China Ecommerce: Video Live Streaming: the Crucial Piece of The
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FOCUS Equity Research 8 July 2020 China eCommerce INDUSTRY UPDATE Video Live Streaming: The Crucial U.S. Internet Piece of the eCommerce Jigsaw Puzzle POSITIVE Unchanged The Key Takeaways: We view live streaming as a crucial function in the differentiation of eCom service offerings, as it creates an interactive scene to seamlessly connect U.S. Internet consumers with sellers and boosts the conversion rates. The function generated Gregory Zhao CNY451bn (US$64bn) GMV in CY19, c.4% of China’s eCom GMV, and is forecast to +1 212 526 2268 reach CNY2.9tn (US$410bn) in CY22, representing c.16% market share, according to [email protected] BCI, US iResearch. We view eCom platforms and short video apps as the primary beneficiaries of the tailwind – noting the former’s comprehensive eCom infrastructure and the Ross Sandler latter’s considerable top-of-funnel user traffic – enabling both to embed eCom live +1 415 263 4470 streaming into their ecosystems. The Covid-19 lockdown has given live streaming an [email protected] BCI, US opportunity to gain market share from offline, with a wide product spectrum from apparel to fresh foods reached by live broadcasting. As eCom and short video Jane Han companies both explore the best model to maximize their financial economics, we think +1 212 526 9317 the win-win strategy is for the two to harness their respective advantages and [email protected] cooperate with each other. We view the Street’s concerns over the threat from the BCI, US “decentralized” eCom of short video apps as overdone, as the industry expertise of eCom companies and their well-established supply chain and logistics services are hard to disrupt in the foreseeable future. Lastly, the eCom video live streaming revolution hasn’t yet reached the West, and the business model could be adapted by Amazon, Facebook and Google. We reiterate our OW rating on BABA given its leading position in the space and expect JD’s (OW) efforts will help it secure a No. 2 market position. The Secret Recipe for Improving eCom Platforms’ Conversion Rates: With BABA, JD and PDD accumulating 726mn, 384mn, and 628mn annual buyers, respectively, Internal improving the conversion rate is now the most critical task, and live streaming can help - enhance user stickiness and conversion rates. BABA is the pioneer in the space with over CNY200bn GMV from Taobao Live in 2019, and JD’s increased efforts on that front saw it achieve solid results in the past “6.18” shopping festival. Restricted Short Video Companies Unsatisfied with the Status Quo: The short video apps have never disguised their ambitions to explore the US$6tn retail market. As a manufacturing country, China has c.30mn SME merchants competing for ecommerce, and we believe short video apps are best positioned in the funnel. We estimate c.15% of the live streaming-driven GMV was generated from short video apps in CY19. The apps are also trying to bypass eCom platforms by directly inviting merchants to open stores in the apps. Threat of Decentralized eCom Ecosystem Seems Overrated: We don’t expect the decentralized ecosystem by short video apps to disrupt the eCom market order, as it did to the ads market, since: 1) eCom is one of the largest ad categories, and short video apps would not risk the loss of this business; 2) eCom has a longer supply chain and operates complicated logistics services, requiring deep industry expertise; and 3) Most brands have built steady partnerships with Alibaba/JD/PinDuoDuo and movement costs are high. Barclays Capital Inc. and/or one of its affiliates 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. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 24. Barclays | China eCommerce CONTENTS Investment Summary .................................................................................................................................... 3 Live Streaming: The Crucial Piece of the eCom Jigsaw Puzzle ........................................................... 4 Live-Streaming Shapes Short-Video Apps as eCom Platforms ......................................................... 7 Short Video is Better at Traffic Acquisition, Rather Than Conversion ....................................... 7 Live Streaming Improves Transaction Conversion on Short Video Apps ................................. 8 Three Kinds of Partnerships, Different Financial Economics ....................................................... 8 Financial Returns Could Drive Renegotiation with eCom Companies ...................................... 9 In-App Stores Providing Short Video Apps have the Highest Financial Returns .................... 9 Renegotiation of the Commission Sharing Scheme May be the Best Option ......................... 9 A Closer Look at Short Video Apps’ eCom Functions ................................................................. 10 Kuaishou, the #1 eCom Live Streaming Short Video App in China......................................... 10 Douyin Rapidly Catching up, leveraging a Large User Base and its Alibaba Partnership .. 11 Live Streaming Boosts the Conversion Rate in eCom Apps ............................................................ 13 Taobao Live: The Leader in eCom Live Streaming ....................................................................... 13 JD.com: Fast Catching Up to Secure the #2 Market Position .................................................... 15 PDD; An Aggressive New Entrant Trying to Differentiate its Service Offering ..................... 17 eCom Enriching Monetization of Pan-Entertainment Apps ............................................................ 18 Two Frequently Asked Questions by Investors ................................................................................... 20 Q1: What Types of Products Are Suitable for eCom Live Streaming? .................................... 20 Q2: Whose Market Shares Are eCom Live Streaming Taking? ................................................. 21 Booming MCN & Host Market Has Benefited eCom Live Streaming ............................................ 22 Government Regulation Enhances Service Creditability ................................................................... 23 8 July 2020 2 Barclays | China eCommerce Investment Summary China’s video live streaming driven eCom GMV in 2019 exceeded CNY450bn, c.4% of the total online shopping GMV, and is expected to grow at a CAGR of c.85% to reach CNY2.9tn in 2022 according to iResearch, representing c.16% of the total eCom GMV. We view eCom companies, including Alibaba (BABA.US, OW), JD (JD.US, OW) and PinDuoDuo (PDD.US, EW), and short video companies, such as ByteDance (private, not covered) and Kuaishou (private, not covered), as the major beneficiaries of the market tailwind. Video live streaming services have existed for more than a decade in the online pan- entertainment industry in China, with technology and user acceptance at relatively mature levels. Functionally, we see an opportunity for eCom companies to escalate user engagement and improve transaction conversion rates; it also provides short video apps with a tool to convert their top-of-the-funnel user traffic to eCom transactions. eCom companies have On the eCom company side, Alibaba, JD and PinDuoDuo have seamlessly integrated the embraced live streaming online shopping value chains from user traffic acquisition and product procurement, to technology, and Alibaba is payment and logistics. With annual buyers reaching 726mn, 384mn, and 628mn in the past clearly ahead of peers quarter, we think it is crucial that companies improve users’ stickiness on the platforms and facilitate consumers in making their purchasing decisions. Live streaming as a virtual interactive scene fits in perfectly with this requirement, and Taobao’s achievement in the past Singles’ Day and “6.18” shopping event proves its effectiveness. Under our eCom coverage, Alibaba is well ahead of its peers on this front with more than CNY200bn GMV generated in 2019, representing c.45% market share. It has attracted more than 400mn live streaming users. Its GMV mix is well balanced between the store owners/sellers (c.70%) and the KOLs/celebrities (c.30%). Alibaba has teamed up with the Douyin app (also known as TikTok outside of China, owned by ByteDance), leveraging its short video user base. JD is also similarly partnering with Kuaishou, and has achieved good results during the past “6.18” promotion. Short video companies are On the short video company side, the short video apps were initially involved in monetizing unsatisfied with the current user traffic with ads services, with eCom companies just another ads vertical. Later, the model and commission sharing short video apps adopted deeper partnerships with the eCom companies. By assisting their merchants in opening stores and selling products inside short video apps, the short video companies started to share in commissions (1-2%). According to 36Kr.com, Kuaishou was the #1 short video app with CNY35bn in-app GMV in 2019. However, short video apps were not satisfied with the partnership with eCom companies. Given the better financial economics, Kuaishou and Douyin launched their Store functions, bypassing eCom companies to directly invite merchants to open stores in the