LETTER FROM CHINA: IPOs Bring Chinese E-Commerce Opportunity to the World

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This editorial was produced by The Beijing Axis for Business Day by Kobus Van Der Wath.

JD.com, China’s answer to the American online retailer, Amazon, released their initial public offering (IPO) on the Nasdaq Exchange in New York in late May. Based out of Zhongguancun (China’s technology centre in northwest Beijing and answer to California’s Silicon Valley), the Chinese e-commerce platform peaked at a market capitalisation of US$28 billion by the close of the first day’s trading, 2.4 times last year’s sale of US$11.5 billion and almost twice as large as Amazon’s market capitalisation. 

This offering, the largest of a Chinese web company ever, exceeded expectations and demonstrated faith that the level of Chinese economic activity online will boom, even as China’s GDP growth rate stabilizes around 7.5%.

Though JD has yet to record a profit, investors remain confident that this simply reflects investment in growth. In recent years, JD has, for instance, expanded it logistical capabilities across Western China, which has allowed the company to replicate the success of its same day shipping model in China’s less-developed provinces. However, this strategy has been very expensive. The IPO will allow the company to recoup some of their investments and advance their ability to expand their distribution infrastructure. 

The JD IPO demonstrates widespread interest in Chinese web companies and the potential for its larger competitor, Hangzhou-based Alibaba, which leverages a different business model. Instead of JD’s more direct management of the logistics of its orders, Alibaba primarily serves as an online retail platform for both consumer-to-consumer (Taobao) and business-to-consumer (T-mall) transactions. Alibaba is essentially the Chinese equivalent of eBay. 

Alibaba recently filed initial paperwork for its IPO, which will take place later this summer, and has received a valuation in the extremely wide, but nevertheless high range of US$115 to US$245 billion. This is due to the firm’s uniquely high value of goods sold through its marketplaces—roughly US$250 billion in 2013—and its high operating margins—roughly 50% of revenues in the first nine months of 2013. 

Similar to Shenzhen’s Tencent and unlike JD, Alibaba has purchased and developed several verticals beyond its central ecommerce platforms, such as Alipay, a Paypal equivalent; Aliyun, an Amazon web services equivalent; and Intime, a department store operator, which will allow for “online-to-offline” shopping. 

With their high valuations and current estimations for growth rates, Chinese web companies represent one of the strongest areas of the economy. Online shopping was recently forecasted to grow at 27% in coming years. 

Moreover, the Chinese government has consistently demonstrated its commitment to reorienting China’s economy around more efficient growth, such as that seen in the technology of web companies. 
 
With their IPOs in New York stock exchanges, not only are these Chinese web companies gaining access to capital to enable further expansion, but they are also advancing their corporate governance. Chinese companies on foreign exchanges are subjected to greater scrutiny, as they are required to open their books and corporate structure up to the public for shareholder critique. 

At the same time, Chinese technology firms have been expanding their international reach. Alibaba, for example, recently established its Southeast Asia headquarters in Singapore and has been on a mission to purchase several foreign start-ups, ranging from a ride-sharing app to several web-based shopping start-ups. Shenzhen-based Tencent has been aggressively rolling out its mobile messaging app, WeChat, across South Africa in the past few months. 

Well-positioned foreign firms will benefit from the internationalization of these firms in many ways. For example, because JD and Alibaba arguably represent the largest marketplaces in the world, the sourcing opportunities as these companies internationalise will be tremendous. 

These IPOs represent a pivotal moment in the transformation of the Chinese economy toward greater consumption and integration with foreign enterprises. Meanwhile, greater transparency in Chinese companies due to their listing on foreign stock exchanges is raising the standard of corporate governance in China. 

Van der Wath is group MD of The Beijing Axis. He can be reached at kobus@thebeijingaxis.com

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