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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
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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 short video apps. In this case, we estimate the apps can earn c.5% commissions.
We view the concerns over the We don’t view the new Store function as a big threat to eCom companies. First, the eCom potential competition from the business has a much longer value chain which requires deeper industry expertise than the “decentralized” eCom as over- ads business, so it takes time for short video apps to lift their learning curve. Secondly, we done believe the one-stop services, including payment, logistics, marketing solutions and supply chain management services provided by the eCom companies will be very difficult to be fulfilled by the short video apps in the near term. In addition, most of the brands and scalable retailers have built up steady relationships with Alibaba, JD and PinDuoDuo, which is not that easy to break. As a result, we are not that worried about the potential competition from the “decentralized” eCom ecosystem developed by the short video apps. It seems more likely that the short video apps and eCom companies would renegotiate a commission sharing scheme.
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Live Streaming: The Crucial Piece of the eCom Jigsaw Puzzle In the competitive eCom eCom companies have never stopped pursuing market share expansion from the online market in China, both the peers and offline market, even though China’s online shopping penetration already existing players and new exceeded 25% in CY19. The other mobile Internet traffic entrances, such as short video, entrants are exploring social and media apps are also looking for opportunities to increase their share of China’s opportunities to enhance retail market, which amounted to CNY41tn (US$5.9tn) in 2019. After almost two decades, conversion rates we are starting to see relative stability in the competitive dynamics of both the upstreaming (user traffics) and down streaming (fulfilment services) of the eCom market. On the user acquisition side, instant messaging, video (long and short) and media platforms share the top layer of the traffic funnel, while eCom companies, such as Alibaba and JD, dominate and consolidate the logistics and delivery markets. As a result, all these companies are exploring measures to enhance the from-traffic-to-transaction conversion rates, and have coincidently selected video live streaming as the critical element.
FIGURE 1 Live streaming eCom has advantages against the other shopping formats in multiple areas
Live streaming eCom Short video eCom Traditional shelf eCom TV Shopping Offline shopping Real time elaboration + Real time elaboration + Real time elaboration + Shopping format Browsing + Purchase Browsing + Purchase Company + Purchase Purchase Company + Purchase
More interactive Less interactive Less interactive Less interactive More interactive More experience More experience Less experience More experience More experience More professional More professional Less professional Less professional More professional Characteristic More pricing advantages Less pricing advantages Less pricing advantages Less pricing advantages Less pricing advantages More traffic sources More traffic sources More traffic sources Less traffic sources Less traffic source Higher conversion Higher conversion Lower conversion Lower conversion Lower conversion
Visit sunk cost Low Low Low Low High
User's decision cost Low Lower Medium Higher Lower
Source: Barclays Research
We view the video live streaming function as a critical step in the ongoing evolution of China’s eCom industry. Its rapid development and prevalence among Internet users has fuelled the restructuring of the online shopping value chain and redefined consumers’ purchasing behaviours. The reform not only expands the addressable user base, such as the integration with short video apps such as Douyin/TikTok, and Kuaishou, but also substantially improves existing user engagement and shopping experience in the online shopping apps (Taobao, JD.com, PinDuoDuo, etc.). Specifically, we think the changes are happening on the following fronts:
Video live streaming enhances 1) Short video apps: Douyin and Kuaishou have experienced dramatic growth in the past short video apps’ role as a three years, accumulating about 489mn and 379mn MAU as of December 2019, according major traffic contributor to to QuestMobile. Each daily user spends more than one hour per day in each app, and more online shopping than 10 times each day. Such high engagement apps have created new traffic funnels to the eCom platforms.
However, the length of short videos on Douyin and Kuaishou is normally between 15 seconds to several minutes, which is insufficient to provide a comprehensive introduction of products or brands, in our view. Video live streaming creates the connection between the short video traffic and the hosts, who can further drive consumer interests in the products and promote their decision-making. We think live streaming functions substantially improve the conversion rate from transaction leads to the final transaction.
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FIGURE 2 Short video was the #2 vertical category in China, in terms of user daily time spent and daily session frequency
Source: QuestMobile, Barclays Research
The integrated short video and live streaming marketing solution not only generates high quality leads to the Taobao and JD merchants that set up stores on the short video apps, but also directs traffic to the merchants who directly open stores in the short video apps. The latter might cause some potential competition with Taobao and JD, as the merchants can bypass the eCom platforms and open stores on Douyin and Kuaishou.
FIGURE 3 Mobile Internet user traffic funnel of online shopping services
Source: Barclays Research
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Live streaming functions 2) Online shopping apps: Alibaba was the first eCom company to realize the importance of enhance the transaction the live streaming function and launched these channels within Taobao as early as 2016. conversion rate in eCom apps With 846mn mobile MAU and 726mn annual active buyers as of March 2020, Alibaba is more than just an online shopping vertical, as its rich functions, such as local services, ticket/hotel booking, second-hand products, classified services, etc. have propelled it to the top-layer of the traffic funnel. Following Alibaba, the other two major eCom players, JD.com and PinDuoDuo have also launched live streaming channels in their apps.
The above eCom platforms also own industry leading fulfilment capabilities and payment services to close the transaction loops. In our opinion, they only need to enhance the conversion rate from the user traffic to the ultimate transaction. We view live streaming as the most effective tool to improve the user understanding of these products, as they organize promotions and help users make purchasing decisions. According to Alibaba, its Taobao Live Streaming function generated more CNY200bn GMV in CY2019, representing about 3% of Alibaba’s total GMV, implying significant improvement upside.
FIGURE 4 Live streaming driven eCom GMV and market share (%)
3,500 CNY bn 25%
3,000 2,855 20% 2,500 1,949 2,000 15% 1,157 1,500 10% 1,000 451 5% 500 150 21 0 0% 2017 2018 2019 2020E 2021E 2022E Live streaming driven GMV as % of eCom market size
Source: iResearch, Barclays Research
eCom is becoming a new 3) Pan-entertainment focused live streaming apps: This group of companies, such as JOYY monetization measure for pan- (YY.US, not covered) and TianGe (1980.HK, not covered), are the pioneers of China’s live entertainment live streaming streaming industry, launching their services as early as 2008. They primarily concentrate on apps entertainment-focused content, such as live shows, dancing and singing. With blockbuster online gaming titles, such as League of Legends, Honour of Kings, PUBG, accumulating a large audience, game live-streaming services have become another popular vertical, represented by Huya (HUYA.US, not covered) and Douyu (DOYU.US, not covered).
eCom was not an initial focus of the pan-entertainment apps. On one hand, with a MAU of less than 100mn about 2 years ago and a relatively low session frequency, these apps were not at the top of the traffic funnel for eCom services. On the other hand, their business revenues are mainly generated from virtual gifts to the hosts, which already generates quite healthy financial economics, thus we think the platforms lack the incentives to dabble in the relatively complicated eCom live streaming services.
The situation started to change in 2019, as eCom live streaming became more prevalent and was accepted by the audience. Hosts can either introduce transaction leads to third party sellers, or close the transaction in the hosts’ own stores. The well-established offline logistics infrastructure also simplifies the sellers’ workload. We note products are mainly concentrated in non-standard SKUs, such as jewellery and sportswear.
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Live Streaming Shapes Short-Video Apps as eCom Platforms
Short Video is Better at Traffic Acquisition, Rather Than Conversion Short video is the #2 traffic Short video apps, specifically Douyin and Kuaishou, have structurally redefined China’s generator on mobile Internet in mobile Internet traffic funnel in the past two years, as reflected in the substantial increase in China with c.86% user user time spent and mindshare on short video content. According to CNNIC (China Internet penetration Network Information Center), in terms of active users, short video exceeded Search to become the #2 vertical function in early 2020 with 85.6% penetration, next to instant messaging’s 99.2% (Figure 5). Based on QuestMobile’s tracking, as of December 2019, the short video category represented 13.7% of Chinese Internet users’ total time spent on mobile, vs. instant messengers’ 26.8% (Weixin 20.6%, QQ 6.1%), with Douyin and Kuaishou contributing 6.5% and 3.9% (Figure 6), respectively.
FIGURE 5 FIGURE 6 Vertical functions’ penetration in Internet users Short video is 2nd in the top 4 apps by user time spent
100%
Instant messaging: 90%
80%
70% Short video:
60% Jun-18 Dec-18 Jun-19 Dec-19 IM Search News
Short Vi deo eCom Payment Source: CNNIC, Barclays Research Source: QuestMobile, Barclays Research
Given the sensitivity of advertising budgets to user volumes and engagement, we note highly disruptive effects by short video apps on the China online ads market. Marketing revenue growth of companies such as Baidu and Weibo saw a substantial slowdown in the past two years primarily due to the competition with Douyin. We explore this in greater detail in our previous research reports (“Online Ads Market Transitioning in A Challenging Macro Environment”, June 14, 2019; “China Internet’s New ‘BBAT’ Paradigm”, February 23, 2020).
Short video as a standalone Initially, short videos were mainly used as a marketing tool to attract user eyeballs and function generates leads, but is generate traffic to eCom stores outside the short video apps’ ecosystems, rather than not enough to generate in-app closing the transaction loops inside the apps. The weakness of the business model is that eCom transactions short video apps could lose their control of user traffic during the jump to other third party apps. This is not a big surprise to us, as the length of the short videos normally ranges between 15 seconds to several minutes, which means that the product information and interaction between the sellers and consumers might be limited. From a financial economic perspective, it also makes sense for the short video apps to retain the transactions inside the apps, given higher commission rates.
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Live Streaming Improves Transaction Conversion on Short Video Apps Live streaming plays a perfect We view video live streaming as the perfect solution, as it creates a lively scene to connect supplementary role to short users with the sellers. The live streaming channels are primarily interest-based, as users can video choose to follow different hosts (KOL, celebrities) or brands’ official channels/accounts. Compared to the general product introductions in the traditional eCom product pages or short video clips, live streaming can provide more granular details of the products and virtually narrow the distance between the audience and sellers. As illustrated in the traffic funnel (Figure 3), while short video content stays at the “awareness” layer to broadly attract user attention, video live streaming focuses more on the “interest” layer to influence the consumer’s purchasing intent, make the payment decision and complete the transaction either inside the short video apps or the merchants’ stores on Taobao or JD.com.
Three Kinds of Partnerships, Different Financial Economics Short video apps have three main ways of monetizing eCom related traffic. In (Figure 7), we use Douyin as an example of how traffic originating from short video apps can:
1) Generate traffic to non-Taobao merchants’ stores outside of the app, which could be Weixin stores or the seller’s own website for example. In fact, this scenario is the traditional advertising model for short videos, as Douyin charges merchants based on a CPM (cost per mile) or CPA (cost per action) model. Assuming the effective CPM at CNY40-50, this means every 1,000 impressions could generate about CNY40-50 revenues to Douyin.
2) Generate traffic to eCom partners, such as Taobao and JD.com. The final transaction and payment step is normally completed in the eCom apps. CPS (cost per sales) is normally used in this scenario, where Douyin, eCom partners and the hosts (and MCNs) share the commissions charged to the merchants. The commission rate is normally at 20-30% of the transaction GMV. Some of the top-ranking MCNs and hosts can charge as high as 30-50%. In addition to the commission, in order to secure a spot in a top-ranking host’s live stream, the merchants must pay a fixed cost, which can be as high as CNY100k (US$14,000).
Assuming a 20% commission rate charged to a Taobao merchant, based on Taobao and Douyin’s agreement in 2019, Taobao can take 7.4% of the GMV, MCNs + hosts can share 11.3%, and Douyin would only get 1.3%.
3) Generate traffic to merchants which directly open stores on Douyin. Douyin Store (or Douyin Xiaodian) is a function allowing merchants to directly place products on Douyin, and merchants do not necessarily need to be a Taobao or JD merchant. In this case, all the transactions are completed inside the Douyin app. Alipay and WeChat Pay can be used for the payment, and merchants are responsible for the logistics services. As no eCom platforms are involved in this scenario, Douyin can maximize its financial return and earn 5-6% commissions, while MCNs + hosts can share 14-15% of the GMV.
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FIGURE 7 Three major eCom monetization measures of Short Video Apps (using Douyin as an example)
The flow from user traffics to finally close a transaction
Monetization models:
1) Short videos 3rd party stores (Weixin, retailers' websites, etc.) CPM: CNY 40-50 per mile
Commission sharing (assuming 20% commission rate)
Short video apps eCom platforms MCNs + hosts
2) Short videos Live streaming channels Taobao app CPS: 1.3% 7.4% 11.3%
3) Short videos Live streaming channels Douyin Stores CPS: 5%-6% 0.0% 14%-15%
Source: Barclays Research
Financial Returns Could Drive Renegotiation with eCom Companies In-App Stores Providing Short Video Apps have the Highest Financial Returns Based on the illustrative analysis above, under the ads model, a short video app like Douyin could generate about CNY40-50 revenue from 1,000 ads impressions. This model is essentially the same as for other vertical advertisers, such as gaming, education, etc., which probably underutilizes the ability of live streaming services to enhance financial economics. The CNY40-50 ad fees can be paid by eCom platforms, retail distributors, or brands.
In the second scenario, Douyin teams up with Taobao, assuming an average product price of CNY50, the in-app conversion rate (from short video leads to final transactions) of 3-5%, and Douyin’s commission rate of 1.3% on the GMV, implying the commission revenue to Douyin of about CNY20-33, which is lower than the revenues from the above ads model. Only when the conversion rate is increased to c.7-8% are the financial economics comparable to the ads model. At the same time, assuming the same conversion rate (3- 5%), Taobao can earn about CNY111 – 185 commission sharing.
In the third scenario, Douyin’s commission sharing percentage is increased from 1.3% to 5- 6%. With the other assumptions unchanged, Douyin could generate CNY75-150 of revenues, while the eCom platforms do not earn any.
From the above analysis, it’s not difficult to conclude that the financial economics of eCom platforms is maximized in the second scenario and is the worst in the third. While, for a short video company like Douyin, the third scenario generates the best financial return, while the second is the lowest.
Renegotiation of the Commission Sharing Scheme May be the Best Option Based on iResearch estimates, about two thirds to three quarters of total eCom GMV from short video apps (including Douyin and Kuaishou) was generated from the first scenario, about 20-25% GMV generated in the second scenario, and only mid-single digit GMV contributed by the third scenario in CY2019.
Although the third scenario shows the highest return, we think it’s unlikely that short video apps like Douyin would aggressively shift the GMV from the first two scenarios to the third one, considering: 1) The direct introduction of merchants to their stores would require companies to become involved in the selection of quality brands and products and supply chain management, such as inventories, billing system, and logistics which may not be a
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strength. 2) Given Alibaba’s dominant position in China eCom market, most of the quality brands have set up stores on Taobao or Tmall, and normally prioritize the demand from Alibaba. While some non-standard products or relatively mid- or long-tail merchants may open stores on short video apps, we believe most of the large brands will continue to choose Alibaba to open an online store. 3) Alibaba is a valuable partner as it introduces many quality merchants. Also, considering the competitive pressures from the Tencent camp (Tencent, Kuaishou, JD.com and PinDuoDuo), partnering with Alibaba can help defend competitors, to some extent.
As a result, we think the more realistic solution for short video apps such as Douyin to enhance their financial economics include: 1) Continuing to explore the long tail and non- standard product market, and move these stores from offline or other online channels onto their platform. 2) As the GMV contribution to Alibaba grows, Douyin may prefer to re- negotiate the commission sharing scheme with Alibaba (the second scenario above) to increase its share of the pie.
Indeed, the second scenario looks possible. According to Sina.com and 36Kr in late May 2020, after July 1, Douyin's strategic partnership with Taobao is up for renewal, and Douyin is reportedly seeking a new partnership structure with Taobao, including changing the current percentage share.
A Closer Look at Short Video Apps’ eCom Functions Kuaishou, the #1 eCom Live Streaming Short Video App in China Kuaishou is China’s #2 short video app and the #1 live streaming platform, in terms of users. Currently the app owns about 500mn MAU and 300mn DAU. Kuaishou incorporated the live streaming feature on its platform as early as 2016, which has since contributed a large majority of the company’s revenues. Other sources of Kuaishou’s revenues include gaming and ads.
Live streaming on Kuaishou is intermixed with short video content on the home feed. Users can either enter the live streaming channels through short video that carry live streaming links, or get access to the live streaming rooms by entering from the shopping segment. The live streaming feature is similar to other pure-play live-streaming apps, allowing streamers to earn money through virtual gifts from their viewers.
We understand that Kuaishou's local content section is 25% -50% comprised of live streaming rooms under the "Same City" segment, while Douyin has about 25% (one out of four). The design gives Kuaishou’s live streaming functions more exposure to users. Currently the top three categories of products sold on Kuaishou are low-priced cosmetics, clothing, and food.
Recently Kuaishou announced a strategic partnership with JD.com. Users can directly purchase the products from JD without leaving the Kuaishou app. Both companies aim to collaborate on brand marketing and integrate JD’s insights in consumer shopping behaviours with Kuaishou’s data. According to JD Retail CEO, Mr. Lei Xu, the deal “will provide Chinese consumers with a high-quality experience in richer shopping scenarios.”
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Douyin Rapidly Catching up, leveraging a Large User Base and its Alibaba Partnership Douyin (owned by ByteDance, private, not covered), also known as TikTok outside of China, is the #1 short video app in China. It started live streaming services in 2017, and expanded into the eCom industry in early 2018. ByteDance has teamed up with Alibaba and allows Taobao/ Tmall merchants to place their products on Douyin. In addition, Douyin also launched Douyin Store (Douyin Xiaodian) function, which allows non-Taobao merchants to directly open stores on Douyin. Starting in early 2019, Douyin has become more active in the field.
With short video being Douyin’s flagship content, an AI-backed algorithm matches viewers with their interests. Therefore, Douyin’s traffic approach creates tremendous potential for user engagement. The majority of Douyin’s live streaming traffic is generally funnelled through short-video content on Douyin’s main page.
Viewers are able to enter a live streaming room from the entrance point in Douyin’s front page, including the shopping cart, Douyin Stores, and streamers’ profiles. Live streaming rooms have virtual chat features allowing viewers to communicate with the streamers. Sellers can make more persuasive pitches for the products through this route.
An eCom link can be included in Douyin live streaming videos during the broadcast. The link takes users to the product introduction page inside the Douyin app. By clicking "Buy now" button, users will be redirected to either the third party shopping platforms’ product pages (Taobao, JD.com, etc.) or the Douyin Store pages to complete the transactions.
ByteDance has also invited celebrities and entrepreneurs to boost the sales on its platform with live streaming shopping. For example, Douyin invited Mr. Yonghao Luo, an internet celebrity and entrepreneur to start streaming live commerce videos on Douyin in April, and his content generated sales of CNY170mn in just three hours on the first day.
FIGURE 8 Celebrity hosts and their recent live streaming sessions and sales on Douyin
Date Celebrities Duration GMV (CNY) Assisting Celebrities
Jun 19th Guan Xiaotong 4h 10min 3.40mn n.a. Jun 19th Yuan Shanshan 7h 47.01mn Sun Jian Jun 17th Yu Shiman 5h 3min 8.63mn n.a. Jun 17th Wang Feng 6h 21min 3.122mn n.a. Jun 16th Lv Yi 3h 0.29mn n.a. Jun 12th Xue Zhiqian 3h 40min 13.98mn Li Kuan, Liu Wei Jun 11th Liu Yan 5h 16min 4.007mn Da Peng Jun 10th Yang Di 4h 46min 1.15mn Xiao Xiao Jun 10th Zhang Ting 4h 53min 135mn Tao Hong Jun 6th Zhang Xinyi 5h 3.97mn Yuan Hong May 17th Yu Zhen 4h 37min 6.39mn n.a. May 16th Chen He 4h 17min 82.64mn Zhu Zhen, Lu Han May 2nd Wang Zulan 6h 39min 21.56mn n.a. Apr 19th Chen Yanfei 3h 4min 3.75mn n.a.
Source: Company data, Barclays Research
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FIGURE 9 Douyin live stream eCom flow chart Redirected to the Taobao App Main Livestreaming section Product purchase and payment
eCom live streaming • More Livestreaming showroom entrance on Douyin app entry point
• Enter into a live streaming showroom The product page in Taobao • Detailed item selection options
• A live- streamer on-the-air, selling products with live streaming
• Entry point for other available products by the • The product page in Douyin same store
• Short video content on Douyin
• Item page with itme's description
• Redirected to the product's Taobao page to complete • Details for delivery services the transaction
• Payment page on Taobao:
• Huabei, and Alipay are the default payment methods
Source: Barclays Research, Douyin app
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Live Streaming Boosts the Conversion Rate in eCom Apps eCom apps have made considerable marketing efforts in the past decade to accumulate users, with social, media, and videos platforms all contributing meaningful traffic. As of March 2020, Alibaba, JD and PinDuoDuo had recorded 726mn, 384mn, and 628mn annual buyers, respectively. However, given the relatively narrow vertical function, the eCom apps are still quite distant from the top layer of the traffic funnel, although the apps have tried to launch a variety of non-eCom services, such as gaming, local services, video, payment, and travel, etc. Reflected in user engagement, each daily active user only spent about 20-30min per day in each eCom app, or about 5-7 times in daily sessions, vs. the more than one-hour time spent and above 10 daily visits of social and short video apps.
As a result, we view the video live streaming function as a critical step in improving user engagement and transaction conversion rates inside the eCom apps. For example, female users tend to select Taobao as the window-shopping venue. Compared to the previous text- or photo-based product pages, video live streaming can provide a more vivid introduction. We believe a virtual in-person interaction with the hosts can facilitate consumers to make purchase decisions. Furthermore, if the consumers and hosts build up a trust mechanism, this can further improve the retention rate, for example, if consumers follow the hosts’ accounts and become fans. Alibaba is the pioneer in this industry in inviting celebrities and KOLs to open live streaming accounts on Taobao, which has enhanced Taobao’s industry- leading transaction conversion rate. We estimate the KOL-/celebrity-driven GMV represents c.30% of Taobao’s live streaming GMV.
According to iResearch, the total live streaming-driven GMV in China was about CNY451bn in 2019, and we estimate about half of the GMV was generated inside the eCom apps, with the other half scattered in short video apps, Weixin, mini programs, and pan-entertainment live streaming apps. As the market leader, Taobao reported more than CNY200bn GMV from Taobao live streaming, more than doubling y/y. JD.com and PinDuoDuo have also increased their efforts in live streaming, and achieved very robust growth in the past “6.18” (June 18th) shopping event.
Taobao Live: The Leader in eCom Live Streaming Taobao Live, Alibaba’s eCom live streaming channel, is the undisputed leader in the space, thanks to a first mover advantage, continued marketing efforts and strong execution. According to the company, Taobao Live GMV maintained more than 150% y/y growth in the past three years in a row, and each day over 350k-hours of live streaming content was available on Taobao in 2019. On the host side, newly registered live streaming accounts also doubled y/y in 2019. During last year’s Single’s Day (November 11) shopping event, more than ten live streamers on Taobao Live each broke the CNY100mn sales record, and over 100 live streamers achieved sales of CNY10mn.
The total GMV generated from Taobao Live exceeded CNY200bn in CY2019 (not including the GMV generated by short video apps for Taobao merchants), according to the company. This represented c.45% market share of China’s eCom live streaming market, but only 3% of Alibaba’s total GMV (CNY6.5tn, based on our estimate) in CY2019, which indicates the potential of the live streaming function in the Alibaba ecosystem. Of note, there were about 400mn Taobao users who used the live streaming function in Taobao last year, implying only CNY500 GMV per user and significant upside vs. the average annual GMV per buyer at more than CNY10,000 in CY2019. We expect Taobao Live to maintain its growth momentum in the next couple of years, and estimate its contribution to Alibaba’s total GMV to rise to mid-single digit in CY2020 and high single digit in CY2021-22.
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FIGURE 10 Taobao app live streaming function flow chart Main video live streaming section Payment section Entrance on Taobao app
• By clicking the live-streamer • A live- information, streamer on viewers can • Detailed product
the air, her c view the profile information for measurements page of the confirmation and sizing streamers and information her past are shown in streaming the room ccc videos • Delivery information • Viewers comments and questions section • Entry point for available • Live streaming products by the same store entry point on Taobao app • Item page, same with regular Taobao item page • Payment page, the final step of the transaction
• Recommendation • Alipay is set by ccc feed function, default. Other including options including discounted Huabei, products, and debit/credit buyers showroom cards
• Buyers can view other available • Button for payment items in the same store and can also view the live streaming of the items Source: Barclays Research, Taobao app
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Buyers on the Taobao platform can enter into the live streaming rooms of different streamers from the first level entry point on Taobao app’s main page (Figure 10). In the live streaming room, the streamer’s information is shown for the buyer’s reference, such as the person’s height and measurements if he/she is selling clothes. Buyers can ask questions in real-time by leaving comments in the chat sections inside the live streaming room, where the live-streamers can answer questions and reply to the feedback in real-time. The buyers can also check the full lists of products on sale by the same streamers in the room and watch the playback of the products.
When viewers are interested in buying products in the live streaming room, they could add these products directly into the shopping carts with special coupons provided especially for live streaming viewers by the merchants. As they move on to the payment page, the live streaming window will be minimized on their screen and viewers can return to the same live streaming room after they make the purchase. The credit card payment method is set as the default payment method on the payment page and Alipay and Alibaba’s microloan service, Huabei, and Jiebei are also supported as payment methods. Currently, Taobao Live’s largest eCom categories are clothing, followed by beauty, parenting, food, and jewellery.
With more brands and buyers becoming active on the platform, Taobao Live is planning to further enhance its services for live streaming hosts, including personalized operations support and new digital technologies, such as 5G and AR-powered features, as well as short videos and audience analytics to help hosts better engage their followers. By the end of 2020, Taobao Live aims to incubate 100K emerging presenters with a monthly income of over CNY10K.
JD.com: Fast Catching Up to Secure the #2 Market Position JD’s emphasis is on the quality of both products and content on its live streaming platform. During “6.18” sales, JD collaborated with BiliBili (BILI.US, not covered) and Strawberry Music Festival with more than 300 celebrities and KOLs to enhance the quality of its live streaming content. Unlike other e-commerce live streaming platforms that highlight promotions and discounts, the high-quality content on JD Livestream platform helps bring in more audiences from all age groups.
JD also announced a long-term strategic partnership with short video platform Kuaishou to pool resources to create a “short video eCom Live streaming ecosystem”. Although JD already has a live streaming platform, it will gain better access to Kuaishou’s audience of more than 300mn DAUs, a large share of which hails from China’s lower-tier cities and rural areas, which are key drivers of online consumer growth.
Jingxi, JD’s team-buy franchise, enables JD.com and its merchants to adopt a “dual-brand” strategy and target two different customer groups. While JD.com focuses on providing high- quality, branded goods for consumers in tier 1-2 cities, Jingxi is a social eCom marketplace that targets price-sensitive customers in smaller tier 3-6 cities and rural areas. During the Singles’ Day last year, approximately 75% of Jingxi's new users came from lower-tier cities. As it expands into rural areas, Jingxi maintains JD’s advantages on logistic management and aims to build a JD that is tailored for these areas.
Group-buying promotions and Weixin are a crucial part of this strategy. Unlike PinDuoDuo's strategy, customers are eligible for rewards and steeper discounts when they share product-related information on Weixin and invite friends, family members, and other contacts to place a group order. Jingxi believes on the quality while providing lower prices to customers.
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Jingxi also concentrates in using live streaming channels to raise conversion rates. Live streaming where young influencers broadcast live, interactive video sessions of themselves trying on new products, is highly popular in smaller Chinese cities.
Viewers can ask the host questions in real-time, and product links are embedded in each live streaming channel, enabling viewers to "buy while watching". After the session is over, users who missed the session can also replay the videos.
FIGURE 11 JD.com app live streaming function flow chart Entrance on JD app homepage Live streaming main section Confirmation & Payment
Homepage of JD app Live streaming page Store homepage Order confirmation
Homepage of live streaming • 6.18 special shopping and live streaming events, and promotion information
. Upcoming live • Order confirmation with streaming programs delivery information Product list Product homepage Payment page
• Recommended products
• Product list of the same • Product page, the same • JD Baitiao, Credit card, store - Buyers can view as the regular JD item WeChat Pay is supported other available items and page with detailed in the payment step the live streaming of the product introduction items • Minimized live streaming page; viewers are able to return to the live streaming showroom Source: Barclays, JD.com app
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PDD; An Aggressive New Entrant Trying to Differentiate its Service Offering PDD has similarly integrated its in-app live streaming channel for sellers to boost the sales of goods on its platform. A Pinduoduo user wishing to be a live streamer needs to undergo face scanning for identity verification, to upload identity card copies, and wait for two days to receive the final approval from Pinduoduo.
FIGURE 12 PinDuoDuo app live streaming function flow chart Entrance on PDD's app Main Livestreaming section Product purchase and payment section
• Item pagepage withwith item'sitme's • Live • Coupon / detailed description streaming Promotion entrance countdown • Buyers can choose • A live-streamer on- • PDD between purchasing distribute live the-air, selling individually, or streaming products with live purchasing with a function entry streaming group. Within point all over purchasing with a the app group option, buyers can choose between joining an existing group or forming a new group. Normally consumers can get more discounts by joining a group. • More • Allowing• Allowing • Delivery address Livestreamin viewersviewers to to g showroom sendsend virtual entry point giftsvirtual to the livegifts- to streamersthe live- • The red streamers pocket icon shows the • Entry point for • Payment page, coupon / other available the final step of promotion products by the the transaction. available in same store • WeChat Pay is the • Buyers can view the set by default. livestream items the Other options room livestreamer is include Apple promoting and Pay. other available items in the store and can enter into the live streaming of the products when they see the tag next to the products • The promoted item stays at the top Source: Barclays Research, PinDuoDuo app
Unlike other e-commerce platforms, PDD’s approach to live streaming is to distribute the live streaming function all over the app, compared to having a clear upfront dedicated entrance. One of PDD's live streaming function entrances is located in the chat area where users can also host a live streaming session. Inside the live streaming showroom, users can access more showrooms that are on-air concurrently and also view the live streaming of products with a “live streaming” tag next to the product which they can tap into. Users would be able to find the live streamers they follow when they go to their “Follow” tab. For each showroom, the red envelop icons indicate the coupons and promotions that are
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available in the live streaming room. When users enter the room, the coupons and promotions will count down (normally within five seconds) for users to receive the coupon.
At the product's purchase and payment section, the user can choose between purchasing the item individually or purchasing with a group. With a group buy option, buyers can choose between joining an existing group or forming a new group. Usually, consumers receive a bigger discount by joining an existing team buy. At the final payment step WeChat Pay is set by default by the app, but other payment options include Apply Pay, Alipay, QQ Wallet, and Huabei. Buyers can also ask their WeChat friends for payment.
eCom Enriching Monetization of Pan-Entertainment Apps Video live streaming is not new to the China Internet sector. JOYY (YY.US, not covered) and TianGe (1980.HK, not covered) launched live streaming services as early as 2008. The live streaming services on JOYY and TianGe primarily concentrate on entertainment-focused content, such as live shows, dancing and singing. With the blockbuster online gaming titles, such as League of Legends, Honour of Kings, PUBG gaining in popularity among Chinese gamers, game live-streaming services have become another popular content vertical attracting a large amount of gamer traffic. This has incubated the game-focused platforms, Huya (HUYA.US, not covered) and Douyu (DOYU.US, not covered).
Taking JOYY as example, as one of the largest pan-entertainment live streaming platforms in China, YY app provides extended entertainment live streaming content on its platform other than e-sports, including talent shows, anime, and outdoor activities. The highly dynamic content and the variety of real-time interactions provide the platform with sticky users and a foundation to monetize with e-commerce.
YY's live streaming shopping function is not as obvious as the traditional e-commerce platforms, as the live streaming window itself will not be marked as eCom. After users enter into the YY's app main page and watch live streaming, some of the live streaming pages will show a shopping cart button on the same page, which indicates there are products available for sales on this page. After the users click the shopping button, they will view the product list of the live streamers. From there, buyers will be redirected to the third-party shopping website to make the purchase.
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FIGURE 13 YY app’s live streaming eCom flow chart eCom live streaming entrance at Payment section the top of YY app YY eCom live streaming section
Live streaming room • Live streaming channel on the YY platform
Product homepage
Product list
• Order confirmation and payment page- Alipay, WeChat pay and Huabei are accepted
• Product detailed information; delivery expenses; inventory status
• Buyers can get access to the store's product page directly, and make the transaction within the YY platform
Source: Barclays Research, YY app
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Two Frequently Asked Questions by Investors
Q1: What Types of Products Are Suitable for eCom Live Streaming? For eCom platforms (Alibaba, JD.com, PinDuoDuo, etc.), we view the embedded live streaming function more like a display channel for the platforms’ existing products. So theoretically, all kinds of products, from large ticket items such as real estate and automobiles to small ticket items such as lipsticks and socks, can be sold in live streaming channels. Users can choose to switch between the live streaming channel and traditional product/store home pages. The popularity of various product categories’ might differ. As shown in Figure 14, apparel, cosmetics and skincare products have the highest live streaming penetration, we think because live streaming probably plays an important role in helping users make purchasing decisions, given the great variety of product SKUs and the weakness of the traditional product exhibition formats (photo and text).
For some high-ARPU products, such as automobiles and real estate, we don’t expect the live streaming to directly complete a deal online, as buyers still need to go to offline to physically check the products and complete financing applications. However, the live streaming service provides a viable alternative for buyers and saves their commuting time, especially relevant during the Covid-19 lockdown.
FIGURE 14 Live streaming features by product category
Cosmetics and Home Home Books and Apparel Fresh food Cars Local services skincare decoration electronics records
Sense of Experience High High High High Medium Low Low Low
Gross margin 50%+ 50%+ 30%+ 20%+ 15%+ 20%+ 15%+ 10%+
ARPU Low Low High High Low Low High Medium
Return rate High Low Low High Low High Low Medium
Live streaming penetration rate 36% 8% 4% 5% 7% unknown ~ 0% ~ 0%
Source: iResearch, Barclays Research
For short video apps, most parts of the live streaming functions are quite similar to that in eCom platforms. One major functional difference is that the apps don’t have embedded eCom platforms, and this is why their product selections are fewer than the traditional eCom platforms.
In our view, two kinds of products are the most popular in eCom live streaming channels: 1) Special and unique products. Live streaming can help consumers better understand the products, the marketing effects are more effective than the display in the traditional eCom shelf. 2) Discounted products and promotions. Hosts have channels to procure products at lower prices, and pass on the benefits to consumers. With strong sales volumes this can help the hosts procure even more products at low prices.
Meanwhile, we note the limitations of live streaming function, especially the channels on short video apps: 1) The limited number of products sold during a fixed session. Assuming a live streaming session is as long as one hour and each product’s display takes about 3mins, this means in total only 20 products can be shown by the host. 2) Product search function on short video apps is still not powerful enough, so users cannot quickly find a full product list as on the eCom platforms. This is also because eCom is only a vertical function of short video apps.
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Q2: Whose Market Shares Are eCom Live Streaming Taking? First, we think eCom live streaming can definitely take market share from offline retail. The display functions of some products in the traditional offline retail franchise, such as apparel sales in shopping malls, can be replaced by the live streaming functions, to some extent. Both eCom platforms and short video apps have the ability to take share from offline retail.
From an online shopping market share perspective, we think live streaming can generate some incremental GMV growth from consumers’ unplanned purchases, driven by the hosts’ advertising, as during the broadcast the hosts can create cross-selling opportunities. For example, as the audience of apparel and cosmetics have quite a high overlap, it is common to see a lipstick host also sell dress accessories in the channel.
Based on the partnership agreement between eCom companies, such as Taobao, and short video apps, if the merchants are existing customers of the eCom companies, the merchants normally connect to Taobao accounts with their Douyin accounts. In this case, there is no direct competition between the two entities, and the GMV is booked by both.
In only one case do we see direct competition between the two entities – if a merchant is not a Taobao customer, it will be free to do business on Douyin. We believe most of the scalable brands in China are already Alibaba’s customers, this means the new stores on short video apps are likely to be some long-tail merchants. However, even if some brands open stores on Taobao and Douyin at the same time, we see a limited impact on Taobao since the potential cannibalization would be very small compared to Alibaba’s total GMV.
FIGURE 15 How merchants (Taobao and Douyin Stores) and content providers are involved in the Douyin eCom ecosystem
Merchants/ brands / individual sellers/ content providers
The entities can help product Do the entities No owners to sell products by own products? joining the Taobao Union and earn commissions
Yes
Do the entities own No Do the entities own No Apply to register Douyin Stores Taobao stores? Douyin Stores?
Yes Yes
1) Open a Douyin account; 2) Turn on Taobaoke function Directly put products into the and set a commission rate; display areas of Douyin Stores 3) Put products in the Taobao- Douyin connected stores
Source: Barclays Research
We think eCom companies and short video companies are more likely to co-exist rather than competing with each other: 1) eCom is one of the largest ad categories in short video apps. Short video’s aggressive expansion into eCom services might break the existing partnership, so we don’t expect short video companies to take the risks; 2) Compared to ads services, eCom industry has a longer supply chain and more complicated logistics services, which needs deeper industry expertise. All these areas are the weaknesses of short video companies and we don’t expect they can fill the gap in the near term. 3) Most of the scalable brands and merchants have built steady partnership with Alibaba/JD/PinDuoDuo, the movement costs to short video apps are high. The brands and merchants also need to take the risks of breaking the existing partnership with eCom apps.
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Booming MCN & Host Market Has Benefited eCom Live Streaming In 2015, there were only 160 multi-channel network (MCN) institutions in China, which rapidly developed into more than 20,000 by 2019 (Figure 16). As reported by iResearch, more than 90% of the current domestic KOLs have signed up with an institution or established MCN agency. The major categories of MCNs are eCom based MCNs, content based MCNs, marketing based MCNs, and knowledge based MCNs.
FIGURE 16 The number of live streaming focused MCNs in China exceeded 20,000 in 2019 25,000
20,000 + 20,000
15,000
10,000
5,000 + 5,000 1,700 160 420 0 2015 2016 2017 2018 2019 Source: Topklout.com, Barclays Research
In recent years, eCom revenue has become a major revenue source other than advertising for MCNs. eCom based MCNs connect with KOLs and celebrities for its upstream, and connect with distribution platforms on the lower stream end. At the same time, the MCNs also play other roles, including being the KOL’s incubator, content producer, event operator, supply chain supporter for e.g., to facilitate the platform’s management of the individual live streamer. According to Topklout.com, about 15% of live streamers are working under the eCom category, but this is still behind the other entertainment categories.
FIGURE 17 Live streaming host distribution by vertical function 2018 2019
Others Others, 7% 14% eComm, Pan 15% Entertainme nt , 36% Pan Entertainme nt Shows 42% 20%
Shows, 24%
Game, 18% Game 24%
Source: Topklout.com, Barclays Research
With MCN institutions developing scale, eCom based live streaming MCNs started to increase the commission as a percentage of total revenue. The revenue distribution for MCN are mainly based on either CPS (Cost per Sales) or the live streamer’s session fee, or both. Commission rate is normally at 20%-30% of the total GMV, but may also fluctuate based on the brands and live streamers. Top tiered KOLs’ commission charges can be as high as 30%-50%, with session fees reaching CNY100K per session. Among all categories,
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cosmetics products have the highest commission rate and apparel the second highest. The food and beverage category has a relatively lower commission rate.
After the live streamers and brands decide on the commission rate and session fee, platforms (including the eCom platform or the content platform) will charge a service fee first, leaving the remaining fees to be distributed among MCNs and live streamers. MCNs normally share revenue at the highest percentage with the live streamers, roughly 50% - 70% of the total commission. The commission rate varies, but revenue share with eCom platforms and content platforms is fixed at roughly 25%-50% of the total commission. Also, top tiered MCNs have the most negotiating power in terms of commission and revenue sharing with the platforms. Top tier merchants and ordinary MCN institutions have less pricing power than the top tier MCNs, but are still stronger at negotiating terms than the medium to small merchants and live streamers.
Government Regulation Enhances Service Creditability China’s government has tightened its regulation on the eCom live streaming market since 2019, which we view as a positive for the market’s secular growth. According to statistics from the Ministry of Commerce, in the first quarter of 2020, there were more than 4 million live streaming eCom channels across the country. A report on consumer satisfaction on live streaming e-commerce released by the China Consumer Association (CCA) on March 31, 2020 showed that 37.3% of consumers surveyed had encountered problems in live streaming eCom. The main concerns for refusing the use of live streaming eCom are "product quality is not guaranteed " and "poor after-sales service."
To regulate the emerging problems, including fake user engagement/ transaction data (the number of Likes, Sharing, Watching and transaction volume), false and exaggerated promotion, unqualified products, and poor after-sales service, on June 8 2020, the Professional Committee of Media Shopping, China General Chamber of Commerce released two drafts of Group Standards: Basic Standards of Video Live Shopping Operation and Service and Guidelines for the Evaluation of Service System of Online Shopping Integrity. Both texts are expected to be implemented starting on July 1, 2020.
Specifically, the first standard clarifies the requirements on industry terms and definitions, such as product quality, software and hardware, codes of conduct for live streamers, service specifications for multi-channel network organizations, the operation management of industrial enterprises, platforms’ compliance, and the supervision/administration of regulatory authorities. For example, the products sold by live streaming should meet the requirements of national laws and regulations for product quality, standards, and measurement, and have production and sales permit certifications, product quality certifications, etc. Cosmetics, beauty products, medicines, healthcare products should also have the ID number of relevant approval documents, manufacture date, shelf life, and precautions.
Similarly, on the use of hyperbolic advertising words, the terms used by live streamers needed to comply with the advertising law, “The lowest price in the whole network”, “national level”, “superlative”, “best” or similar comparative words are considered illegal terminology. Meanwhile, live streamers and other relevant personnel need to participate in training organized by relevant departments, obtain qualification certificates or working & operations certificates, and register in professional institutions.
Going forward, the Professional Committee of Media Shopping, China General Chamber of Commerce will increase its cooperation with the Ministry of Public Security, the Ministry of Commerce, the General Administration of Customs, State Administration for Market Regulation, etc. and establish a blacklist and a national supervision and reward system.
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ANALYST(S) CERTIFICATION(S): We, Gregory Zhao and Ross Sandler, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
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IMPORTANT DISCLOSURES CONTINUED J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities of this issuer and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from this issuer within the past 12 months. L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. O: Not in use. P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services. Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to this issuer. R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. S: This issuer is a Corporate Broker to Barclays PLC. T: Barclays Bank PLC and/or an affiliate is providing equity advisory services to this issuer. U: The equity securities of this Canadian issuer include subordinate voting restricted shares. V: The equity securities of this Canadian issuer include non-voting restricted shares. Risk Disclosure(s) Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLP unit holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units. Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12- month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe":
U.S. Internet Activision Blizzard, Inc. (ATVI) Alibaba Group Holding Ltd. (BABA) Alphabet Inc. (GOOGL) Amazon.com, Inc. (AMZN) Baidu, Inc. (BIDU) Booking Holdings Inc. (BKNG) Chewy, Inc. (CHWY) eBay, Inc. (EBAY) Electronic Arts, Inc. (EA) Expedia Inc. (EXPE) Facebook, Inc. (FB) GoDaddy Inc. (GDDY) Groupon, Inc. (GRPN) GrubHub, Inc. (GRUB) GSX Techedu Inc. (GSX) IAC/InterActiveCorp (IAC) JD.com, Inc. (JD) Lyft, Inc. (LYFT)
8 July 2020 25 Barclays | China eCommerce
IMPORTANT DISCLOSURES CONTINUED
Match Group, Inc. (MTCH) MercadoLibre (MELI) NetEase, Inc. (NTES) Peloton Interactive, Inc. (PTON) Pinduoduo Inc. (PDD) Pinterest, Inc. (PINS) Revolve (RVLV) Shopify (SHOP) Snap, Inc (SNAP) Spotify Technology S.A. (SPOT) Stitch Fix (SFIX) Take-Two Interactive Software (TTWO) Tencent Holdings Ltd. (TCEHY) Trip.com Group Ltd. (TCOM) Tripadvisor Inc. (TRIP) Twitter, Inc. (TWTR) Uber Technologies Inc. (UBER) Weibo Corporation (WB) Wix.com Ltd. (WIX) Yelp, Inc. (YELP) Zillow, Inc. (ZG) Zynga Inc. (ZNGA)
Distribution of Ratings: Barclays Equity Research has 1574 companies under coverage. 45% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50% of companies with this rating are investment banking clients of the Firm; 74% of the issuers with this rating have received financial services from the Firm. 38% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 43% of companies with this rating are investment banking clients of the Firm; 68% of the issuers with this rating have received financial services from the Firm. 15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 33% of companies with this rating are investment banking clients of the Firm; 59% of the issuers with this rating have received financial services from the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Top Picks: Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant "industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes "Top Picks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While analysts may highlight other Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each industry. To view the current list of Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicks). To see a list of companies that comprise a particular industry coverage universe, please go to https://publicresearch.barclays.com. Types of investment recommendations produced by Barclays Equity Research: In addition to any ratings assigned under Barclays’ formal rating systems, this publication may contain investment recommendations in the form of trade ideas, thematic screens, scorecards or portfolio recommendations that have been produced by analysts within Equity Research. Any such investment recommendations shall remain open until they are subsequently amended, rebalanced or closed in a future research report. Disclosure of other investment recommendations produced by Barclays Equity Research: Barclays Equity Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months. To view all investment recommendations published by Barclays Equity Research in the preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations. Legal entities involved in producing Barclays Research: Barclays Bank PLC (Barclays, UK) Barclays Capital Inc. (BCI, US) Barclays Bank Ireland PLC, Frankfurt Branch (BBI, Frankfurt) Barclays Bank Ireland PLC, Paris Branch (BBI, Paris) Barclays Bank Ireland PLC, Milan Branch (BBI, Milan) Barclays Securities Japan Limited (BSJL, Japan) Barclays Bank PLC, Hong Kong Branch (Barclays Bank, Hong Kong) Barclays Capital Canada Inc. (BCCI, Canada) Barclays Bank Mexico, S.A. (BBMX, Mexico) Barclays Securities (India) Private Limited (BSIPL, India) Barclays Bank PLC, India Branch (Barclays Bank, India) Barclays Bank PLC, Singapore Branch (Barclays Bank, Singapore)
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IMPORTANT DISCLOSURES CONTINUED Barclays Bank PLC, DIFC Branch (Barclays Bank, DIFC)
8 July 2020 27 Barclays | China eCommerce
IMPORTANT DISCLOSURES CONTINUED Alibaba Group Holding Ltd. (BABA / BABA) Stock Rating Industry View USD 240.00 (06-Jul-2020) OVERWEIGHT POSITIVE Rating and Price Target Chart - USD (as of 06-Jul-2020) Currency=USD Publication Date Closing Price Rating Adjusted Price Target 19-Jun-2020 220.64 270.00 275 14-Feb-2020 219.63 260.00
250 13-Jan-2020 230.48 245.00 20-May-2019 160.65 225.00 225 14-Apr-2019 188.91 220.00 31-Jan-2019 168.49 200.00 200 04-Nov-2018 147.59 195.00 09-Oct-2018 146.94 210.00 175 27-Aug-2018 180.65 225.00 150 07-May-2018 195.35 230.00 31-Oct-2017 184.89 220.00 125 18-Aug-2017 167.50 200.00 02-Aug-2017 151.91 180.00 Jan- 2018 Jul- 2018 Jan- 2019 Jul- 2019 Jan- 2020 Jul- 2020 On 07-Jul-2017, prior to any intra-day change that may have been Closing Price Target Price published, the rating for this security was Overweight, and the adjusted
price target was 175.00. Source: Bloomberg, Barclays Research Historical stock prices and price targets may have been adjusted for stock splits and dividends.
Source: IDC, Barclays Research
Link to Barclays Live for interactive charting A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of Alibaba Group Holding Ltd. in the previous 12 months. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by Alibaba Group Holding Ltd.. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by Alibaba Group Holding Ltd.. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Alibaba Group Holding Ltd. in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from Alibaba Group Holding Ltd. within the next 3 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by Alibaba Group Holding Ltd. and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from Alibaba Group Holding Ltd. within the past 12 months. L: Alibaba Group Holding Ltd. is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: Alibaba Group Holding Ltd. is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: Alibaba Group Holding Ltd. is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: Out $270 PT is derived from a SoTP valuation method, which is comprised of Core Commerce ($198.1), Cloud ($25.6), DME ($3.3), innovation ($0.9), investments ($25.5), and net cash ($16.8). The PT implies 27x P/E multiple on FY22E EPS. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Key risks include: 1) Competition – Tencent is competing with Alibaba in almost all business frontiers. In the e-commerce space, Alibaba faces fierce competition from PinDuoDuo and JD.com. We also expect Alibaba's global expansion to face direct competition from Amazon. 2) Margin pressure – Digital media & entertainment, Ele.me and some other new innovation segments are reporting substantial losses, and may continue to pressure Alibaba's margins.
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IMPORTANT DISCLOSURES CONTINUED JD.com, Inc. (JD / JD) Stock Rating Industry View USD 63.24 (06-Jul-2020) OVERWEIGHT POSITIVE Rating and Price Target Chart - USD (as of 06-Jul-2020) Currency=USD 70 Publication Date Closing Price Rating Adjusted Price Target 65 19-Jun-2020 58.64 65.00 60 17-May-2020 50.85 59.00 55 03-Mar-2020 41.46 50.00 50 24-Feb-2020 39.37 47.00
45 16-Jan-2020 39.56 45.00 24-Nov-2019 31.95 Overweight 38.00 40 19-Aug-2019 31.58 Equal Weight 36.00 35 Source: Bloomberg, Barclays Research 30 Historical stock prices and price targets may have been adjusted for
25 stock splits and dividends.
20
15 Jan- 2018 Jul- 2018 Jan- 2019 Jul- 2019 Jan- 2020 Jul- 2020
Closing Price Target Price Rating Change
Source: IDC, Barclays Research
Link to Barclays Live for interactive charting CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by JD.com, Inc.. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by JD.com, Inc.. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by JD.com, Inc. and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from JD.com, Inc. within the past 12 months. M: JD.com, Inc. is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value JD based on a P/E methodology, as the company already delivers stable profits and we expect consistent positive margin profile in the next couple of years. Our target price of $65 is derived from a 29x P/E multiple on 2021E EPS of US$2.23(CNY15.80) (USD: CNY=7.1). We view the targeted P/E multiple as fair, because of its faster profit growth, driven by steady top-line growth and margin expansion outlook. We model JD's EPS to growth c.28.4% y/y in 2022E, which implies 1.0x PEG, largely in-line with the industry average PEG ratio. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: The key downside risks include: 1) China's macro slowdown to affect overall consumption demand and impact JD's top-line growth; 2) The promotion of its team-buy services in low tier cities might spike its S&M expense growth and weigh on margin expansion; 3) Intense competition with the peers might drive continue marketing campaign and promotional events, which might pressures margins.
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IMPORTANT DISCLOSURES CONTINUED Pinduoduo Inc. (PDD / PDD) Stock Rating Industry View USD 87.00 (06-Jul-2020) EQUAL WEIGHT POSITIVE Rating and Price Target Chart - USD (as of 06-Jul-2020) Currency=USD Publication Date Closing Price Rating Adjusted Price Target
100 26-May-2020 64.89 Equal Weight 60.00 13-Apr-2020 41.42 43.00 24-Nov-2019 33.99 40.00 75 29-Aug-2019 33.61 38.00 19-Aug-2019 25.57 Overweight 32.00 Source: Bloomberg, Barclays Research 50 Historical stock prices and price targets may have been adjusted for stock splits and dividends.
25
0
Sep- 2018 Jan- 2019 May- 2019 Sep- 2019 Jan- 2020 May- 2020
Closing Price Target Price Rating Change
Source: IDC, Barclays Research
Link to Barclays Live for interactive charting A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of Pinduoduo Inc. in the previous 12 months. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by Pinduoduo Inc.. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Pinduoduo Inc. in the past 12 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by Pinduoduo Inc. and/or in any related derivatives. L: Pinduoduo Inc. is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value PDD using a P/S methodology (prior P/E method), as we postpone the timeline of PDD's profitability. Our price target of $60 is based on a 5.0x P/S multiple on its 2022E revenues of US$14.1bn. We expect PDD's operating margin to breakeven in 2021. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Key downside risks include: 1) Fierce competition, as Alibaba and JD both move into the team-buy market, we expect more head-to-head competition in the less developed market; and 2) PDD's S&M expense is still at a quite high level as percentage of revenues. The company has not given a clear timeline for profitability. Key upside risks include: 1) Faster than expected GMV growth and take rate expansion; 2) Lower than expected S&M expenses and promotional efforts.
8 July 2020 30
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