Posted in Finance Articles, Total Reads: 2993
, Published on 29 October 2014
China has the world’s largest online populations with 130 million residential broadband accounts. E-tailing produced more than $180 billion in sales in 2012. The e-tailing industry in China has registered 120% compound growth rate since 2003. At the heart of this e-tailing revolution lies the Alibaba group, which is slated to go public in the United States as early as next month.
The Alibaba group was founded in 1999 when its current head Jack Ma founded the website Alibaba.com, a business to business portal to help connect Chinese exporters, manufacturers and entrepreneurs with overseas buyers. Its next invention, Taobao, a consumer-to-consumer portal similar to e-bay, features nearly a billion products and is one of the 20 most-visited websites globally. Then came Tmall, a business-to-consumer portal similar to Amazon that helps global brands reach China’s middle class.
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Today the company and its related businesses operate leading wholesale and retail online marketplaces as well as internet based businesses such as advertising and marketing services, electronic payments, cloud based computing and networking services and mobile solutions among others.
Alibaba group today controls about 80 percent of the China’s online shopping market. Alibaba is also the most profitable Chinese e-commerce company. It handled transactions worth $248 billion last year, more than amazon and eBay combined. Alibaba currently has 231 million active buyers and 8 million active sellers.
Alibaba.com limited is the flagship company of the Alibaba group. It is the world’s largest business-to-business trading platform connecting manufacturers in China to their clients abroad. Alibaba.com has three main services,
• The English language website Alibaba.com connects importers and exporters from over 200 countries
• The Chinese portal 1688.com handles domestic business-to-business trade
• AliExpress.com allows small buyers to buy goods at wholesale prices
Taobao is China’s largest consumer-to-consumer online shopping platform. It was launched in May 2003 to compete against e-bay, and its acquisition of Eachnet. Taobao’s growth has been attributed to offering free registrations and commission-free transactions to customers using a free third party payment platform. More than 6 million merchants are listed on Taobao.
Tmall was launched in 2008 as an online retail platform to bring global brands to an increasingly affluent Chinese middle class.
To boost traffic through its websites, Alibaba’s online payments system business, Alipay, was setup in 2004. The company’s impressive growth can to some extent be attributed to the impediments that China placed before its American rival, PayPal. Alipay has 470m users worldwide and more than half a million Chinese merchants accept it.
Alibaba today has established itself as the most profitable Chinese e-commerce company and is at pole position today, for what is widely considered to be the biggest e-commerce market in the world, China.
The company that started in Mr. Ma’s apartment employs 24,000 workers and is headquartered in Hangzhou. Alibaba handled transactions worth more than $248 billion last year, more than the combined transactions carried out on both Amazon and eBay.
Alibaba’s registration documents with the SEC reveal that Japan’s Softbank Corporation, is the biggest investor in Alibaba with close to 35 percent stake and stands to be the biggest gainer from an IPO. Softbank founder Masayoshi Son invested $20 million 20 years ago in Jack Ma’s idea, and today Softbank possibly stands over a $30 billion payday. Yahoo owns close to 23 percent of the company. Jack Ma, its founder owns close to 10 percent of the company.
Finding a true business comparable for Alibaba will be a hard task, given that the Alibaba is a diverse group comprising of market place, search engine, bank, software, mobile services, and video streaming and so on. The below chart sheds some light on Alibaba’s businesses
Informatics Source: QZ.com
Comparing Alibaba with some of the other global e-commerce giants such as Amazon and eBay yields interesting results. In terms of value of gross merchandise sold on its portals, Alibaba leapfrogs both Amazon and eBay combined as seen from the chart below.
Figures in billion USD
Although Alibaba dwarfs its competitors in terms of volume of transactions it carries out, Alibaba’s revenue is lower than that of Amazon and eBay. The reason being that Alibaba typically does not seek a commission from the sellers that use its portals. Its main source of revenue is advertising which accounts for 85 percent of its revenue and transaction fees.
Figures in billion USD
Even though Alibaba has much lower revenues than its global peers, it is very profitable compared to these companies such as Amazon or eBay, as shown in the figure below.
Figures in billion USD
The Acquisition Spree
Alibaba has been on a buying spree since the start of last year to acquire stakes in businesses ranging from department stores and mapping services in China and an array of tech start-ups in the United States.
• Alibaba agreed in March to buy a 6 percent stake in ChinaVision, which is a producer and distributor of films and television programs in China. This deal was completed for $804 million in June. The company was renamed Alibaba Pictures.
• Alibaba purchased 82 percent of the Chinese mapping service AutoNavi that it did not own for $1.1 billion.
• It bought a 16.5 percent stake of Youku Tudou, and internet video company, for $1.1 billion.
• Alibaba’s other recent deals include a 30 percent stake in Sina Corporation’s Weibo microblogging website, now traded for $586 million. A 26 percent stake in Intime retail, a Chinese department store for about $692 million as well as roughly one-third of UCWeb, a Chinese mobile browser, that it did not own for an undisclosed amount.
Alibaba had been in discussions about a listing with the Hong Kong stock exchange and the Securities and Futures Commission since last year, but this proposal was blocked by regulators in Hong Kong as they feared that side stepping their shareholding regulations would set a dangerous precedent for others mainland Chinese companies that are either listed or wish to list in Hong Kong. Alibaba’s proposal violated the restriction set by Hong Kong on dual-class share structures, which allow controlling shareholders disproportionate voting rights.
Alibaba had planned an IPO with a shareholder structure that allows a group of top managers and founders to nominate and control the board. The NYSE and NASDAQ seemed more at ease with allowing the senior management to decide on the make-up of its board. Alibaba is now planning to list on the New York Stock Exchange in what is anticipated to be one of the biggest IPOs in the US. On 6th May 2014, Alibaba filed registration documents to set the stage for it to go public in the US.
Alibaba’s choice to ditch a Hong Kong listing in favor of a U.S. listing will allow the e-tailing giants leadership led by Jack Ma to keep control over the company’s board, a privilege which the authorities in Hong Kong were keen to deny.
On the flipside, a listing in the US markets will not make for smooth sailing. A U.S. listing will come with stricter checks and balances being thrust upon the company. By listing in the U.S., Alibaba opens itself to class-action lawsuits from investors unlike Hong Kong, which lacks a class-action mechanism. A U.S. listing will also mean turning over books containing valuable data on the Chinese economy to U.S. regulators, which might be opposed by officials in Beijing.
The exact size of the Alibaba IPO has been closely guarded. Many expect that the size of the IPO could be between $15 billion - $ 20 billion valuing the company at $154 billion.
Figures in billion USD
These tech giants market capitalisation today is as follows, (conservative estimate for Alibaba)
Figures in billion USD
A Balancing Act
Alibaba and Jack Ma have come a long way since the company’s beginning in an apartment in Hangzhou. Today the company stands on the brink of possibly the biggest IPO in US history and early investors such as Softbank and Yahoo stand to make windfall gains. Alibaba is China’s and by some estimates the world’s biggest online e-commerce company. Alibaba’s three main sites account for hundreds of millions of users in China alone. Together they host millions of merchants and businesses. Alibaba is also poised to reap benefits from the domestic market as a rising number of Chinese middle class start shopping online. Internet penetration in China is at a lowly 30 percent. If recent acquisitions are anything to go by, Alibaba is serious about growth. What remains to be seen is whether the company can keep innovating, galvanize its recent acquisitions into delivering more value to the group, operate under the scrutiny of the SEC and reward its shareholders, in what would appear to be a tough balancing act in the days to come.
This article has been authored by Manas Mohan from Faculty of Management Studies
• McKinsey Global Institute Report 2013 – China e-retailing
• Wall Street Journal – Alibaba IPO
• Economist.com – Alibaba group
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