China’s E-Commerce Opportunities & Constraints in a Booming Market Amy Cao, Deloitte Beijing June 2011 Chinese e-players offer full commercial / social solutions, mostly following their US counterparties’ business model Online Shopping(B2C) Online Shopping(C2C) Microblogging Deal-of-the day Blogging Mobil Chat Instant Wikis Messaging SNS Video Sharing Professional Q&A Message SNS Boards 2 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. B2C and C2C models have seen substantial growth and potentials Business-to-business (B2B) • Emerged in late 1990s • Become the major platform of exporter and connection between manufacturers and wholesalers • Transaction value reached around USD45 billion in 2010 • Alibaba accounted for 65% of market share Business-to-customer (B2C) • • • • Customer-to-customer (C2C) • The real C2C model is very rare in China. • C2C sellers are mostly entrepreneurial wholesalers, rather than individuals, but enjoy the tax free benefits • Transaction value reach USD 63.5 billion in 2010 • Taobao has 90% market share • Large shops in C2C platform gained PE investments and started to create their own platform to reduce dependence on Taobao Small shop owners Emerged in early 2000 Rapid growth: 175% in 2009 and 150% in 2010 Transaction value reach around USD9 billion in 2010 3C, apparel, and tourism sectors received most of the PE/VC investment 3 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. China’s online shopping market (B2C&C2C) reached 72.5 bn USD in 2010 and is expected to grow at a CAGR of 70% for the next five years China Online Shopping Market (bn USD, 1997-2015f) 2010 US market value 140.0 120.0 Period 2003-2006 2006-2010 2010-2015f CAGR 202% 106% 70% Close to 2004 US market value Strong Growth 100.0 1213 Early Development 80.0 72.5 Infancy 60.0 38.8 40.0 19.1 20.0 0.0 0.0 0.1 0.5 1997 2003 2004 1.9 3.5 2005 2006 7.4 2007 2008 2009 2010 2015f Source: www.iresearch.com.cn, Access Asia, National Bureau of Statistics (NBS) 4 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. VC / PE investment: 2010 saw a boom Online Shopping Market 1997-2002 2003-2005 2006-2009 2010 13 84 (59 disclosed) 47 (30 disclosed) 65 455 540 9 18 Number of Deals Disclosed Total Investment (mn USD) • A small number of signifiant investment • Majority of deals were smaller than 5mn USD Average Investment (mn USD) 5 Source: www.zero2ipo.com.cn, www.chinaveture.com.cn, toocle.com 5 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. VC /PE investment over 10mn USD – 2009 slowed down due to financial crisis Time Target company Business sector PE/VC investor Investment value ($ mn) 2000 Ctrip B2C - Tourism Soft Bank, Carlyle, IDGVC 12 2003 eLong B2C - Tourism Tiger, Blue Ridge 12 2004 DangDang B2C - Book Tiger 10 2006 DangDang B2C - Book DCM, Walden Int. 30 2006 SousouKe C2C D&H Capital, Asian Groove 17 2007 Redbaby B2C - Motherhood KPCB 25 2007 360Buy B2C – 3C Capital Today 10 2008 IntoHotel* B2C - Tourism KPCB, Zero2ipo 30 2008 Udooo B2C–Gift Legend , SIG 25 2008 Liba B2C -Comprehensive Investor AB, Walden 15 2008 ByeCity B2C - Tourism JAFCO, Investor AB 10 2008 Vancl B2C – Apparel Qiming, IDG, Legend 10 2008 9diamond B2C - Luxury KPCB, Rapaport, Qiming, Zero2ipo 10 2009 360Buy B2C – 3C Capital Today 21 2009 Okbuy B2C–Footwear Sequoia Capital 17 Source: ChinaVenture database, Zero2ipo.com.cn, Deloitte analysis 6 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. VC / PE investment over 10mn USD in 2010 and 2011 – sector spread, large deal emerge Time Target company Business sector PE/VC investor Investment value ($ mn) 2010 2010 360Buy Moonbasa B2C – 3C B2C – Apparel Tiger Fund Tiger Fund, GSR ventures 75 80 2010 Lashou B2C - Group buying Tenaya Venture 50 2010 VANCL B2C - Apparel Tiger Fund 49 2010 Lightinthebox B2C – Outbound Ceyuan, Trust Bridge Partners 35 2010 Mbaobao B2C – Accessory Legend Capital, DCM 30 2010 Vipshop B2C - Luxury Sequoia Capital, DCM 20 2010 Redbaby B2C - Motherhood Northern light, 20 2010 Okbuy B2C – Apparel Sequoia Capital, Intel, DFJ 17 2010 Ayatuan B2C - Group buying Individual Investor 17 2010 2010 2010 2010 2010 2010 Letao Yuego yesmynet Manzuo Didatuan Masa Maso B2C - Apparel B2C - Motherhood B2C – Food B2C - Group buying B2C - Group buying B2C – Apparel Ceyuan DT Capital Partners Mandra, DCM, Zero2ipo KPCB IDG Sequoia 11 10 10 10 10 10 2011 360Buy B2C – 3C DST, Tigar 500 2011 Lashou B2C – Group buying Milestone Capital, Reinet Fund, GSR Ventures 110 2011 OkBuy B2C – Apparel Not disclosed 60 2011 Zbird B2C - Luxury Ceyuan, FountainVest Partners 50 2011 Letao B2C – Apparel Not disclosed 31 2011 Xiu B2C - Comprehensive KPCB 20 Note: All disclosed deals above USD 10 million are included Source: ChinaVenture.com.cn, Zero2ipo database, Deloitte analysis 7 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. More online shopping companies are expected to go public following Mexcolane and Dang Dang in the next a couple of years IPO Company Business Sector Time Listing IPO multiples EPS when listed Current P/E Current EPS Ctrip B2C/B2B:Online travel agency 2003 Nasdaq 39 0.01 42 1.07 Mecoxlane B2C: Apparel 2010 Nasdaq 157 0.06 63 0.08 103 0.03 745 0.02 B2C: Dang Dang books/comprehensiv 2010 e NYSE To-be-IPOed Company Business Sector Proposed IPO Time Proposed listing Estimated Market Value (mn USD) Business Sector 360buy B2C 2012-2013 HK or Nasdaq 10,000 3C/comprehensive Vancl B2C 2012-2013 Nasdaq 5,000 Clothing Source: www.pedaily.cn, www.chinaveture.com.cn, finance.yahoo.com, multiple media 8 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. Established 8 years later, Taobao now has a comparable transaction value as ebay does today. Registered user accounts for 1/4 of China population vs. Year Established 1995 2003 Enterprise Type Listed: Nasdaq Private Business Model C2C C2C(individual seller based B2C) /B2C 9,510 770 11.3% 115% Main Revenue Stream Service fee and sales commission Advertising (product ranking, stand-alone ads, etc.); value-added service fee No. of Registered users (2010 Global) 94.5 million 370 million Total Transaction Value (2010, bn USD) 62 61 2010 Revenue (mn USD) CAGR (2006-2010) Comment • ebay is Holding company of Eachnet (since 2003), • Taobao is the current C2C market leader, taking currently 3rd largest C2C platform in China, with a over 80% market share total transaction value of 1.4 bn USD in 2009, − no service fee and no tax paid for the seller accounting for 4% of total C2C market − A supporting online payment system • Eachnet lost its market leadership to Taobao in • Launched Taobao mall as B2C platform 2006 and has been losing market share since Source: company websites, www.zero.ipo.com.cn, Deloitte Analysis 9 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. Fueled by several rounds of PE investment, Ctrip has shaped China’s online tourism booking market and gained 50% share vs. Year Established Enterprise Type Business Model Focus Sector 2010 Revenue (mn USD) 1996 Listed: Nasdaq B2C Tourism 1999 Listed: Nasdaq B2C, B2B Tourism 3450 444 11% 44% Main Revenue Stream Commission Commission Market Cap (mn USD) 6,770 6,420 50+ million 50+ million 65.6 6.0 • Expedia holds 56% of eLong’s share • eLong is 2nd largest online trabel booking agency in China, with 79 mn USD revenue in 2010, accounting for 8% of total market share • eLong has been losing its market share over the past five years • Market leader in online travel booking, with 49% market share • Ctrip is expanding its business to more tour operation focused, recently acquired several local travel agencies CAGR (2006-2010) Number of Members, 2010 Global Total Transaction Value (bn USD) Comment Source: company websites, iReseach, www.zero.ipo.com.cn, Deloitte Analysis 10 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. Struggling in the low margin book selling sector for 10 years, Dangdang managed to go public in 2010 and substaintially expanded the product offering vs. Year Established Enterprise Type Business Model Focus Sector 2010 Revenue (mn USD) CAGR (2006-2010) Main Revenue Stream Number of Registered users (2010 Global) Total Transaction Value (mn USD) Comment 1994 Listed: Nasdaq B2C, C2C Book/comprehensive 36,930 2000 Listed: NYSE B2C Book/comprehensive 346 34% 64% Online sales, service fee, sales commission online sale of books and other products 100+ million 40 million 33,251 342 2nd • Amazon.cn, formerly joyo.com, is the largest B2C company in China, with over $3200 revenue in 2009, accounting for 9.4% market share • Amazon.cn is the 2nd largest online book seller in China. It has diversified its product portfolio from mainly books to 20+ categories • It offers free delivery in China • 3rd largest B2C company in China, accounting for 8.5% market share in 2009 • Market leader in online book sale sector • Dang Dang still focuses on book sector while expanding its product categories • Dang Dang offers best price guarantee for its books and free delivery services Source: company websites, www.zero.ipo.com.cn, Deloitte Analysis 11 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. Group buying is an emerging hot sector with over thousand websites and received over 500 million dollars since 2010. Industry consolidation is expected vs. Year Established Enterprise Type Business Model Focus Sector 2010 Revenue (mn USD) CAGR (2009-2010) Main Revenue Stream Number of Registered users, (2010 Global) Total Transaction Volume (bn USD) Comment 2008 Private B2C Group buying 460 2009 Private B2C Group buying 150 2000+% 6000+% sales commission and advertising sales commission and advertising 50 million 3 million 2 0.15 • Groupon just entered China market and looking for partnership/acquisition opportunities • Lashou currently ranked 2nd in group buying market in terms of number of user covered, after ju.taobao.com, the group buying platform developed by Taobao • Leading online shopping companies (e.g. 360buy.com), social networks (e.g. renren.com), information portals (e.g. ganji.com) and communication portal (e.g. qq.com) all launched their group buying platform • Currently there are over 2000 group buying platforms established all over China. Experts expected only 4 to 5 will survive in five years Source: iResearch, company websites, www.zero.ipo.com.cn, b2b.toocle.com, techweb.com.cn, Deloitte Analysis 12 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. As China’s micro blogging, Weibo developed dramatically and became the hottest emerging media covering 140 million users Sina Weibo • Registered members reached 140 million; daily posts exceed 25 million • Average time spend / day, user is over 1 hour • Conquer 87% market shares by spending time per member and 57% market share by number of active user • Weibo may have a more significant influence to the public than many of the traditional media, i.e. newspaper A comparison with Twitter Year Established 2006 2009 Registered user 195 million 140 million Obtaining first 50 million users In 3 years In 1 year Visit proportion in total internet 0.40% in UK, 0.18% in US visits Active user 38 million accounts with 16 or more followers • Top account in Weibo has followers of over 8 million • China’s No1 newspaper issued 3.5 million everyday and only 19 newspaper has circulation over 1 million 0.63% in China • Weibo has become the most important information sources for internet users; an emergency may spread to millions of user in very short time − A recent example: a well known and well respected PE fund founder post his decision of elopement in Weibo. The post was forwarded by 5000 times in one hour and 2.4 million comments in 10 days 100 million accounts with over 20 or more followers 13 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved. Bottlenecks – Less reliable third party logistics services and underdeveloped credit and payment system remain the biggest issues Low Ratio of Online Payment • Awareness of online payment is still low. Many of customers still prefer cash payment upon receiving products for following reasons − The credit system in China is still at early development stage. Online payment safety is a significant concern among e-shoppers − Currently online payment platform are not user friendly and often requires installations of specific software under specific systems or websites • China has just set up its Third-Party Payment Association and issued licenses to 20+ online payment companies Unreliable Third-party logistics support • Most of couriers companies not able to cover lower tier cities / counties • Missing the delivery deadline or damaging products are quite common • Short of hands in holiday seasons, especially Chinese New Year, resulting in delay on delivery • Many of the significant players have invested heavily to build their own logistics system Lack of trust on products and services • Many product descriptions online are different from real products, or reported fake products • Most consumers are only comfortable to purchase low-value products online, e.g. books, clothes, etc. • After sales servcies is usually poor, with a very difficult return / refund terms Information Security • Over 20% of Chinese Internet users reported having experiences of being cheated by fraudulent websites • Over 40% of Chinese internet users reported having had personal information stolen or manipulated. 14 ©2011 Deloitte Touche Tohmatsu Limited. 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