China E-commerce Analytics [Credit Suisse]

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China E-commerce Analytics [Credit Suisse]

  1. 1. 12 November 2009 Asia Pacific/China Equity Research Consumer Internet (Internet) / OVERWEIGHT China Internet Sector Research Analysts SECTOR REVIEW Wallace Cheung, CFA 852 2101 7090 wallace.cheung@credit-suisse.com Chinas e-commerce market: a new retail boom Sharon Jing 852 2101 7039 China e-commerce market GMV forecast sharon.jing@credit-suisse.com (RMB bn) 1,800 Asia Internet Research Analyst Team Wallace Cheung, CFA 1,600 (China) 1,400 Jeff Kahng 1,200 (Korea) 1,000 800 600 400 200 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 Taobao C2C Taobao shopping mall Paipai Vertical B2C sites Others Source: Company data, Credit Suisse estimates ■ E-commerce is becoming important for China’s retail market. We expect China’s e-commerce market size, in terms of gross merchandise value (GMV), to grow to Rmb243 bn (US$35.6 bn) in 2009, up 89% YoY. We expect the size of this market (as a percentage of China’s retail sales) to increase from 1.2% in 2008 to 4.2% in 2012, compared with 5.1% in the US in 2007. ■ Taobao is the dominant e-commerce player. Taobao (not listed) is the dominant e-commerce player due to: 1) its high user loyalty, 2) high transaction value with a dominant market share (78% in 2008) and 3) high traffic volumes. ■ Tencent is the best e-commerce play. As Taobao is not listed, we believe Tencent is the best play in the fast-growing China e-commerce market. Tencent’s e-commerce businesses, Paipai and Tenpay, are gaining market share. We estimate Paipai and Tenpay’s valuation at US$8.3 bn, equivalent to 22% of our DCF valuation for Tencent. We believe the market has not fully factored in the valuation of both businesses. We reiterate our OUTPERFORM rating for Tencent with a target price of HK$166.70. ■ Baidu facing competition from Taobao. Although it is the largest search engine in China, Baidu cannot provide traffic to 78% of the e-commerce market in China, as Taobao has blocked Baidu’s search crawling software since 3Q08. Also, our proprietary survey shows that ‘long tail’ online merchants prefer Taobao to Baidu. Given Taobao’s competition, we expect Baidu’s paid search market share to fall from 58% in 2008 to 36% in 2012. We reiterate our UNDERPERFORM rating on Baidu with a target price of US$263.3.DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S.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. Investorsshould consider this report as only a single factor in making their investment decision.
  2. 2. 12 November 2009Focus chartsFigure 1: Growth forecast for China’s e-commerce market Figure 2: e-commerce (as a % of retail sales) in the US and China (RMB bn) (%) (%) 8 1,800 128 200 89 7 1,600 71 53 100 1,400 40 28 20 17 6 1,200 814 - 5 1,000 739 4 -100 800 563 657 3 600 -200 775 2 400 446 324 620 -300 1 200 217 323 477 52 119 90 188 - 26 -400 - 4 9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E B2C C2C YoY growth rate (%) China USSource: iResearch, Credit Suisse estimates Source: iResearch, Company data, Credit Suisse estimatesFigure 3: Breakdown of China’s e-commerce market Figure 4: Taobao sellers’ storefront distribution(C2C only) (on various C2C platforms) (%) (%) 100 100 13 - 90 18 18 16 25 80 80 33 24 70 60 38 53 60 50 40 82 55 59 40 20 38 32 30 20 0 10 Blended <1 y ear 1-2 y ears 2-3 y ears >3 y ears - 2007 2008 2009 2010 2011 2012 2013 2014 2015 Taobao shop age Taobao Paipai Eachnet Youa Pure Taobao Taobao+Paipai Taobao+Paipai+othersSource: iResearch, Credit Suisse estimates Source: Credit Suisse estimatesFigure 5: Online payment market share (annual) in China Figure 6: Online merchants: “Which P4P advertising is better?” (%) 60 50 Baidu 40 0% 30 Same 20 3% Taobao 10 97% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Alipay Tenpay Shanghai Unionpay OthersSource: iResearch, Credit Suisse estimates Source: Credit Suisse estimatesChina Internet Sector 2
  3. 3. 12 November 2009China’s e-commerce market: a newretail boome-commerce – from scale to profitWe are positive on the long-term growth of China’s e-commerce market, including both China’s e-commerce marketB2C and C2C, and expect its size, based on gross merchandise value (GMV), to increase (as a percentage of retailto Rmb887 bn in 2012, a CAGR of 54% from 2009 to 2012. We expect the size of China’s sales) up from 1.2% in 2008e-commerce market (as a percentage of China’s retail sales) to increase from 1.2% in to 4.2% in 20122008 to 4.2% in 2009 due to competitive pricing, convenience, and national coverage.We expect China’s e-commerce companies to play an important role in China’s retail e-commerce will play a vitalmarket and remain competitive in the retail space due to: (1) better data mining and role in China’s retail marketworking capital management capabilities, (2) ability to constantly interact with customers,and (3) supportive government policies. A few e-commerce companies in China areexpanding through multi-channel strategies and are building a network of physical stores.Unlike the US market, China’s e-commerce market is dominated by the C2C business C2C is the key businessmodel and has a highly concentrated market structure. In 2008, C2C accounted for 93% of model; Taobao accountedthe total e-commerce GMV. Taobao is the dominant player with a 2008 market share of for 82% of the C2C market82%, followed by Paipai, owned by Tencent Holdings (0700.HK, HK$138.60,OUTPERFORM, TP HK$153.60), at 10%.The contribution of B2C’s market to the e-commerce market will rise from 7% in 2008 to Taobao‘s shopping mall also36% in 2012. We expect Taobao’s mall to account for 38% of B2C market in 2009. dominant in the B2C marketPayment – the e-commerce highwayThe third-party online payment platform, instead of credit cards, is the dominant payment Alipay, a sister company ofmethod in China’s e-commerce market. We expect the online payment platform’s TPV to Taobao, had an onlinegrow to Rmb566 bn in 2009, up 106% YoY. Alipay (not listed), Tenpay (owned by payment market share ofTencent) had a TPV market share of 50.7% and 19.3%, respectively, in 2008. We believe 50.7%Taobao’s owes a part of its success to the launch of Alipay, the sister company of Taobao.We expect Alipay to remain the largest online payment platform in China in the near future.Search versus e-commerce – ‘Yin-Yang’The link between e-commerce and general search engines in China is much weaker than Baidu not linked to 78% ofthat in the global market. Taobao has blocked Baidu’s crawling software (technology to e-commerce marketacquire information from websites online) since 3Q08. Baidu cannot directly providesearch traffic to Taobao, and the latter accounts for 78% of e-commerce market. Also,Taobao launched its independent search engine in October 2009. Finally, based on oursurvey, 97% of online merchants prefer Taobao’s pay-for-performance (P4P) advertisingproducts, instead of Baidu’s. Taobao and Baidu are competing in the long term.Taobao is a valuable company due to its: (1) high user stickiness, (2) dominant market We estimate Taobao’sshare, and (3) high traffic volumes. Based on public information, we expect Taobao’s DCF valuation at US$12.0 bn,enterprise value to be US$12.0 bn, translating into a 2010E non-GAAP P/E of 75x. equal to 75x 2010E P/ETencent’s Paipai and Tenpay are gaining market share. We estimate Paipai and Tenpay Paipai and Tenpay shouldto account for US$8.3 bn of the valuation, 22% of our DCF valuation for Tencent. We contribute to 22% of ourbelieve the market has not factored in the valuation of both businesses fully. We reiterate valuation for Tencentour OUTPERFORM rating on Tencent with a target price of HK$166.70.Despite being the largest search engine in China, Baidu’s paid search business will face Baidu’s paid searchcompetition from Taobao. We expect Taobao’s search market share to rise from 3% in business to face competition2008 to 22% in 2012, whereas Baidu would be down from 58% in 2008 to 36% in 2012. from TaobaoWe reiterate our UNDERPERFORM rating on Baidu with a target price at US$263.3China Internet Sector 3
  4. 4. Global valuation comparativesChina Internet Sector Figure 7: Global valuation comparatives Mkt EPS ROE Net margin FCF yield Close Target cap Consensus P/E P/B (%) EV/EBITDA (%) (%) Company Ticker Ccy price Rating price (US$ mn) 2009 2010 2011 2008 2009 2010 2009 2009 2008 2009 2010 2008 2009 2010 2008 2009 2010 China. Sina SINA.OQ USD 40.4 R R 2,174 1.1 1.5 1.9 R R R R R R R R R R R R R R NetEase NTES.OQ USD 39.6 O 48 4,800 2.1 2.9 3.4 21.9 18.4 13.5 4.7 25.6 15.4 13.3 8.7 52 48 39 5 4 6 Shanda SNDA.OQ USD 48.7 U 39.7 3,298 3.6 3.9 4.2 19.6 14.2 14.8 4.0 28.0 10.7 7.2 6.4 35 32 27 8 6 7 Tencent 0700.HK HKD 138.6 O 153.6 32,405 3.1 4.3 5.6 80.6 40.7 29.5 18.1 44.9 61.1 31.0 20.9 39 44 42 1 2 3 The9 NCTY.OQ USD 8.0 N 9.7 225 -1.3 -1.0 -1.4 15.9 -5.0 -16.5 0.6 -9.0 -2.3 4.0 -66.0 5 -33 -15 8 -22 -4 Sohu SOHU.OQ USD 55.2 N 61.1 2,115 4.0 4.3 5.2 13.6 14.1 13.7 3.5 27.9 9.4 6.4 5.0 37 30 25 9 12 9 Baidu BIDU.OQ USD 396.3 U 263 13,699 6.3 9.1 13.2 89.8 65.0 50.4 20.3 31.0 62.4 45.6 34.5 35 35 36 1 2 2 Kongzhong KONG.OQ USD 15.2 N 11.4 529 0.5 0.7 1.4 -26.4 39.1 28.5 3.0 -8.1 -20.3 16.7 11.9 -23 14 18 1 0 4 Perfect World PWRD.OQ USD 45.7 O 53.1 2,224 2.8 3.5 4.4 28.6 16.5 12.0 5.3 44.2 18.6 11.1 7.2 45 48 48 0 6 8 Changyou CYOU.OQ USD 31.4 O 46.5 1,612 2.9 3.3 4.2 13.8 11.1 9.0 7.4 66.6 12.0 7.3 5.1 53 54 54 8 10 11 Alibaba 1688.HK HKD 17.8 O 23.7 11,546 0.2 0.4 0.5 65.8 78.4 43.1 8.4 19.2 53.9 54.4 28.4 40 26 28 2 2 4 Ctrip CTRP.OQ USD 60.4 N 49.6 4,052 0.5 0.7 1.1 61.9 47.4 37.5 10.7 25.8 53.6 39.1 28.6 28 29 29 31 47 249 Korean Daum Communications 035720.KQ KRW 54,500 O 70,000 561 2109 4000 5134 16.8 23.0 14.2 3.4 16.2 9.8 9.7 6.3 20 14 17 n.a. n.a. n.a. SK Communications 066270.KQ KRW 7,260 O 14,000 249 -110 381 719 -13.9 -22.0 12.5 1.6 -7.0 13.5 10.3 3.5 -10 -7 9 n.a. n.a. n.a. NC Soft 036570.KS KRW 129,000 O 201,000 2,219 7735 9737 11308 103.4 15.2 11.1 4.7 29.5 35.6 9.9 7.1 7 27 29 n.a. n.a. n.a. NHN Corp 035420.KS KRW 186,000 O 210,000 7,088 8874 10723 12515 24.6 21.2 17.0 9.0 42.2 16.2 15.7 13.1 30 34 35 n.a. n.a. n.a. Non-Japan Asia Average 34.4 25.2 19.4 7.0 25.2 23.3 18.8 8.0 26 26 28 Japan Softbank 9984 JPY 2,140 O 3,000 25,566 59 115 144 22.3 55.4 19.3 6.2 11.4 7.6 6.8 6.6 4 2 4 n.a. n.a. n.a. Yahoo Japan 4689 JPY 27,290 N 27,500 17,501 1281 1401 1537 26.4 21.7 20.3 6.8 30.7 11.2 10.8 9.9 24 28 29 n.a. n.a. n.a. Japan Average 24.3 38.5 19.8 6.5 21.0 9.4 8.8 8.2 14 15 17 n.a. n.a. n.a. North America Google GOOG USD 551.1 O 600 175,261 22.7 26.2 30.6 28.3 24.5 21.0 5.1 20.8 17.0 13.8 13.6 28 31 30 n.a. n.a. n.a. Amazon.com AMZN USD 126.2 N 105 54,266 2.3 2.8 4.0 91.9 62.4 50.0 16.0 24.5 66.2 62.1 28.0 3 4 4 n.a. n.a. n.a. comScore SCOR USD 16.6 na. na. 503 0.7 0.8 0.9 20.0 156.2 56.4 3.7 0.0 20.2 16.6 12.5 21 3 7 n.a. n.a. n.a. eBay EBAY USD 23.3 N 25 30,929 1.5 1.6 1.8 13.2 15.1 14.3 2.4 16.1 8.6 8.6 10.3 27 23 24 n.a. n.a. n.a. Expedia EXPE USD 23.5 O 29.0 7,036 1.4 1.5 1.7 18.5 17.1 15.9 2.6 0.0 10.1 8.5 7.3 13 14 14 n.a. n.a. n.a. InterActiveCorp IACI USD 19.3 na. n.a. 2,774 0.4 0.7 0.9 21.2 62.1 87.4 0.6 0.0 5.8 6.1 4.7 9 3 2 n.a. n.a. n.a. Liberty Interactive LINTA USD 12.1 na. n.a. 7,229 0.5 0.7 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0 n.a. n.a. n.a. LoopNet LOOP USD 9.8 na. n.a. 398 0.4 0.3 0.5 19.9 38.9 40.7 3.9 0.0 8.4 8.5 8.7 21 14 13 n.a. n.a. n.a. Netflix NFLX USD 55.9 na. n.a. 3,369 1.9 2.3 2.9 42.3 29.5 25.1 18.9 64.1 8.2 7.0 6.5 6 7 6 n.a. n.a. n.a. Orbitz Worldwide OWW USD 5.2 O 9 540 0.3 0.4 0.5 197.4 23.9 18.1 2.3 0.0 8.3 6.7 5.7 0 3 4 n.a. n.a. n.a. priceline.com PCLN USD 172.0 O 185 7,271 7.5 9.2 10.7 28.9 22.5 18.7 0.0 31.0 17.9 12.9 10.3 15 16 18 n.a. n.a. n.a. WebMD Health WBMD USD 35.9 n.a. n.a. 2,149 0.8 1.0 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0 n.a. n.a. n.a. Yahoo YHOO USD 15.9 N 18 22,243 0.5 0.6 0.7 22.6 24.3 21.2 2.0 8.1 7.2 7.1 12.9 14 14 16 n.a. n.a. n.a. 12 November 2009 North America average 38.8 36.7 28.4 4.4 12.7 13.7 12.1 9.3 12 10 11 Note: 1) Rating: "O" = Outperform; "N" = Neutral; "U" = Underperform; "R" = Restricted; "na."= not rated 2) PER is based on Credit Suisse adjusted EPS.3) priced dated Nov 6, 2009 Source: Company data, Credit Suisse estimates4
  5. 5. 12 November 2009Table of contentse-commerce – from scale to profit ..................................................................................... 6 History of China’s e-commerce market.......................................................................... 6 Reasons behind e-commerce expansion in China......................................................... 6 e-commerce market growth estimate ............................................................................ 7 e-commerce growth drivers........................................................................................... 8 Is e-commerce important for China’s retail market? .................................................... 10 Price competitiveness of the e-commerce platform ..................................................... 14 Difference between the US and China e-commerce markets ...................................... 16 C2C market – on its way to profitability ....................................................................... 19 B2C market – still seeking the right business model.................................................... 25 Online shoppers’ demographics – consumer survey ................................................... 28 Online merchants’ profiles - Taobao seller survey ....................................................... 38Payment – the e-commerce highway............................................................................... 46 What is an online payment platform? .......................................................................... 46 Third-party online payment market.............................................................................. 46 Alipay has contributed to Taobao’s success................................................................ 52Search versus e-commerce – ‘yin-yang’ .......................................................................... 54 e-commerce companies reliant on search engines?.................................................... 54 Baidu and Taobao – on the path to direct competition................................................. 56 C2C platform for P4P advertising – for ‘long tail’ online merchants.............................. 60 Paid search market – Baidu’s share to fall due to Taobao........................................... 65Taobao – elevating to the next level ................................................................................ 66 Taobao – basics.......................................................................................................... 66 Strategies.................................................................................................................... 67 Challenges.................................................................................................................. 71 Monetisation and Valuation ......................................................................................... 72Tencent Holdings (0700.HK / 700 HK)............................................................................ 75 ‘Crouching tiger, hidden dragon’.................................................................................. 75 Background................................................................................................................. 76 Products...................................................................................................................... 76 Strategies.................................................................................................................... 76 Business model........................................................................................................... 78 Monetisation and valuation.......................................................................................... 78 Financial forecast........................................................................................................ 80Baidu Inc (BIDU.OQ / BIDU US)..................................................................................... 83 Rebuilding the missing link of e-commerce ................................................................. 83NetEase.com (NTES.OQ / NTES US) ............................................................................ 85 Value of shopping search not yet unveiled .................................................................. 85Appendix I: Regulatory .................................................................................................... 87 Expect positive policies to be released........................................................................ 87 Online store registration .............................................................................................. 88 Online payment or third-party payment platform.......................................................... 88 e-commerce taxation................................................................................................... 89 Other e-commerce rules ............................................................................................. 89Appendix II: e-commerce company profiles ..................................................................... 91 Vancl........................................................................................................................... 91 M18 (MecoxLane) ....................................................................................................... 91 Eachnet ...................................................................................................................... 92 360buy ........................................................................................................................ 92 Joyo ............................................................................................................................ 93 Zbird ........................................................................................................................... 94Appendix III: Case studies ............................................................................................... 95China Internet Sector 5
  6. 6. 12 November 2009E-commerce – from scale to profitHistory of China’s e-commerce marketChina’s e-commerce market has experienced 10 years of development till now. The firste-commerce company in China was 8848, a B2C site founded in 1999. According to ACNielsen, China has about 3,000 B2C companies currently.Figure 8: Milestones in China e-commerce marketYear Company Milestone1999 8848 Founded (Chinas first online B2C company) Eachnet Founded2000 8848 Monthly revenue reached Rmb10 mn Joyo Founded by Kingsoft and Lenovo2001 8848 Divided into two parts, B2C and new business, and soon exited the market2002 Eachnet EBay acquired 33% of Eachnet2003 Eachnet EBay acquired the rest (66%) of Eachnet Taobao Founded by Alibaba Group Alipay Founded by Alibaba Group2004 Joyo Amazon acquired 100% of Joyo at US$75 mn2005 Paipai Launched by Tencent2006 Eachnet EBay and Tom founded JV to co-operate with Eachnet2008 Youa Launched by BaiduSource: Company data, Credit SuisseReasons behind e-commerce expansion in ChinaE-commerce has a broad scope, including business-to-business (B2B), business-to-consumer (B2C) and consumer-to-consumer (C2C). We define e-commerce as consumer-related e-commerce i.e., only B2C and C2C.We are positive on the long-term growth story of the e-commerce market in China:We believe China’s general consumers are price-sensitive. E-commerce companies do Low price, low costsnot have to run physical stores, operate an on-the-ground sales team, or lower inventorylevels (without physical stores), resulting in significant cost savings. Channel costs arealso high, as general department stores share 20-30% of the revenues of the retailers andfranchise stores will likely share about 20% (some high-end shopping malls can take40-50%). Finally, we believe many online merchants on the C2C platform are individualsand have not deliberately paid taxes. The low operating cost structure allows e-commercecompanies to provide low-priced products. We believe low-price e-commerce platform isattractive for general consumers in China. In the analysis on page 15, products sold one-commerce platform are, on average, 21% cheaper than that in physical stores.A few branded companies or shopping malls have been providing differentiated pricing Price impartialitystrategies, e.g., different prices for different areas. However, e-commerce companies willprovide only one price point for all customers in the entire country.After 10 years of development, logistics system and companies in China are robust. Most Conveniencelogistics companies can ship products to most of the cities in China within three-sevendays. For instance, our best experience was the shipping of a product from Guangzhou toHong Kong within two days.A large variety of products is available in tier-one cities. However, major brands’ physical National coveragestores network do not cover all of the 300 prefecture-level cities, 370 county-level citiesand 1,600-plus counties in China. With the rising wealth in lower tier cities, e-commerceprovides national coverage for all products in China. Based on Credit Suisse ChinaConsumer Survey (see page 29), growth in e-commerce spend and time spent on onlineChina Internet Sector 6
  7. 7. 12 November 2009shopping in tier-two cities are much stronger than that in tier-one cities. We expect e-commerce market potential in tier-two cities to be much higher.E-commerce provides a variety of products, besides products from the mainstream Product varietybrands. Consumers can find many niche products through search functions of e-commerce companies or through general search engines. For instance, after buying adress in a physical store, a person can buy many accessories to complement her dress.Besides branded retail companies, many small- to medium-scale retail stores do not have Extra consumer protection,a well-planned product return policy. To increase consumer confidence, e-commerce improved customerplatforms and companies are providing attractive product protection plans, e.g., one of the experienceTaobao’s customer protection plans “providing three times penalty if one product is fake”(see page 23). Also, in order to further increase consumer confidence, M18 (Mexcolane),one of the largest online apparel companies, sends courier staff to pick up returned goodsfrom customers’ premises. Finally, the popular third-party payment platforms, e.g. Alipayand Tenpay, normally settle their online payments after a few days of purchase, normallyabout seven. If they are not satisfied with the product quality, customers can hold up thepayment and seek dispute redressal. (See section on Payment – the e-commercehighway.)E-commerce market growth estimateE-commerce market includes both B2C and C2C markets. According to iResearch, thesize of China’s e-commerce market was Rmb128 bn (or US$18.3 bn) based on grossmerchandise value (GMV). We expect China’s e-commerce market to grow to Rmb243 bn,up 89% YoY and to Rmb887 bn, a CAGR of 54% from 2009 to 2012.Figure 9: Growth forecast for China’s e-commerce market (RMB bn) (%) 2,000 128 150 89 71 1,800 53 40 28 20 50 1,600 17 1,400 814 -50 1,200 739 1,000 657 -150 800 563 -250 600 446 400 775 324 620 -350 200 52 477 217 323 4 119 90 188 - 9 26 -450 2007 2008 2009 2010 2011 2012 2013 2014 2015 B2C C2C YoY growth rate (%)Source: iResearch, Credit Suisse estimatesIn China’s e-commerce market, C2C is the dominant business model, accounting for 93% C2C is the dominantof the total GMV in 2008. We expect share of the B2C market to increase in the future due business modelto: 1) rising consumer confidence in e-commerce and demand for B2C products, 2) largerproduct variety, 3) traditional branded companies’ participation in e-commerce, and4) Taobao’s diversion of its GMV into Taobao shopping malls.Within the C2C market, Taobao is the dominant player with a 82% market share, followed Taobao is the dominantby Paipai (operated by Tencent) at a 10% share and Eachnet (JV between eBay and TOM C2C playerOnline) at 8%.China Internet Sector 7
  8. 8. 12 November 2009Figure 10: C2C market breakdown (2008) Figure 11: B2C market breakdown (2008) Othe rs 20% Taobao mall Paipai 21% 10% Redb aby 4% Taobao 139shop 4% 360 buy 82% Eachnet 16% 8% Vancl 4% M18 Joyo 8% Dan gdang 12% 11%Source: iResearch Source: iResearchB2C market is more fragmented. In 2008, Taobao’s shopping mall was the largest player Fragmented B2C marketwith a 20% market share, followed by 360buy (private company, a consumer electronicsplatform) at 16%, Joyo (private company, owned by Amazon) and Dangdang (privatecompany, the largest book store player)E-commerce growth driversWe believe the underlying key growth drivers of China’s e-commerce market are asfollows.China’s e-commerce market accounted for 1.2% of China’s retail sales in 2008, China’s e-commerce marketsubstantially lower than that of the US at 5.1% in 2007. Given sustainable economic will follow US’growth, we expect China’s e-commerce market (as a percentage of retail sales) to beclose to that of the US market.Figure 12: e-commerce market (excluding B2B) as a % of retail sales – China and the US (%) 8 7 6 5 4 3 2 1 - 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E China USSource: comScore, iResearch, Credit Suisse estimatesChina Internet Sector 8
  9. 9. 12 November 2009We believe the rising Internet user base and e-commerce penetration rate are the key Rising Internet user basegrowth drivers of China’s e-commerce market. According to China Internet Network and e-commerceInformation Center (CNNIC), China had 338 mn internet users in 1H09, up 33.6% YoY, penetration rate as keyrepresenting a penetration rate of 25.6%. We expect the number of Internet users in China growth driversto grow to 571 mn by 2012 (a penetration rate of 39%) and 780 mn by 2020 (a penetrationrate of 57%). Also, China had 80 mn e-commerce users in 2008, representing apenetration rate of 26% (as a percentage of China’s Internet user). (a Credit SuisseConsumer survey in 2008 indicated a penetration rate of 31%.) We expect e-commerceusers to reach 287 mn in 2012 and e-commerce penetration rate to increase to 50.3%by 2012.Figure 13: Internet users and Internet penetration forecast Figure 14: e-commerce customers and penetration forecast (mn) (%) (mn) (%) 900 100 600 90 60 65 800 500 56 70 44 50 700 80 37 426 383 50 400 26 27 30 600 337 19 30 60 287 500 300 231 10 400 170 40 200 113 -10 300 80 100 55 200 26 -30 20 100 - -50 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1999 2002 2005 2008 2011 2014 2017 2020 e-Commerce customers (LHS) Internet users [LHS] Intern et pene tration rate (RHS) e-Commerce penetration among internet users (RHS)Source: CNNIC, Credit Suisse estimates Source: iResearch, Credit Suisse estimatesAccording to iResearch, among the 80 mn China e-commerce users in 2008, 65 mn were B2C user base will growC2C users, 75% higher than the B2C user base at 40 mn. We expect the C2C user base faster than C2Cto remain higher than B2C’s, due to low costs and large variety of products provided byC2C platforms. However, we expect the B2C user base to grow faster versus C2C, asexperienced C2C users will demand higher quality products and become B2C users. (Userbase for both B2C and C2C are overlapping. In 2008, about 77% of C2C users were thesame as B2C users.)Figure 15: e-commerce users forecast Figure 16: B2C spending and C2C spending comparison (mn) (%) (RMB per month) 350 600 89 91 93 100 79 85 300 500 80 250 400 71 71 255 60 200 232 300 57 57 62 207 150 180 40 200 150 100 120 100 85 212 237 20 65 154 184 50 24 48 118 60 85 - 28 40 - 14 - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 B2C (LHS) C2C (LHS) B2C/C2C % (RHS) B2C C2CSource: iResearch, Credit Suisse estimates Source: Credit Suisse estimatesChina Internet Sector 9
  10. 10. 12 November 2009Rising e-commerce spending is another key driver. Monthly spending per e-commerce Rising e-commerceuser in 2008 was Rmb158, up 38% YoY (compared with surveyed spending at Rmb100 of spending as anotherCredit Suisse Consumer Survey (see page 31). We expect monthly e-commerce to be up growth driverby 32% to Rmb210 in 2009. In 2008, C2C monthly spend was about Rmb177 per user,whereas B2C spend was Rmb22 per user. Due to rising popularity of e-commerce andhigher demand for branded products, we expect B2C spending per user to increase toRmb43 in 2009 and to Rmb287 in 2015, exceeding the C2C spending levels. However, weexpect C2C monthly spending level to be flattish after 2010 due the increasing number ofnew e-commerce users with low ARPU.Is e-commerce important for China’s retail market?We believe China’s e-commerce market will play an important role in the China’s retailmarket. Compared with traditional physical stores, e-commerce companies have thefollowing strengths to justify an increase in their market share.E-commerce companies advantages(1) Superior data mining capabilityInternet companies have a detailed database management system and track user Huge user database, withbehaviour, e.g. visit time, frequency, duration and products that users have been clicked high quality of informationon and have been purchased. Also, internet companies normally have personalinformation of users, e.g. name and phone numbers. Database of e-commerce companieswould be even more reliable than regular Internet companies’, as e-commerce usersnormally enter genuine personal information and even provide their real addresses, aslogistics companies have to deliver products to buyers’ home or office. This information isessential for users to understand user demographics, trends and develop better products.For instance, Amazon, the largest B2C company in the world, has been popular in datamining and has successfully recommended products to users based on user profile andprevious visit/purchase behaviour.Figure 17: Screen snapshot of Amazon’s front pageSource: Company data, Credit Suisse estimatesChina Internet Sector 10
  11. 11. 12 November 2009On a relative basis, traditional retail chains find it difficult to collect a large amount of user Difficulties for Traditionalinformation. Customer information collected offline is normally less detailed and retail chains for informationcomprehensive than online information. For instance, it is virtually impossible to record the collectionname and frequency of customers visiting physical stores, while this is not the case foronline stores. Separately, many large scale, self-branded retail chains rely heavily onfranchise stores, limiting their ability for data collection, as franchise store systems cannotbe fully linked to their headquarter systems.Also, franchise stores’ sales staff are trained mostly for sales jobs and less on datacollection. For instance, only 5% of the Li-Ning’s (2331.HK, HK$22.20, OUTPERFORM,TP HK$27.60) distribution network of 6,800 are directly managed retail stores. Weunderstand some well-operated retail chain have linked only 60-70% of the retail networkto the centralised point-of-sale (POS) system.A few well-managed traditional retail chains have already developed a VIP system withdetailed customer information, e.g. Belle (1880.HK, HK$8.06, OUTPERFORM, TPHK$7.80) and Ports (0589.HK, HK$20.50). However, we expect VIP to remain a smallfraction of the total customer base and revenue. On the other hand, through its 10-yeareffort, M18, one of the largest online apparel firms in China, has accumulated 10 mn-plusidentifiable customer database. We believe most traditional retail chains are still behind e-commerce companies in terms of database development and data mining capability.(2) Improved working capital managemente-commerce can easily reduce a substantial amount of working capital (or inventory), as E-commerce companiesphysical stores need to store inventory for demonstration and customer trials. This require less working capitaladvantage is more applicable for items with high price tags. For instance, without a largephysical store network, Zbird (private), one of the largest online diamond stores in China,can save substantial working capital. Also, as e-commerce companies can forecastcustomer demand better than traditional retail chains. Well-operated e-commercecompanies can shorten inventory turnover cycle by about a month from suppliers tocustomers. (Most listed traditional retail chains calculate inventory turnover dates fromonly suppliers to franchise stores, as franchise stores are regarded as third-partycompanies.)(3) National brand, not regional brandAll e-commerce/Internet companies can reach customers across country and are national E-commerce companiesbrand companies, whereas many traditional retail chains are strong on a regional basis, cover the whole nationnot on a national basis. Thus, when these regional retail companies are expanded to theentire country or other provinces, incremental marketing expenses would be significantand execution would also be challenging.(4) Positive government policiesWe expect China’s government policies to favour growth of e-commerce market (see Government supporting e-Appendix I: Regulatory), as e-commerce market development will fuel economic growth commerce marketand reduce unemployment rate. Thus, the Chinese government will likely formulatefavourable policies to facilitate e-commerce development in China. For instance, e-commerce companies may be identified as hi-tech companies enjoying favourable taxationpolicies. Currently, the corporate tax for hi-tech companies rate is about 15% or evenlower, whereas traditional retail chains are taxed at 25%.(5) Short history of retail branding in ChinaWe understand that successful China retail brand companies were founded in mid to late E-commerce brand as1990s, whereas successful e-commerce companies were founded only five-10 years later, strong as traditional brande.g. M18 in 1996, 360buy in 1998 and Taobao in 2003. In China, we believe the relativelyshorter history of Chinese retail brand provides a good opportunity for new, fast growing e-commerce companies to build own brand as strong as traditional retail brand.China Internet Sector 11
  12. 12. 12 November 2009(6) Ability to constantly interact with customersE-commerce companies can promote their products and platform through multiple direct Interaction with e-commerceand customised approaches, e.g. emails, SMS/MMS, catalogue mailing. But without a customersdetailed customer database, traditional retail companies can only advertise their productsthrough traditional methods e.g., TV or outdoor advertising.E-commerce companies allow customers to interact and exchange views, leading to Interaction leading to higherhigher user stickiness and possibly higher trading volumes for the platform. Also, through user stickinessvarious forums, customers can understand product features and differentiate between highand low quality products. For instance, in Taobao’s social networking service (SNS),customers can comment on specific products. Such networking effect is unrivalled bytraditional retail chains.Figure 18: Screen snapshot of Taobao SNS 3,410 Taobao customers shared views on Nokia handset 5300Source: Company data, Credit Suisse estimatesE-commerce companies challengesWe expect e-commerce companies to face serious of challenges during expansion.Many e-commerce companies are garnering market share from traditional retail stores. Potential price warAfter growing to a certain scale, e-commerce companies compete directly with larger scaleretail brands. We expect traditional retail companies could engage in price wars tocompete against e-commerce companies. With higher economies of scale, traditional retailcompanies may be able to undercut their margins to maintain market share, thus exertingpressure on e-commerce companies. For instance, 360buy, one of the largest onlineconsumer electronics companies, generated Rmb1.4 bn in revenues in 2008, versusGome’s Rmb45.9 bn and Suning’s at Rmb49.7 bn in 2008. We expect 360buy to generatee-commerce transaction volume (GMV) of Rmb3.5 bn in 2009.China Internet Sector 12
  13. 13. 12 November 2009We believe pure online e-commerce services business model is more suitable for low- E-commerce not applicablepriced, standardised products, and they are less suitable for tailor-made products, e.g. to all productsmen’s suits. Thus, we expect e-commerce business model would be evolved into a hybridmodel (online/ offline), depending on product type and service requirement.The growth of e-commerce companies is driving internet penetration. On the other hand, Internet user base as athe size of the e-commerce market is limited by the number of Internet users. bottleneck of expansionIn our view, the branding strategies of most e-commerce companies are not different from Weak brand managementthose of their traditional counterparts’. However, brands of e-commerce companies areless prominent than those of their traditional brand counterparts, because: 1) Businessmodels of many e-commerce companies are platform-based online shopping malls withoutor with limited owned brand products. Also, product categories among online shoppingmalls are similar. 2) Most e-commerce companies have been focusing on technologicalplatform development and have hired fewer marketing professionals to refine marketsegments and build brand image. 3) Many traditional retail brands have been advertisingaggressively on TV, whereas e-commerce companies have been marketing mostly online.Although online advertising provides higher return on investment (ROI), TV advertising canhelp build brand image in a shorter period. Among all e-commerce companies, Vancl(private), founded in October 2007, is one of the few successfully cases to have developeda strong brand through aggressive online brand advertising strategies in two years. Also,among all e-commerce companies, Taobao is one of the few e-commerce companieshave developed differentiated brand strategies and advertised on CCTV.Due to the fast growing e-commerce market, many traditional retail companies are Traditional retail companies’opening online stores. For instance, Li-Ning is among the most aggressive in the online expansion into online spacespace, and has opened multiple online stores, including:■ Official online stores with a unique domain name (http://www.e-lining.com).■ Taobao online store (http://lining.mall.taobao.com/).■ Partnership with Youdao shopping search (http://gouwu.youdao.com/mdetail?site=e- lining.com&keyfrom=gouwu.index.merchant).Figure 19: Li ning official online store snapshot Figure 20: Li ning Taobao Mall online storeSource: Company data Source: Company dataChina Internet Sector 13
  14. 14. 12 November 2009Besides Li-Ning, GOME, Sunning and Lenovo have all developed their online stores. All Traditional retail companiesthese traditional retail companies all entered into e-commerce market to diversify its entering into e-commercechannels. Thus, competition in the e-commerce market is intensifying. marketMulti-channel strategies – the success formulae?Despite their efforts to diversify into the e-commerce market, none of the traditional retail In US, 22 out of the top-25companies has disclosed their online sales breakdown, and we expect online sales e-commerce companiescontribution of total revenues to remain insignificant. The situation is different from that in were traditional retailthe US market. According to US e-commerce report Web 2.009, dated 22 October 2008, companies22 out of the top-25 e-commerce companies in the US were traditional retail companies.On average, only 5.1% of the total revenues of top-25 e-commerce companies in 2007were generated online and we believe this percentage is rising.Traditional retail companies’ low e-commerce revenue contribution is likely due to Low e-commerce revenueinadequate resources allocated to their online stores. Also, we believe traditional retail contribution of traditionalcompanies have not developed balanced channel strategies in China, including those on retail companiespricing, discount, rebate and channel mix.On the other hand, e-commerce companies are building their physical presence based on e-commerce companies aretheir business strategies and product characteristics. building their distribution networkM18 (or Mecoxlane), one of the largest online apparel firms, was founded in 1996 as acatalogue company, which later expanded into the online space and is now operating 300 M18 - online apparel firmsstores in China. Revenue from each business line is evenly distributed among three operate 300 storesvarious channels in 2009. M18 aims to develop physical stores to improve its brand imageand to reach customers unwilling to buy apparels online.Zbird, one of the largest online diamond and jewellery stores, was founded in 2002 as an Zbird – online diamond firmonline diamond store. Since 2005, Zbird has opened its flagship store in Shanghai, and to open one flagship per citynow has 10 flagship stores in 10 cities (one flagship store in each city). Instead of openingthe store on the street, all Zbird stores are located in high-rise commercial buildings toserve only online customers.As such, we have observed that both traditional retail chains and e-commerce companies E-commerce companies findare expanding their respective territories. In the meantime, we believe that e-commerce it easier to strike the rightcompanies finding easier to strike the right balance on channels compared with traditional balance on channelsretail companies, as physical network is more complimentary to online store network interms of presence and demographics. However, traditional retail companies’ online storeswould cannibalise its fast growing physical store network.Price competitiveness of the e-commerce platformOn average, buyers get a 21% discount for goods purchased online. Among all the Online products are 21%categories, price discount for apparel, cosmetics, and accessories on C2C platforms are cheaper than goods sold inthe highest. physical storesChina Internet Sector 14
  15. 15. 12 November 2009Figure 21: Price discounts on online products (% of offline price)* Offline price Taobao Paipai Eachnet Youa AverageProduct Category (Rmb) (%) (%) (%) (%) (%)Sharp handset - 9130 Handset 3,580 17 20 25 12 19Apple Laptop - MB990CH/A IT 9,498 6 7 0 2 4LiNing basketball shoes - 2BMC369-2 Apparel 366 50 45 40 45Dior perfume - Jadore Labsolu 75ml Cosmetics 1,250 46 29 53 26 39Sony Camera - T900 Digital 2,450 11 16 2 -22 2Supor pan - PC32T Household 387 13 46 29 29 29JAK dried vegetable 150g Food 17 18 26 26 30 25China Mobile front payment card Rmb100 Front payment 100 5 2 1 1 2Swatch children watch - ZFPN029 Accessories 398 40 40 46 45 43Zhui Fengzheng de Ren Book 25 25 25 0 -20 8Meadjohnson milk powder - A+1 900g Baby 230 10 4 0 5 5The North Face hiking bag - AS9U 35L Outdoor 1,198 26 24 25Philips recorder - AZ1022 Electronics 488 31 39 28 28 31 Average 23 25 19 15 21Note: * Offline prices are taken from typical offline distribution channel for each product, e.g. YongLe for handset and IT, Yaohan for apparelSource: Credit Suisse estimatesFor online air ticket booking, Taobao offers a 8% discount on average, compared to the Airline tickets on Taobao areprice offered by airline companies’ telephone sale or website, but most of the tickets 8% lower than airlinecannot be rescheduled or refunded, whereas Ctrip (CTRP.OQ, $60.40, NEUTRAL, TP companies’$49.60) provides the most flexible air ticket and best value added services.Figure 22: Air ticket price discount (% of offline price)Flight Airline operator price (Rmb) Taobao (%) C-trip (%)CZ39080 740 1*^° -7°MU2518 360° 22*^° 11°ªHU7787 307° 16*^° -7°ªCA1596 630° -6° -10°FM9217 1,120° 5*^° 0°ªAverage 8 -3* Not eligible for rescheduling ^ Not eligible for a refund ° Not eligible for change of airline ª set discountoffer of air ticket + hotel is availableSource: Credit Suisse estimatesEntry barriers for online stores are much lower than that for offline stores, due to fewer Low entry barriers forprocedural requirements, lower initial investment and expenses. Figure 23 shows a online storescomparison for procedure, initial investment, time needed, and tax rate between an onlinestore and an offline store.Figure 23: Initial procedure and investment to open an apparel store in a tier-two city Offline store Online storeProcedures Four steps Two step Registration at local Administration for Industry & Commerce Registration on Taobao or other C2C platforms Registration at local office of State Administration of Taxation Registration on Alipay and/or other online payment platforms Registration at Administration of Local Taxation Rental contract/ property ownership certificateInitial investment Rmb55,000 Rmb10,000 Rmb500-1,000: Registration fee Rmb 5,000: Camera Rmb24,000: Rental deposit (assuming Rmb8,000 per month * 3months) Rmb5,000: First bunch of inventories Rmb30,000: First bunch of inventories or Franchise depositTime needed Two months Less than one week 15 days: Looking for shop site and signing of the contact with landlord, 1 day: register online and get familiar with transaction procedures market place, or shopping mall 7days: Register with the above mentioned regulators. Total time needed 2-3 days: photo the products and decorate online store varies in different locations, fastest one-two days. 30 days: shop decorationTax 8% (approximately) 0Source: Credit Suisse estimatesChina Internet Sector 15
  16. 16. 12 November 2009Difference between the US and China e-commercemarketsWe believe China’s e-commerce market will follow the growth trend of the US market.However, we have identified a few key differences between China and US markets.In the US e-commerce market, B2C accounted for 69% of total e-commerce market in C2C dominant in China,2007. In China, C2C has been the dominant business model with 93% of the total whereas B2C is thee-commerce market share in 2008. We believe Taobao (private), founded in 2003, has mainstream in the USbeen the key driver of the China’s e-commerce market (for the section on Taobao, pleaserefer to page 66). Taobao, including Alipay, has provided additional buyer protectionsystem and improved buyer confidence in e-commerce, especially on Taobao platform.Also, C2C platforms provide comprehensive product categories and competitive pricing,and have attracted significant consumer attention versus B2C companies. Chinese buyersare generally price-sensitive. Also, in the US, B2C is more dominant, as: 1) traditionalretail brand companies have actively provided online B2C platforms in the early stages ofthe e-commerce market and 2) C2C is an auction-based platform (whereas China C2Chas a more fixed price and direct-sale approach) and is always regarded as a nicheproduct platform. Also, in the US market, besides pricing, consumers are willing to pay forproduct quality and after-sales services.Figure 24: US and China e-commerce market forecast Figure 25: US and China e-commerce (as a % of retail sales) (US$ bn) (%) 8 350 7 300 6 250 5 200 4 150 3 100 2 50 1 - - 2002 2004 2006 2008 2010E 2012E 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E China US China USSource: iResearch, Credit Suisse estimates Source: iResearch, Company data, Credit Suisse estimatesFigure 26: US B2C and C2C market breakdown Figure 27: China B2C and C2C market breakdown (% of total e-Commerce GMV) (% of total e-Commerce GMV) 100 100 90 90 80 80 70 70 60 60 50 50 40 76% 40 73% 70% 68% 69% 30 66% 30 20 20 36% 30% 10 10 22% 8% 7% 11% 0 0 2002 2003 2004 2005 2006 2007 2007 2008 2009E 2010E 2011E 2012E B2C C2C B2C C2CSource: Credit Suisse estimates Source: iResearchChina Internet Sector 16
  17. 17. 12 November 2009China’s e-commerce market is highly concentrated, with the top-three players (in terms of The e-commerce market inGMV) i.e., Taobao, Paipai and Eachnet, accounting for 94% of the total e-commerce China is highly concentratedmarket in China in 2008. Similar to the retail market, US e-commerce market is more versus the fragmentedfragmented, as the top-three players account for 27% of the market. This implies that nature of the USChina’s e-commerce buyers rely heavily on e-commerce platforms that are reliable and e-commerce marketprovide comprehensive product categories. In the long run, we expect China’s B2C marketto grow faster than C2C market and China’s e-commerce market to be less concentrated.However, in the medium term, we believe the market structure of China’s e-commercemarket will not change significantly, and platform players such as Taobao will continue tothe most dominant in the Chinese e-commerce market.Figure 28: China and US e-commerce player comparison US e-commerce market (2007) China e-commerce market (2008)B2C GMV (US$ mn) % of B2C B2C GMV (US$ mn) % of B2CAmazon.com 14,835 12 Taobao mall 251 20Staples Inc. 5,600 5 360buy 200 16Office Depot Inc. 4,900 4 Joyo 150 12C2C GMV (US$ mn) % of C2C C2C GMV (US$ mn) % of C2CEbay (domestic only) 28,452 53 Taobao 14,002 82 Paipai 1,686 10 Eachnet 1,346 8Total e-commerce GMV % of total Total e-commerce GMV % of total(B2C + C2C) (US$ mn) e-commerce (B2C + C2C) (US$ mn) e-commerceEBay (domestic only) 28,452 16 Taobao 14,253 78Amazon.com 14,835 8 Paipai 1,686 9Staples Inc. 5,600 3 Eachnet 1,346 7Office Depot Inc. 4,900 3 360buy 200 1 Joyo 150 1Source: US Census, iResearch, Credit Suisse estimatesThe US retail market has diversified after 100 years of development. Compared with the Limited catalogue andUS retail market, China retail market remains in the early stage of development and many discounted store marketsuccessful sub-sectors in US retail market, e.g. discount stores, have not been well in Chinadeveloped in China. Thus, it provides a good opportunity for e-commerce to gain share inthe developing retail market For instance, according to US Census, the size of the UScatalogue market was US$87 bn and that of discounted department stores (includingfactory outlet) was US$75 bn, together representing 6.8% of total US retail market size in2008. In China, both catalogue and discounted store markets are very limited. In thecatalogue market, most global players have exited their businesses in China, e.g.Bertelsmann’s termination of its China book club in July 2008.We understand that M18 (or MexcoLane), one of the largest online apparel companies in E-commerce likely to gainChina, is one of the few profitable companies in the catalogue industry and probably the shares given that thelargest catalogue company in China. Separately, discounted stores have not been well discounted store market isdeveloped in China market, due to consumer behaviour and transportation reasons. As under developedthe China retail market is still evolving, e-commerce will likely gain further market share inChina versus the US, due to the limited scale of catalogue and discount stores market.US C2C market is auction-based and its offers are valid for a certain auction period, US C2C seller is in for ‘fun’;whereas China’s C2C market is mostly fixed-price, direct sale model. This difference is China C2C seller does thispartly due to differences in consumer behaviour, as the offline auction market in China is for a livingvery small. Also, in the China C2C market, we believe that most participants, mainlyindividuals or families, run C2C online stores as real businesses and owners of C2Cstores are run those stores on a full-time basis, i.e. they normally quit full-time jobs.In the initial stages, the US C2C market was similar to the flea market, with most sellers More professional sellers inrunning online stores on a part-time basis. After years of development, the C2C market in China C2C market than thatthe US has evolved and now represents a mix of semi-professional and casual sellers. in the USChina Internet Sector 17
  18. 18. 12 November 2009Moreover, the trends seems to be shifting to the semi-professional direction given Amazons3P platform and eBays new DSR (detailed seller rating) emphasis, which prioritisesprofessional and semi-professional sellers over casual ones. As such, eBay’s fixed priceGMV (gross merchandise value) was has seen a rising trend in the past few years. Also,most Chinese C2C platforms provide instant messaging (IM) tools for online store staff tocommunicate with buyers, e.g. Taobao’s Aliwangwang, Paipai’s QQ IM and Youa’s Hi, asmost China C2C online stores operate on a full-time basis. However, EBay has failed tointegrate with Skype as, in our view, most sellers are unavailable for chats with buyers.Figure 29: EBay fixed price (% of total GMV) (%) 60 55 50 45 40 35 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09Source: Company dataApparels/garments are products that are popular in both the US and China, as China has Online apparel commonlymany low cost apparel producers and most apparel manufacturers produce products popular in US and China,based on the latest fashion trends. In the US, although consumers are able to buy low- but rest are differentcost, high quality brand apparels in discounted department stores or factory outlets,apparels remained the No. 1 item in 2007. This shows that apparel demand is very strongin China. Besides apparel/garment, the remainder of the popular product categories for USand China are different. For instance, office products’ supplies were ranked No. 2 in theUS due to online procurement for the commercial sector, whereas virtual items were thesecond most saleable items, due to the high popularity of online games in China.Figure 30: Top product categories in the US and China (in terms of revenue) US (2007) China (2008)1 Apparel & Accessories Garment2 Office Supplies Virtual items3 Consumer Packaged Goods Digital4 Consumer Electronics Cosmetics5 Furniture, Appliances IT6 Books & Magazines Books/DVD7 Home & Garden Handset8 Music, Movies & Videos Household9 Computer Software Top-up cards10 Toys & Hobbies Accessories11 Jewellery & Watches Gifts & toys12 Flowers, Greetings, Gifts Food13 Sports & Fitness Appliance electronicsSource: ComScore, iResearch, Credit Suisse estimatesChina Internet Sector 18
  19. 19. 12 November 2009Credit card is the most dominant payment and settlement tool in the e-commerce market COD/third- party paymentin the US. Even Paypal (private) is a payment platform based on credit cards. As the platform dominant in China,banking system has not provided enough protection for buyers and credit cards are not not credit cardsvery popular across the country, cash on delivery (COD) is the dominant approach for e-commerce. Based on our interviews with a few leading B2C companies, we understandthat COD is the key payment approach (except high price tag items). In some cases, CODcan represent for 60%-plus of revenues. On the other hand, third-party escrow paymentplatform, e.g. Alipay, Tenpay, are the dominant approaches for C2C platforms in China.After years of development, Alipay has 200 mn+ registered accounts, and Tenpay has 50mn+ registered users. We expect 70-80% of Taobao GMV to be settled through Alipay.Although China has issued over 150 mn credit cards as of 2008, we expect third-partyescrow payment platform to remain the dominant payment approach for e-commerce inthe long run, due to its extra buyer protection system and its high popularity amongInternet users. (Please refer to Section 2 for more details on third-party paymentplatforms.)Figure 31: Payment platform availability on multiple B2C and C2C platform Cash Umpay Credit Alipay on Tenpay (China WesternWebsite Card (Alibaba) Delivery (Tencent) Baifubao 99bill Mobile) e-Banking UnionC2CTaobaoPaipaiYouaB2C360buyNeweggjoyoVanclDangdangmall.taobaoZbirdM18Source: Credit Suisse estimatesC2C market – on its way to profitabilityAlthough B2C was the first business model founded in China, C2C is the more successful C2C is the more successfule-commerce business model, so far, and is the key driver of e-commerce market in China, e-commerce businessinstead of B2C. According to iResearch, the total C2C market size was Rmb120 bn in model2008, up 131% YoY. C2C accounted for 93% of total e-commerce GMV in 2008, slightlyup from 92% in 2007. It shows that C2C growth in China remains strong, despite theemergence of B2C market.In terms of traffic, Taobao has been ranked No. 5 in China since mid-2008, whereas Taobao - No. 5 trafficPaipai’s traffic ranking rebounded from 70 in mid-2008 to 45 in early November 2009. ranking in ChinaEachnet was ranked below 1,000, implying a small user base.China Internet Sector 19

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