily a function of disrupting existing retail channels, but rather creating new demand country-wide to a broader group of consumers and product categories. Product and services alike will benefit immensely from China becoming the stand-out leader in e-commerce globally. In 2013 total online sales in China are expected to reach US$298 bn and account for 7.7% of total retail sales (Figure 27). China’s e-commerce industry will be 18% larger than the previous No. 1, the US, and more than 2x larger than the UK which is third. Clearly, China’s e-commerce market has become a behemoth that domestic and international retailers/sellers cannot ignore. Criticisms of China’s e-commerce industry growth decelerating are unfounded because they ignore the “law of big numbers” and the fact that China will grow by US$100 bn annually or roughly the size of Japan’s entire e-commerce industry. Interestingly, China will account for 45-50% of global e-commerce growth in each of the next four years, in our view. While China’s e-commerce industry has grown at 100% annually over the past decade, the 30% annual growth forecasted over the coming four years is 2x global growth and 3x and 6x higher than that of the US and Japan, respectively. Simply put, China’s share of global e-commerce spending is expected to increase from 19% in 2012 to 31% in 2016E. Despite a decelerating growth trend, China’s e-commerce industry is in its early stages where the impact on overall consumption and retail sales growth will be the most profound force in the economy (Figure 28). Figure 27: China will emerge as the largest e-commerce market globally in 2013E Figure 28: Growth rates are naturally slowing, but still posting an early-stage high growth profile 298 252 142 119 53 40 0% 10% 20% 30% 40% 50% 60% 70% 0 50 100 150 200 250 300 350 China US UK Japan Germany Australia 2013E E-Commerce Sales (US$bn) 3-Year CAGR (rhs) 0.2 0.2 0.6 1.9 3.2 6.8 31.4 38.5 68.1 121.4 206.7 298.4 395.2 487.1 580.6 0% 50% 100% 150% 200% 250% 300% 350% 0 100 200 300 400 500 600 700 China E-Commerce Sales (US$bn) YoY % Change (rhs) Source: iResearch, IDC, Credit Suisse estimates Source: iResearch, Credit Suisse estimates Not only should China be the largest e-commerce market in the world measured by gross sales, but as a percentage of total retail sales, it should rank ahead of the closest developed market peers at nearly 8% (Figure 29). The only developed market to have a larger share of retail sales coming from e-commerce will be Australia at 14%. China is about to become the largest e-commerce market in the world… …with total sales 18% larger than #2 US and 2x larger than #3 Japan Growth rate is naturally decelerating, but at 30% annual growth, an equivalent of Japan’s e- commerce industry will be created each year As a percentage of retail sales, China will exceed both the US and Japan
  19. 19. 28 May 2013 APAC E-Commerce Primer 19 Figure 29: E-commerce will account for a greater share of retail sales than in the US % of total retail sales from e-commerce 0% 2% 4% 6% 8% 10% 12% China US Japan Source: iResearch, Forrester, CEIC, Credit Suisse estimates The fact that China will generate a larger percentage of its overall retail sales from e- commerce compared with its developed market peers is not a sign of a peak, rather just the contrary, in our opinion. Later in this report, we discuss how China’s e-commerce industry will grow in parallel with modern format retail but at a faster rate, and within the next five years, China will be the only major economy in the world where e-commerce penetration is greater than that of bricks-and-mortar retail. Therefore, the potential for the percentage of retail sales coming from e-commerce is much greater than that of any other major market, will likely continue to grow in excess of 100 bp annually and is unlikely to stop at 14% like that of Australia. The upside potential is tremendous and will only become evident once China emerges from the high-growth phase of its e-commerce lifecycle, which may be another ten years away. Enablers of growth China’s 30% annual forward growth rate in e-commerce spending is predicated on the continued roll-out of infrastructure to drive 20% annual growth in online buyers. The key enablers for this are: (1) Broadband penetration: China is currently the largest broadband population in the world and 239 mn users, but penetration continues to be low at 54%; (2) Internet usage: As broadband penetration rises, the accessibility, reliability and speed of Internet will improve thus driving Internet penetration higher of the currently low base of 45%; (3) Mobile network build-out: Over the past five years, the three Chinese mobile players have invested US$186 bn in aggregate capex to develop the mobile network infrastructure. Over the next five years, Credit Suisse expects the aggregate amount to be even larger at US$207 bn; (4) Smartphone penetration: China’s smartphone population of 160 mn now exceeds that of the US at 123 mn and is nearly 4x larger than that of Japan. This being said, smartphone penetration remains remarkably low at 12%; (5) Online payment systems: China’s online payment penetration is only 17% versus 50-60% in the US and Japan. Improved quality, security and trust in online payment systems will be a key driver to growth in online buyers; Potential for e-commerce to represent an increasingly larger share of total retail sales is greatest in China compared with any other major market Six key enablers of growth are tied to infrastructure roll- out and will be important to 20% annual growth in online buyers
  20. 20. 28 May 2013 APAC E-Commerce Primer 20 (6) Logistics: Without more developed and efficient supply chain systems, online buyers will be reluctant to have greater trust in the e-commerce system. This is the key gatekeeper to China’s e-commerce industry reaching its full potential. Investment in multi-channel retail models will quicken the development of supply chain systems and lead to both earlier and greater efficiencies than we have seen in the developed markets. In essence, infrastructure development will be the driving force behind online buyer growth because penetration rates are so low, but can also be the crutch to the industry because without it the limitations would be insurmountable. Across all key infrastructure enablers, China’s penetration rates are well below those of the US and Japan (Figure 30). Figure 30: Infrastructure penetration enables e-commerce usage and spending All data for 2012 China Japan US Total e-commerce sales (US$ bn) 206.7 112.8 226.3 Forecast 2012-2016E CAGR 29.5% 5.8% 9.6% e-commerce spending per user (US$) $875 $1,743 $1,231 Internet users (mn) 600 105 258 Internet penetration (% of total population) 45% 82% 82% Home Broadband users (mn households) 239 35 86 Broadband penetration 54% 69% 71% Internet enabled: PCs (mn) 319 69 311 Mobile devices (mn) 298 86 376 IADs (mn) 23 15 72 Total Internet enabled devices (mn) 639 171 758 Internet devices per user 1.06 1.62 2.94 Hours spent online per user per month 120.5 120.3 120.0 Smartphone penetration 12% 33% 48% Online payment users (mn) 234 67 184 Online payment penetration (% of total population) 17% 53% 59% Online buyers (mn) 288 73 184 Online buyer penetration (% of total population) 18% 48% 59% Online buyer penetration (% of online population) 43% 68% 58% Wireline Internet users as buyers 32% 60% 74% Wireless Internet users as buyers 7% 27% 27% Source: CEIC, comScore, eMarketer, iResearch, IDC, IMF, Credit Suisse estimates Broadband penetration Over the next four years, household broadband access is expected to increase by 11% annually to 368 mn households (Figure 31). By 2016, China will have comparable broadband penetration levels as the US and Japan (Figure 32). Compared with developed market peers, upside for China’s enablers is considerable Broadband penetration to equal that of the US and Japan in 2016E
  21. 21. 28 May 2013 APAC E-Commerce Primer 21 Figure 31: China broadband penetration on the rise… Figure 32: …and will reach developed market peers by 2016E Broadband penetration as % of online users 119 139 205 239 257 296 334 368 0% 10% 20% 30% 40% 50% 60% 70% 80% 0 50 100 150 200 250 300 350 400 2009 2010 2011 2012 2013E 2014E 2015E 2016E Households with Broadband (mn; lhs) % Broadband Penetration (rhs) FWD CAGR = 11.4% 25% 35% 45% 55% 65% 75% 85% China US Japan Source: IDC, Credit Suisse estimates Source: IDC, Credit Suisse estimates Internet usage Growth in total Internet users is expected to slow from 17% annually to 8% annually over the next four years, but interestingly China is expected to add ~50 mn new Internet users each year (Figure 33). This is comparable to adding half of Japan’s Internet population every year. By 2016, China’s Internet penetration of 59% is expected to remain well below that of the US and Japan at 86% and 87%, respectively (Figure 34). This is an indication of the sustainability of high growth in China beyond 2016. Figure 33: Internet penetration on the rise… Figure 34: …but a long-term driver of growth as penetration rates will be low for quite some time Internet users as % of total population 371 446 513 600 656 711 759 802 0% 10% 20% 30% 40% 50% 60% 70% 0 100 200 300 400 500 600 700 800 900 2009 2010 2011 2012 2013E 2014E 2015E 2016E Number of Internet Users (mn) % population using the Internet (rhs) FWD CAGR = 7.5% 25% 35% 45% 55% 65% 75% 85% 95% China US Japan Source: iResearch, Credit Suisse estimates Source: iResearch, IDC, Credit Suisse estimates Mobile network build-out Over the past five years, China Mobile Limited, China Unicom Hong Kong Ltd and China Telecom have invested 38% of sales in capex for a total of US$187 bn. Over the next five years, Credit Suisse’s analyst Colin McCallum expects the number to be even larger at US$207 bn, but lower as a percentage of sales at 27% (Figure 35). China Unicom has been the largest investor and this is expected to continue to be the case. China expected to add 50 mn new Internet users per year—half of Japan’s total Internet population Capex in mobile networks expected to be US$207 bn over the next five years
  22. 22. 28 May 2013 APAC E-Commerce Primer 22 Figure 35: Mobile infrastructure capex will be higher over the next five years than in the past five years Aggregate capex by China Mobile, China Unicom and China Telecom 150 195 227 271 315 361 407 453 489 0% 10% 20% 30% 40% 50% 60% - 100 200 300 400 500 600 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E Aggregate Cellular Capex (US$; mn) Cellular Capex as % of Sales (rhs) FWD CAGR = 11.6% Source: Company data, Credit Suisse estimates Smartphone penetration Smartphone penetration could be the single largest cause of higher-than-expected e- commerce sales in China over the next five-ten years. Currently, the expectations are for future annual growth of wireline online buyers (23%) to outpace that of mobile online buyers (20%), but 53% annual growth in smartphones coupled with improvements in cellular network infrastructure and mobile payment systems, we would not be surprised to see spending from mobile online buyers outpacing that from wireline online buyers (Figure 36 and Figure 37). Figure 36: China has the largest smartphone population and expected to more than triple… Figure 37: …yet penetration will still be well below that of the US and other developed markets Smartphone users as % of total population 12 32 86 160 285 420 566 20% 25% 30% 35% 40% 45% 50% 55% 60% 0.0 100.0 200.0 300.0 400.0 500.0 600.0 2009 2010 2011 2012 2013E 2014E 2015E Number of Smartphones (mn) Smartphone Penetration (rhs) FWD CAGR = 52.5% 0% 10% 20% 30% 40% 50% 60% China US Source: Credit Suisse estimates Source: IMF, comScore, Credit Suisse estimates Infrastructure improvements and smartphone penetration increases will likely lead to higher growth in spending per mobile online buyer, which is currently at only 5% of total or Rmb148/year. A 53% annual growth in smartphones and penetration reaching >40% in 2016 should drive strong mobile e-commerce growth
  23. 23. 28 May 2013 APAC E-Commerce Primer 23 Forward growth rates are expected to be similar between mobile online buyers and wireline online buyers; however, as mentioned above, we believe the expectations for mobile online buyers is conservative given the rise in smartphones and investment in cellular networks (Figure 38). Figure 38: Upside surprise potential lies in mobile buyers and spending YoY change 0% 20% 40% 60% 80% 100% 120% 140% 160% 2010 2011 2012 2013E 2014E 2015E 2016E Mobile Online Buyers Spending by Mobile Online Buyers Wireline Online Buyers Spending by Wireline Online Buyers Source: iResearch, Credit Suisse estimates Chinese consumers are primarily using mobile e-commerce to spend on travel services such as airline tickets, hotel rooms and tours. These services accounted for 93% of mobile business-to-consumer e-commerce in China in 2012 (Figure 40). For wireline e- commerce, travel related services accounted for 39% of the total, and spending on books, apparel, electronics and other computer related products (Figure 39). Figure 39: Wireline online buyers purchase a wide range of products and services … % of business-to-consumer wireline e-commerce sales Figure 40: …but wireless online buyers primarily use e- commerce for travel-related services % of business-to-consumer mobile e-commerce sales Travel services 39% Apparel 19% Books, CDs, DVDs 12% Computer hardware 8% Consumer electronics 7% Software 7% Other 6% Movie tickets 2% Travel services 93% Apparel 2% Books, CDs, DVDs 2% Other 2% Consumer electronics 1% Source: iResearch, Credit Suisse estimates Source: iResearch, Credit Suisse estimates We believe the low usage of mobile e-commerce to purchase physical goods is a function of the low trust, security and sophistication in mobile payment systems. For travel-related services, the consumer can often elect to pay at point of service whether it is check-in for air travel or hotel stays. The breadth of purchasing by mobile consumer is likely to expand Upside surprise potential from growth in mobile e- commerce Use of mobile e-commerce will broaden as well Mobile payment market size expected to increase 73% annually
  24. 24. 28 May 2013 APAC E-Commerce Primer 24 exponentially as mobile payment systems evolve. It is expected that the mobile payment market size will increase by 73% annually over the next four years and that 17% of mobile online purchases will be transacted through a mobile payment system versus only 7.5% in 2012 (Figure 41). Figure 41: Mobile payments will represent an increasingly larger share of mobile e- commerce 39 59 80 151 302 537 865 1,358 0% 5% 10% 15% 20% 25% 0 200 400 600 800 1000 1200 1400 1600 2009 2010 2011 2012 2013E 2014E 2015E 2016E Mobile Pmt Market Size (RMB bn) % of Mobile E-commerce Transactions (rhs) FWD CAGR = 73% Source: iResearch, Credit Suisse estimates Reach of e-commerce to drive future growth There are ~250 mn online buyers in China, which is equivalent to the entire online population in the US, 46% higher than the number of online buyers in the US and nearly 3x higher than the online buyers in Japan. In a country where modern format retail penetration is well below 40%, the reach of e-commerce is now 42% of the online population and 18% of the total population. Upside remains tremendous because penetration rates are well below developed market standards in the US and Japan where online buyers as a percentage of total population and online population is 55% and 65%, respectively (Figure 42). Figure 42: China’s upside lies in the growth of online buyer penetration Online buyer penetration (%) 0% 10% 20% 30% 40% 50% 60% 70% China US Japan Source: eMarketer, iResearch, Credit Suisse estimates Penetration of e-commerce and modern format retail remain low and both poised for expansion …
  25. 25. 28 May 2013 APAC E-Commerce Primer 25 E-commerce penetration will not displace that of modern format retail, but rather be developed in parallel, and given that historical growth rates of online and online buyer populations have been 25% and 43% annually over the past decade, respectively, this will be the primary driver of the 30% CAGR over the coming four years (Figure 43). During this same period, online buyer penetration relative to the total population is expected to rise from 19% to 39%, which is a much faster level of rate of development than anyone could possibly expect in bricks-and-mortar retailing. Not only is the reach potential of e- commerce greater than that of traditional bricks-and-mortar, but the speed is exponentially faster as well. China will become the first major economy globally where e-commerce penetration exceeds that of modern format retailing. This is a key reason why e-commerce in China should not be simply viewed with regards to historical precedents in developed markets where penetration levels remain lower than that of modern format retail. China’s e- commerce industry is and will continue to be an integral component of the evolution in consumption and retail sales. Chinese online buyers will continue to spend larger amounts annually, but growth is expected to lag that of the increase in the number of online buyers (Figure 44). This is another important contrast to developed markets where e-commerce growth is dependent on increases in annual spending per online consumer. In China, forward growth in online buyers of 20% annually is expected to be nearly 3x higher than the 8% annual growth in spending per online buyer. However, upside surprise potential lies in spending per online buyer because if infrastructure bottlenecks (logistics and payment systems) evolve faster and lead to more trust by the consumer, then a greater proportion of household spending, especially in rural communities, will come online. Figure 43: Growth in China’s online buyer penetration… Figure 44: …will lead that of spending per buyer 7 6 6 27 32 46 74 108 161 194 242 290 348 418 502 -20% 30% 80% 130% 180% 230% 280% 330% 380% - 100.00 200.00 300.00 400.00 500.00 600.00 Online Buyers (mn) YoY % Change (rhs) 191 310 810 577 798 1,116 2,952 2,437 2,872 4,046 5,389 6,372 7,032 7,223 7,175 -20% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Spending per Online Buyer (RMB) YoY % Change (rhs) Source: iResearch, Credit Suisse estimates Source: iResearch, Credit Suisse estimates A common misconception about China’s e-commerce industry is that a lack of trust or reliability in the industry leads to low penetration rates. While we agree that this has an impact on the number of online buyers, data suggests that active participants in the industry actually have a significant degree of trust, reliability and belief in the system. This is based on the fact that Chinese online buyers spend a large amount online relative to their US, Japanese and global counterparts (Figure 45). Chinese e-commerce spending per online consumer is disproportionately high compared with the differences in per capita incomes, disposable incomes, household incomes and wealth. From this, we gather that the entire e-commerce chain in China likely functions better than the common perception. … but e-commerce penetration will rise at a faster rate than modern format retail E-commerce penetration in China will likely exceed modern format retail penetration within the next five years Developed markets are dependent on higher spending amounts per online buyer because of high penetration rates in bricks-and-mortar and e- commerce Trust and credibility issues are more a myth as Chinese online buyers spend disproportionately high amounts relative to income levels
  26. 26. 28 May 2013 APAC E-Commerce Primer 26 Figure 45: Relative to income levels, Chinese online buyers spend disproportionately higher than their developed market counterparts Annual spending per online buyer (US$) 3,878 1,865 1,857 1,525 1,439 1,318 1,224 1,028 947 620 587 542 Source: eMarketer, IDC, Credit Suisse While it is easy to underestimate the e-commerce industry in China today, so too is the likelihood of underestimating the amount spent per online buyer in the long term. As the infrastructure for supply chain/logistics, electronic payment systems, broadband, mobile networks and online retailer websites evolve through investment and experience, it is likely that spending per online buyer moves higher in a more linear fashion. Single largest driver of overall retail sales growth E-commerce has emerged as a bona fide and powerful driving force behind the overall macroeconomy and will play a paramount role in China’s rebalancing. China’s domestic consumption-to-GDP ratio of 35% is unsustainable over the long term, and if new leadership and/or ensuing leadership wishes to successfully rebalance the economy so that domestic consumption is closer to 50% of GDP, then promoting and regulating growth in e-commerce is an imperative. No longer can e-commerce be considered a derivative of consumption in China because it now represents ~20% of total annual retail sales growth in the economy. This is the single largest retail category driving growth in total retail sales. Put another way, growth rates in total retail sales will heavily depend on the evolution of the e-commerce industry. Therefore, promoting and regulating broadband penetration, online users, Internet security, payment security, supply chains, product licensing, online retailer licensing, mobile systems and smartphone usage should be key areas of public policy in the Chinese government. Failure to manage even one of the critical components of e- commerce development will impede not online industry growth, but that of total retail sales in China and the efforts to rebalance towards a domestic consumption-driven economy (Figure 46). Spending per online buyer could be a source of positive surprises Promoting and regulating e- commerce growth is imperative to the rebalancing of China’s economy E-commerce is now the single largest driver of total retail sales in China, highlighting the importance of promoting the enablers of e-commerce growth
  27. 27. 28 May 2013 APAC E-Commerce Primer 27 Figure 46: E-commerce has become a powerful driver of total retail sales growth in China 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E % of Retail Sales Growth from E-Commerce (lhs) E-Commerce Sales as % of Retail Sales (rhs) Nearly 1/5th of total retail sales from E- Commerce Source: CEIC, iResearch, Credit Suisse estimates In a consumption-driven economy such as the US, where domestic consumption comprises 72% of GDP, growth in e-commerce sales has accounted for 10-20% of total retail sales growth for nearly the past decade and is plateauing (Figure 47). This is not the case in China, where a greater percentage of total retail sales growth coming from e- commerce will likely persist for several more years, if not another decade, such as we saw in developed markets like the US. It is also important to keep in mind the differences in underlying real retail sales growth in China (14% per year) versus the US (4.5% per year). Figure 47: The importance of e-commerce growth to total retail trade in the US has diminished as the industry has matured 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 0% 5% 10% 15% 20% 25% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E % of Total Retail Sales Growth from E-commerce (lhs) E-commerce Sales as % of Total Retail Sales (rhs) Source: Forrester, Credit Suisse estimates Driving incremental demand It is rather difficult to estimate the split of China’s e-commerce industry and USD growth in terms of substitute to bricks-and-mortar retail versus incremental demand. In a recent McKinsey study, it is estimated that e-commerce accounts for ~2% of China’s nominal private consumption growth of 11% in 2012. We believe this could err on the conservative side because the impact on the ‘harder-to-measure’ tier 3 and tier 4 cities is likely more E-commerce driving retail sales growth will likely persist for several more years in China, unlike in the US where e-commerce contribution to growth is plateauing We believe estimates of e- commerce’s share of total retail in China understated as tier 3 and 4 cities are harder to measure
  28. 28. 28 May 2013 APAC E-Commerce Primer 28 significant and where much of the consumption is under-measured due to strong grey and black market activities. This can be proven by the fact that more rural online buyers spend a much larger share of income and disposable income on e-commerce purchases (Figure 49). E-commerce provides previously unavailable products/services, increases product/services assortment, lowers prices and allows for improved shopping comparison for rural consumers. As a result, it should not be surprising that they will spend a larger share of incomes online when the penetration of modern format retailing is low in their community, product assortment is inferior and price competitiveness is low. While nation-wide contribution to consumption growth may be only 20-25%, the impact in rural China is likely to be materially higher. Figure 48: Consumption per online buyer higher in more developed cities… Purchases per online shopper; Rmb Figure 49: …share of income is highest where e-commerce adds more value Online purchases as percentage of disposable income 6,819 4,922 4,624 4,467 Tier 1 Tier 2 Tier 3 Tier 4 18% 17% 21% 27% Tier 1 Tier 2 Tier 3 Tier 4 Source: Credit Suisse Source: Credit Suisse China e-commerce landscape We divide the e-commerce universe in China into the following segments: (1) online retailers/B2C firms; (2) marketplaces/C2C firms; (3) online payment providers; (4) logistics service providers; and (5) other service providers (search, advertising etc.). Figure 50 shows a map of China’s e-commerce universe, highlighting the key players in each segment. Rural online buyers actually spend a much larger share of income on e-commerce purchases
  29. 29. 28May2013 APACE-CommercePrimer29 Figure 50: China’s e-commerce landscape Percentages represent market share of e-commerce vertical China E-commerce Online retailers (B2C) RMB 387bn Amazon China (Amazon.com, AMZN.OQ) - 2.7% Suning (002024.SZ) - 5.5% 360Buy (Private) - 19.6% Tmall (Alibaba Group, Private) - 56.7% Coo8 (Gome, 0493.HK) - 1.4% QQ Buy (Tencent, 0700.HK) - 4.7% Dangdang (DANG.N) - 1.9% Vancl (Private) - 1.2% Vipshop (VIPS.N) - 1.4% Marketplaces (C2C) RMB 917bn eBay China (eBay Inc, EBAY.OQ) - 0.01% Paipai (Tencent, 0700.HK) - 9.46% Taobao (Alibaba Group, Private) - 94.53% Logistics providers EMS (China Post, State-owned) SF Express (Private) ShenTong Express (Private) Yuantong Express (Private) ZJS Express (Private) Yunda Express (Private)Huitong Express (Private) ZTO Express (Private) Online payment providers RMB 3.8tn Alipay (Alibaba Group, Private) - 47.4% IPS (Private) - 2.7% China Unionpay (Private) - 12.7% Yeepay (Private) - 3.1% Huifutianxia/China PnR (Private) - 5.6% 99Bill (Private) - 5.9% Tenpay (Tencent, 0700.HK) - 20.3% Other service providers RMB 28bn (search engine mkt) Baidu (BIDU.OQ) - 79.5% Soso (Tencent, 0700.HK) - 1.5% Sogou (Sohu, SOHU.OQ) - 3.0% Youdao (Netease, NTES.OQ) - 0.3% Sina (SINA.OQ) Allyes (Private) Source: Company data, Credit Suisse estimates
  30. 30. 28 May 2013 APAC E-Commerce Primer 30 C2C market still dominates… C2C remains the main online shopping channel in China, although its combined market share had eroded from 91% of China’s total online shopping market in 2009 to 70% in 2012. The C2C segment is overwhelmingly dominated by Taobao (Alibaba Group), which holds a 94.5% market share, followed by Paipai (Tencent Holdings) at 5.46% and Eachnet at 0.01% (Figure 51). Taobao, with more than 500 mn registered users, is projected to maintain its dominant market share as it strengthens its mobile platform and benefits from Alibaba Group’s recent investment for 18% of Sina Weibo, China’s premier social networking website. Paipai, launched in 2006, is Tencent’s online trading platform and leverages on Tencent’s other services such as QQ (instant messaging), Soso (search engine) and Tenpay (online payment). Eachnet was acquired by eBay in 2003, and while it was the dominant C2C player ten years ago, its market share has dwindled from 85% at the time of acquisition to 0.01% today due to the rise of Taobao. China’s C2C segment is estimated to witness a CAGR of 26.5% from 2012 through 2015. Figure 51: China C2C market share (2012) Figure 52: China B2C market share (2012) Taobao 94.53% Eachnet/ ebay 0.01% Paipai 5.46% 2012 C2C market value: Rmb 917bn Tmall 56.7% 360buy 19.6%QQ Buy 4.7% Suning 5.5%Amazon CN 2.7% Dangdang 1.9% Vancl 1.2% yihaodian 1.2% Coo8/Gome 1.4% Vipshop 1.4% Others 3.7% 2012 B2C market value: Rmb 387bn Source: iResearch Source: iResearch …with B2C catching up fast but extremely fragmented The B2C market in China has experienced exponential growth in recent years, growing by 185% and 115% in 2011 and 2012, respectively. However, the B2C landscape is much more fragmented and competitive compared to the C2C segment (Figure 52) – 2012 was marked by aggressive price wars, especially among electronics retailers. Tmall, owned by Alibaba Group, has the largest market share at 56.7%, followed by 360buy (www.jd.com) at 19.6% and various niche players such as Suning (electronics), Dangdang (books/media), Vancl (apparel) and Yihaodian (grocery). Tmall was spun off from Taobao in 2011 to build a clearer brand position (focusing only on B2C), stress the high quality branding of Tmall and create stronger synergy for the entire Taobao empire. Unlike other B2C players, Tmall works exclusively with the third party merchants instead of stocking its own SKUs. 360buy is the largest vertical B2C platform in China and offers a comprehensive product range (~1 mn SKUs). It is investing heavily in warehousing and raised US$700 mn in February 2013 to invest in its logistics platform. Amazon China is a promising player as it has been aggressively building up its presence and is differentiated in the country for its advanced warehousing and logistics system. Alibaba Group has a 95% share of C2C and 57% share of B2C B2C market expected to grow at a faster rate and is more fragmented; thus potentially lowering prices and pressuring margins
  31. 31. 28 May 2013 APAC E-Commerce Primer 31 Latest trends, key metrics Taobao still dominates C2C with the highest monthly page views and unique visitors (Figure 53, Figure 54). Taobao remained the No. 3 website in China in April 2013, according to Alexa, with its reach ratio up to 5.44%. Tencent’s Paipai fell four spots in the C2C platform China rankings, from 55th in March 2013 to 59th in April 2013 (Figure 55, Figure 56). Figure 53: Unique visitors of C2C platforms (mn) Figure 54: Page views of C2C platforms (bn) 0 50 100 150 200 250 Apr-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Mar-12 May-12 Taobao.com paipai.com 0 0.2 0.4 0.6 0.8 1 1.2 1.4 0 5 10 15 20 25 30 35 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Oct-10 Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jul-11 Aug-11 Sep-11 Nov-11 Dec-11 Feb-12 Mar-12 Apr-12 Jun-12 Taobao.com[LHS] paipai.com[RHS] Source: Google Adplanner Source: Google Adplanner Figure 55: C2C platform China rankings Figure 56: C2C website reach rates (% of Internet users) 0 2000 4000 6000 8000 10000 12000 0 10 20 30 40 50 60 70 80 Jun-11 Aug-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Taobao.com [L] paipai.com [L] eachnet.com [R] 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0 1 2 3 4 5 6 Jun-11 Jul-11 Sep-11 Oct-11 Dec-11 Feb-12 Mar-12 May-12 Jul-12 Aug-12 Oct-12 Nov-12 Jan-13 Mar-13 Apr-13 Taobao.com [LHS] paipai.com [RHS] eachnet.com [RHS] Source: Alexa Source: Alexa In terms of B2C platforms, Tmall’s ranking moved down to the 11th spot from the eighth at the end of 2012, while 360buy remained flat at 16th (Figure 57). The ranking relative to Amazon China has narrowed over the past 12 months. Tmall still has more than 2x higher unique visitors, page views and reach rate than that of the #2 B2C player, 360buy.com (Figure 58 to Figure 62). Alibaba’s Taobao has the highest page views and unique visitors, and reach ratio increased to 5.44%. Tmall is the dominant B2C player for its unique visitors, page views and reach rate
  32. 32. 28 May 2013 APAC E-Commerce Primer 32 Figure 57: B2C platform China rankings Figure 58: Unique visitors of B2C platforms (mn) 0 200 400 600 800 1000 1200 1400 0 20 40 60 80 100 Aug-11 Oct-11 Nov-11 Jan-12 Feb-12 Mar-12 May-12 Jun-12 Jul-12 Sep-12 Oct-12 Dec-12 Jan-13 Feb-13 360buy [L] Dangdang [L] Amazon China [L] Tmall [L] suning.com [R] - 20 40 60 80 100 120 140 0 10 20 30 40 50 60 Apr-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Mar-12 May-12 360buy.com[LHS] Amazon.cn[LHS] dangdang.com[LHS] Suning.com [LHS] Tmall.com[RHS] Source: Alexa, Credit Suisse estimates Source: Google Adplanner Figure 59: Page views of B2C platforms (mn) Figure 60: Reach rate of China B2C platforms (%) - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 0 200 400 600 800 1000 1200 1400 1600 1800 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 360buy [LHS] Amazon.cn [LHS] Dangdang [LHS] Suning.com [LHS] Tmall [RHS] 0 0.5 1 1.5 2 2.5 3 Jun-11 Jul-11 Sep-11 Oct-11 Dec-11 Feb-12 Mar-12 May-12 Jul-12 Aug-12 Oct-12 Nov-12 Jan-13 Mar-13 Apr-13 360buy Amazon.cn Tmall Dangdang Suning.com Source: Google Adplanner Source: Alexa, Credit Suisse estimates
  33. 33. 28 May 2013 APAC E-Commerce Primer 33 Figure 61: E-commerce website monthly page views (June 2012, mn) Figure 62: E-commerce website monthly unique visitors (June 2012, mn) 60 68 90 97 170 170 250 310 330 720 1300 1700 2300 3000 27000 buy.qq.com M18.com HC360.com 51buy.com Ctrip.com suning.com Vancl.com Amazon.cn Dangdang.com Alibaba.com Paipai.com 360buy.com Alipay.com Tmall.com Taobao.com 4.6 6.2 9 9.8 12 16 19 21 23 34 55 55 66 120 190 coo8.com buy.qq.com 51buy.com HC360.com Ctrip.com Vancl.com Amazon.cn suning.com Dangdang.com Alibaba.com Paipai.com 360buy.com Alipay.com Tmall.com Taobao.com Source: Google Adplanner Source: Google Adplanner According to Google Adplanner, in June 2012 (last available data point), Taobao, Tmall and 360buy still dominated the top three B2C/C2C positions based on monthly page views and unique visitors, while Alipay continued to dominate in the online payment arena (Figure 63 and Figure 64). Figure 63: Page views of Taobao major e-commerce websites (mn) Figure 64: Unique visitors of Taobao major e-commerce websites (mn) - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 0 500 1000 1500 2000 2500 3000 3500 4000 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Alipay [LHS] Tmall [LHS] Taobao [RHS] - 20 40 60 80 100 120 140 160 180 200 0 20 40 60 80 100 120 140 Apr-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Mar-12 May-12 Alipay [LHS] Tmall [LHS] Taobao [RHS] Source: Company data, Credit Suisse Source: Company data, Credit Suisse Baidu is a major traffic source of most e-commerce websites, excluding Taobao’s, 360buy’s and Tencent’s e-commerce websites (Figure 65 to Figure 66), while Alibaba Group websites are the largest traffic sources for Taobao, Tmall and Alipay. Alipay has the highest page views and unique visitors among online payment providers Baidu is a leading source of e-commerce traffic
  34. 34. 28 May 2013 APAC E-Commerce Primer 34 Figure 65: China top e-commerce websites traffic analysis – upstream (2 May 2013) Traffic from China Search Top % of (%) Ranking Baidu engines total Top-4 portals* weibo.com Taobao.com upstream site traffic jd.com* 17 10.96% 10.96% 5.25% 2.55% 5.11% 360buy.com 19.58% 360buy.com 84 12.50% 12.50% 6.31% 2.15% 4.23% Baidu 12.50% Dangdang.com 55 17.88% 17.88% 6.33% 2.30% 3.16% Baidu 17.88% Amazon.cn 22 10.22% 12.12% 4.40% 3.52% 5.34% Baidu 10.22% Tmall.com 8 4.66% 4.66% 2.40% 1.73% 47.11% Taobao 47.11% Taobao.com 3 8.72% 10.20% 6.60% 2.31% * Tmall.com 9.72% Paipai.com 57 19.42% 20.10% 31.13% 0.95% 5.13% qq.com 31.13% Suning.com 93 11.13% 11.13% 6.92% 2.64% Baidu 11.13% Source: Alexa, Google Adplanner *Top-4 portals are qq.com, 163.com, sohu.com and sina.com.cn Figure 66: China top e-commerce website traffic analysis – downstream (2 May 2013) Traffic to China Search Top % of (%) ranking Baidu engines total Top-4 portals* weibo.com Taobao.com downstream site traffic jd.com* 17 11.95% 11.95% 5.57% 2.91% 7.05% 360buy.com 14.35% 360buy.com 84 12.48% 12.48% 5.70% 2.05% 5.05% jd.com 17.16% Dangdang.com 55 17.79% 17.79% 6.68% 2.46% 3.99% Baidu 17.79% Amazon.cn 22 11.87% 14.08% 6.12% 3.65% 6.98% Baidu 11.87% Tmall.com 8 7.72% 7.72% 3.44% 2.20% 37.98% Taobao 37.98% Taobao.com 3 9.71% 11.14% 6.20% 2.23% * Tmall 12.09% Paipai.com 57 16.62% 17.63% 25.06% 1.07% 7.12% qq.com 25.06% Suning.com 128 11.50% 11.50% 6.87% 1.92% 4.02% Baidu 11.50% Source: Alexa, Google Adplanner *Top-4 portals are qq.com, 163.com, sohu.com and sina.com.cn Alibaba Group websites barely rely on outside search engines and have formed a self- sufficient traffic circle—Taobao.com attracts huge numbers of users and traffic, and leads them to other Taobao-related websites (Figure 67). Figure 67: Upstream sites of Taobao e-commerce products Search Top Other Other China engines Top-4 upstream % of Taobao % Taobao % (%) Ranking Baidu total portals weibo.com site traffic websites Reach websites Reach Taobao.com 3 8.7% 10.20% 6.60% 2.31% Tmall.com 9.72% Alipay 4.33% Etao.com 1.93% Tmall.com 8 4.7% 4.66% 2.40% 1.73% taobao.com 47.11% Alipay 5.57% Etao.com 1.81% Alipay.com 15 5.7% 5.68% 2.81% 1.26% taobao.com 35.96% tmall.com 7.70% n.a. n.a. Etao.com 43 6.3% 6.32% 5.10% 1.74% taobao.com 37.48% tmall.com 7.68% Alipay 1.90% Source: Alexa, Credit Suisse estimates According to the ranking of the Top 30 2011 B2C websites by iResearch (Figure 68), only four out of the Top 30 sites are physical retail companies. Suning.com leads the pack as the fourth-largest e-commerce website with a yearly GMV of Rmb6.9 bn in 2011, only Rmb0.1 bn behind Amazon China. Alibaba Group websites have a self-sufficient traffic circle China is not a market where physical retailers have a large online presence
  35. 35. 28 May 2013 APAC E-Commerce Primer 35 Figure 68: Top 30 B2C websites in China in 2011 Website Category E/P* 2011 GMV (Rmb bn) Growth (YoY) (%) Tmall Comprehensive E 92 206.7 360buy Comprehensive E 30.9 202.9 Amazon China Comprehensive E 6 100 Suning.com 3C P 5.9 490 Qqbuy Comprehensive E 5.3 165 Dangdang Comprehensive E 3.55 57.1 Vancl Apparel E 3.5 89.2 No. 1 Shop Comprehensive E 2.72 235.8 51buy.com 3C E 2.37 196.3 Coo8 3C E 2.1 320 New Egg 3C E 1.5 -16.7 Red baby Baby & mother E 1.5 0 VIPshop Apparel E 1.43 377.1 Moonbasa Apparel E 1.2 380 Gome.com 3C P 1 300 M18 Apparel E 0.75 9.6 Lafaso Cosmetics E 0.63 384.6 Okbuy Shoes E 0.6 200 Maibaobao Bags E 0.5 233.3 Xiu.com Apparel E 0.5 150 Tianyi Mobile net 3C P 0.46 143 Letao Shoes E 0.45 350 Jumeiyoupin Cosmetics E 0.4 n.a. Jiuxian Alcohol E 0.4 n.a. Tiantian.com Cosmetics E 0.35 n.a. New7.com 3C E 0.34 126.7 Lusen digital 3C E 0.3 100 V+ Apparel E 0.3 100 ihush Apparel E 0.3 50 Lenovo online store 3C P 0.3 200 Source: iResearch *E/P=e-commerce companies or Physical retail companies E-commerce service providers also a crowded arena Online retailers and marketplaces in China are rarely fully vertically integrated, so third party service providers such as search portals, online payment providers and logistics/delivery firms play a crucial role in facilitating the e-commerce market. China’s third party online payment market reached Rmb3.8 tn in 2012. Alipay, owned by Alibaba Group, leads with a 47.4% share, followed by Tenpay (Tencent Holdings) at 20% and China Unionpay at 13% (Figure 69). China UnionPay, a state-backed enterprise, is also the only domestic bank card organisation and interbank network in the country. Growth in the online payment market will be driven by: (1) Expanding e-commerce sales; (2) Adoption of online payment platforms for new applications such as utilities, airline tickets and online games; (3) Improved buyer protection, data and customer profile security; (4) Low penetration and preference by Chinese consumers to use credit cards. The scale of the online payment market can be larger than the consumer e-commerce market because the adoption of business-to-consumer transactions will likely occur soon. Large online payment companies such as Alipay and Tenpay are not fully monetising (take rate of less than 1%); therefore, as usage becomes more widespread, we believe Marketplaces are not vertically integrated, so rely on a full list of service providers Alipay has a strong 47% share in online payment market Online payment market can potentially outsize overall e- commerce market
  36. 36. 28 May 2013 APAC E-Commerce Primer 36 monetisation by the industry leaders will improve materially. Until this does, the online payment market is likely to grow slower than that of overall e-commerce. Figure 69: China online payment market share 2012 Figure 70: China search engine market share 2012 Alipay 47.4% Tenpay 20.3% China Unionpay 12.7% 99bill 5.9% China PnR 5.6% Yeepay 3.1% IPS 2.7% Others 2.3% 2012 market value: Rmb 3.8tn Baidu 79.5% Google China 15.8% Sogou 3% Soso 1.5%Others 0.2% 2012 market value: Rmb 28bn Source: iResearch Source: iResearch The express delivery market in China had grown rapidly with the rise of e-commerce, reaching an estimated Rmb84 mn in 2011, However, the market is extremely crowded with over 7,000 express delivery companies ranging from state-owned giants such as EMS (owned by China Post) to small local players with just a couple of bikes. The four biggest providers are EMS, SF Express, Shentong Express and Yuantong Express, making up almost two-thirds of the domestic express delivery market, although many are franchised outlets with inconsistent service quality. Online search portals and social networking sites in China provide an essential advertising platform for e-commerce firms, as out of the top 20 websites in China, 13 are either search portals or social networking sites. Baidu leads the online search engine market by a long shot, commanding a 79.5% market share in 2012, with other players such as Google China, Sogou (owned by Sohu), Soso (owned by Tencent) and Youdao (owned by Netease) slowly chipping away at the block (Figure 70). A key online advertising agency in China is Allyes, in which US private equity firm Silver Lake Partners owns a majority stake. Express delivery is set to become a much larger market but heavily fragmented leading to uncertain profitability Search portals have a strong tie-in to e-commerce for both traffic and advertising revenue models
  37. 37. 28 May 2013 APAC E-Commerce Primer 37 Why consumers use e-commerce Cheaper goods, ease of price comparison Cheaper price was one of the biggest initial attractions of e-commerce to consumers. ■ E-commerce platforms represent a more direct distribution model compared to physical stores (Figure 71): For the same goods, brands are given a more direct access to consumers via e-commerce platforms. In contrast, for physical stores, brands usually go through layers of distributors to be able to reach final customer, incurring higher distribution costs and inventory stocking and warehouse costs at various physical stores. ■ Increasing competition among e-commerce platforms, along with their focus on ramping-up transaction (as opposed to profitability), lead to aggressive promotions, diverting traffic away from brick and mortar shops (Figure 72). Figure 71: E-commerce offers direct connection between suppliers and end-consumers—360buy is an example Figure 72: The battle for UV and transaction volume— Drove intense promotions and price competition online Source: Company website, Credit Suisse Source: Alexa, Credit Suisse China Merchandise richness: Physical retail’s Achilles’ heel In the commercially matured developed countries, retailers’ long developmental process before the advent of Internet allowed physical stores to have rich merchandise selection and deep reach to their consumers. China’s retail industry had a late take-off, as it only truly started to flourish since the opening and reform a couple decades ago. Not long after, Chinese consumers also started to have initial access to PC and the Internet. Brands in China are extremely fragmented and regionally confined. With the fast- growing scale of B2C and C2C platforms, brands and suppliers that had distribution capacity for only up to a regional level could now be reached nation-wide. As a result, consumers are offered a dazzling array of merchandise online (and they had the ease to search for them without having to step out of their home or office) (Figure 73). Confined to physical space, the merchandising appeal of physical retail stores started to wane. Cheaper price was one of the biggest initial attractions of e-commerce to consumers For consumers, merchandise selection and availability among various ecommerce portals is another major advantage over physical stores Unique Visitors (mn)
  38. 38. 28 May 2013 APAC E-Commerce Primer 38 Figure 73: Number of merchandise items available on e-commerce website, using keyword search (as of April 2012) Source: Company data, Credit Suisse. Note: The heist number is underlined. Lastly, e-commerce platforms are evolving to become an integrated virtual ‘mall’ format, by connecting to a variety of category-specialised B2C websites. These alliances not only greatly enlarged the number of SKUs available through their platform but also expanded the spectrum of merchandise categories (Figure 75). Figure 74: Internet penetration exceeding physical retail— Giving e-commerce a chance to leapfrog physical stores Figure 75: Online ‘mall’, widen merchandise selection— Tmall’s alliance with category specialty vertical websites 0 10 20 30 40 50 60 70 80 90 100 China(urban) UK France Germany SouthKorea US Japan Brazil India Top 20 retailer's share of total retail sales % % of population with Internet yougou.com Source: Boston Consulting Group (2010 data) Source: Credit Suisse Convenience For standardised products that do not require physical trial (such as electronics, home goods), saving a trip does hold appeal to a lot of consumers. ■ Delivery services are low-priced by a lot of e-commerce portals. Some offer free delivery for minimum order of above Rmb29-49. Before 2012, 360buy, Dangdang and Amazon China all offered free delivery services on any orders. Additionally, some portals also offer lenient return policies, easing another consumer concern about online shopping. The convenience of not having to get on the road became even more appealing as more and more consumers living in major Chinese cities start to face worsening traffic jams, increasing air pollution and more demanding work hours. ■ Mobile shopping adding more convenience: Smartphones are growing at an amazing speed, accentuating the convenience of shopping on-the-go as one fundamental appeal offered by e-commerce (Figure 77). Saving a shopping trip is becoming more appealing, given cheap delivery fees, congested city traffic and increasingly hectic lifestyles
  39. 39. 28 May 2013 APAC E-Commerce Primer 39 Figure 76: Total online shopping market size (online shopping includes B2C and C2C) Figure 77: Online shopping via mobile devices—A fast means to conduct online shopping 165 182 202 236 259 301 320 424 10% 11% 16% 10% 16% 7% 32% 0% 5% 10% 15% 20% 25% 30% 35% 0 50 100 150 200 250 300 350 400 450 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012e 2Q2012e 3Q2012e 4Q2012e Rmbbillion Total on-line shopping (Rmb bn) QoQ % 1 2 3 5 7 12 16 21 1% 1% 2% 2% 3% 4% 5% 5% 0% 1% 2% 3% 4% 5% 6% 0 5 10 15 20 25 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012e 2Q2012e 3Q2012e 4Q2012e Rmbbillion Mobile on-line shopping (Rmb bn) Mobile as % of total Source: iResearch Inc. 2013.1 (Note: total value includes VAT) Source: iResearch Inc. 2013.1 (Note: total value includes VAT) Key products and services Chinese consumers buy online Of China’s Rmb1,304 bn e-commerce sales in 2012, apparel, shoes and bags and leather goods stood out as the largest single category contributor, followed by 3C products (computer, communications, consumer electronics) (Figure 78, Figure 79). Particularly, in a Chinese online shopper’s basket, apparel takes a much bigger share at 27% than it does in an American online shopper’s at only around 12%. Figure 78: 2012 e-commerce sales—Apparel, shoes, bags & leather goods, along with 3C items, take the lion’s share Figure 79: ‘Others’ category may consist of a variety of activities/services—respondents in CS consumer survey Apparel, shoes, bags, leather goods 27% 3C items 18% Cosmetics 5% Baby products 4% Books, audio, video 3% Others 43% Gaming 31% Banking 17% Travel 6% Gambling 1% Social network 23% Instant messaging 22% The "other" category: Not related to physical goods, this consists of services sold on-line or providede free. Source: iResearch Source: Credit Suisse China Consumer Survey 2013 Apparel Primary motives of Chinese buying apparel: According to a survey done on mainland consumers by Hong Kong Trade Development Council, 90% of the respondents purchased new clothing for practical seasonal change and replacement, and 50% respondents listed promotions and discounts as another reason for the purchase. Apparel and consumer electronics represent more than 40% of e-commerce sales Purchase driven by broader assortment and lower prices
  40. 40. 28 May 2013 APAC E-Commerce Primer 40 Given the wider selection of brands and SKUs online, the transparency in price comparison, and the enhancing quality of delivery and return services, Chinese consumers likely find online channels a better fit with the above two primary motives (Figure 80, Figure 81). Figure 80: 14% of China’s apparel sales was done online Figure 81: Recent growth trends in apparel sales 15 33 64 162 205 800 1,000 1,100 1,255 1,437 2% 3% 6% 13% 14% 0% 2% 4% 6% 8% 10% 12% 14% 16% 0 200 400 600 800 1,000 1,200 1,400 1,600 2007 2008 2009 2010 2011 Online apparel sales (Rmb bn) Total apparel sales (Rmb bn) on-line as % of total 23.30% 18% 16% 21% 22% 30.80% 17% 16% 31% 10% 0% 5% 10% 15% 20% 25% 30% 35% 2007 2008 2009 2010 2011 Total apparel growth High-end dept stores' apparel sales growth Apparel sales in high-end dept stores fell below overall apparel sales, amid fast growing on-line sales Source: iResearch, WIND Source: China National Commercial Information Centre (CNCIC) Unprecedented move by brands, big and small: The advent of B2C and C2C portals has enabled a lot of smaller brands to gain national exposure. Thousands of emerging private labels were incubated via the online channels, such as Taobao C2C portal, Tmall (Taobao’s B2C portal), as well as VANCL (B2C) (Figure 82). Key drivers: Female shoppers, mid-end apparel merchandise. Women make up the majority of apparel purchases online. According to iResearch, women’s apparel became the biggest sub segment for Taobao in 2010, accounting for roughly 44% of its total sales (Figure 83). Figure 82: VANCL—Growth through B2C apparel sales Figure 83: Taobao’s apparel segments transaction volumes Sportswear 2% Female apparel 44% Lady underwear 11% Lady shoes 9% Childern's wear 13% Men's shoes 2% Male Apparel 12% Cases & Bags 7% Female shoppers drove almost 77% of on-line shopping , after counting in childern's wear (13% of total on-line sales) Source: Company website Source: Company data as disclosed in 2011, Credit Suisse research Fast growing B2C: We estimate that B2C accounted for nearly 30% of the total e- commerce market GMV in 2012, up from 14% in 2010. We forecast B2C (as a percentage of the e-commerce market) will grow to in excess of 40% in 2015, because of: (1) customer demand for B2C’s better product quality than C2C’s; (2) superior B2C services (e.g., time to delivery, customer service and product guarantees) compared to the C2C segments; and (3) more C2C individuals and SMEs migrating to become B2C merchants Marketplaces are key for small/local brand awareness Women’s apparel is the largest sub segment for Taobao B2C will grow on the back of stronger back-end logistics and improved scale by online retailers
  41. 41. 28 May 2013 APAC E-Commerce Primer 41 (e.g., Taobao brands setting up independent vertical B2C websites). Figure 84 shows the market share breakdown of China’s apparel online retail market. Figure 84: 2011 China B2C apparel online shopping market share breakdown Source: iResearch New formats to further grow apparel sales ■ Social ecommerce: Mogujie and Meilisuo are China’s most popular social shopping and social media websites in China, also sometimes referred to as China’s Pinterest (Figure 85). Mogujie’s revenue is derived from end portals, such as Taobao, paying for such traffic diversions. For Taobao, not only these sites could help source new traffic, they could also help increase customer stickiness by engaging them in an active community that is highly targeted and relevant to their individual shopping interests. In April 2012 Taobao Alliance officials announced that Mogujie brought Rmb160 mn monthly transaction value to Taobao. According to itxinwen.com, 90% of Mogujie.com (social shopping website) and 80% of Meilishuo.com’s (social media websites) traffic goes to Taobao, with the rest going to OkBuy.com and other B2C websites. Mogojie’s monthly revenue reached Rmb4 mn in March 2012, according to DoNews. ■ Flash sales: Most of these sites are inventory clearance portals that conduct short- duration (e.g. seven-day) sales events online with deep discounts. Examples include VIPshop.com, ihush.com, fclub.cn and VIPstore.com (Figure 86). Brands being cleared on these sites range from mid-end domestic brands to genuine western luxury. Brands grew preference for this means because brand’s own website and physical stores remain not associated and untarnished, while the tightly timed flash events creates a sense of exclusiveness, discreetness, and urgency for buyers to take action. Figure 85: Front page of Mogujie.com—China’s Pinterest Figure 86: Flash sale website—VIP.com Time left in the flash sale event Source: Company website Source: Company website Mogujie and Meilisuo are China’s most popular social shopping and social media websites – sometimes referred to as China’s Pinterest Brands being cleared on these sites range from mid- end domestic brands to genuine western luxury
  42. 42. 28 May 2013 APAC E-Commerce Primer 42 3C products High per-ticket sales, but also high level of price competition: The former incumbent leader, 360buy.com, started with 3C products (computer, communications and consumer electronics), which used to account for 80%+ of its total general merchandise volume in the middle of 2011. It gained market share fast by providing very low prices at the early stage. But competition started to crowd up in this high price-transparency environment (Figure 87). Figure 87: Average price of the same five 3C products on different platforms In RMB Source: Company websites, Credit Suisse (as of 2012 May) Suning.com and Coo8.com (GOME’s e-commerce): Gome and Suning are the Top 2 physical retailers of home appliances. They have actively joined the e-commerce game and made inroads starting with 3C products and aim to expand into other non-3C categories (Figure 88). Their future growth could potentially be helped by: (1) existing and improving logistics, (2) larger- network of offline stores, (3) strong support from parent companies and (4) higher quality of existing branding. Suning has dual B2C brands: Suning.com (Suning Yigou) and cnsuning.com (Suning home electric equipment). According to tuan800.com, Suning.com’s online transaction volume was Rmb5.9 bn in 2011, accounting for 7% of its total transactions. Suning’s CEO commented that Suning targets transforming from a home appliance retailer to “Amazon + Wal-Mart” in China. Figure 88: Estimate of selective vendors and their 3C sales Source: iResearch, Credit Suisse China (2012 May) Travel The online travel market: An ever-expanding horizon ■ More consumers are ‘upgrading’ their consumption from physical merchandise to life- experience-based services, such as travel. This is further helped by the government’s promotion of toll-free highways during holidays and the increasing relaxation of visa for travel abroad. Price is key differentiator in the 3C category Suning and Gome broadening away from solely 3C Suning has high ambitions for multi-channel retail development Consumer buying habits and preferences evolve with the industry and wealth levels

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