05 August 2015 Asia Pacific/India Equity Research
India Internet Primer #2
Connections Series
Ten lessons from China
Figure 1: E-commerce in India is 4-10 years behind China on several parameters
Organised retail Online shopping penetration penetration Online Internet shoppers penetration China (1999): ~10% China (2007): 0.6% India (2014): 9-10% India (2014): 0.7% China (2006): 43 mn China (2008): 23% India (2014): 38 mn India (2014): 20%
Urbanisation GDP per-capita (US$) Spend per online Smartphone The Credit Suisse Connections Series buyer (US$) penetration China (1997): ~33% China (2004): 1,498 India (2014): 32% India (2014): 1,487 leverages our exceptional breadth of China (2007): 135 China (2010): 13% macro and micro research to deliver India (2014): 104 India (2014): 14% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 incisive cross-sector and cross-border (-17) (-16) (-15) (-14) (-13) (-12) (-11) (-10) (-9) (-8) (-7) (-6) (-5) (-4) thematic insights for our clients. Year (years from 2014)
Source: Credit Suisse research Research Analysts Anantha Narayan ■ India at the 'tipping point', based on the China experience. While there 91 22 6777 3730 are differences, the two internet markets are similar in many ways—a large [email protected] population, growing middle class, and an underdeveloped organised market. Nitin Jain 91 22 6777 3851 From 0.2% of GDP in 2007, the Chinese e-tailing market rose to about 5% in [email protected] 2014, an 80% CAGR from US$7.4 bn to US$458 bn. India is 4-10 years Dick Wei behind on key parameters—e-tailing was US$4 bn in 2014, 0.2% of GDP. 852 2101 7339 [email protected] ■ Ten lessons from China. In our first extensive look at the sector last year (The modern day gold rush), we explored the Indian internet landscape in great detail. In this note, we explore ten lessons from the China experience. We believe that e-commerce, rather than being purely disruptive, can be significantly accretive to the Indian economy—government regulations need to take cognizance of that and traditional retail needs to move quickly on omni-channel strategies. India will be a largely mobile market and companies will need to have strategies around that. Pricing wars will cease eventually but can continue for a while. O2O (online to offline) can be an extremely big segment in a few years. And Amazon will not miss out in India! ■ Indian e-tailing can conservatively be a US$60-90 bn market by 2020. E- tailing was $4 bn of the US$15 bn e-commerce market (excluding B2B) in 2014, and growth rates are accelerating due to higher internet penetration, rising consumer aspirations, better ancillary services such as logistics and increasing comfort with online shopping. Even taking significant haircuts to 2014 China metrics—such as proportion of internet users who shop online, retail sales proportion of GDP and online retail as a portion of that—gets us to a US$60-90 bn market easily.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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.
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05 August 2015 Focus charts and table
Figure 2: India is 6-7 years behind China in internet Figure 3: E-tailing penetration is also 6-7 years behind penetration China, at <1%
50% China internet penetration 12% China: Online shopping as %age of retail sales 45% 40% India (2014): 20% 10% 35% 8% 30% India (2014): <1% 25% 6% 20% 15% 4% 10% 2% 5% 0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Internetlivestats, Credit Suisse estimates Source: iResearch, IAMAI, Credit Suisse estimates
Figure 4: Major chunk of the retail market is unorganised Figure 5: Scale is important; larger players have gained in India; e-commerce should be additive to the economy market share in China
120% Retail market break-up China B2C online vendors market share Others Vancl 100% 100% 90% Tencent 80% 80% Amazon China 60% 70% 60% Dangdang 40% 50% Yihaodian 20% 40% Gome 30% Vipshop 0% 20% India China Indonesia Thailand Malaysia Taiwan US 10% Suning 0% JD.com Organised Unorganised 1QCY11 4QCY14 Tmall Note: Data for FY12-13. Source: KPMG, Crisil, CS research. Source: iResearch, Credit Suisse estimates
Figure 6: O2O has grown into a big market in China; it Figure 7: Age and profitability are not necessarily also has potential in India preconditions to list
80 GMV and penetration of local lifestyle O2O market 7% 20 47% 18% 16% 70 6% 15 -5% 10% 29% 0% 60 14% 5% 16% 10% -5% -1% -62% 12% -31% -1% 50 10 49% 15% 4% 46% 8% 40 -47% 3% 30 5 2% 20 0 10 1%
-5
Tuniu
Baidu
Jumei
Qihoo
Qunar
Weibo Boyaa
0 0% Youku
51jobs
Bitauto
Soufun
58.com
JD.com
Jiayuan
Vipshop Tencent
RenRen Alibaba*
2010 2011 2012 2013 2014 2015 2016 2017 500.com
Autohome Dangdang
GMV (US$ bn) % penetration [RHS] Age at the time of listing (in years)
Source: iResearch, Credit Suisse research Note: Numbers at the top of the column represent margins at the time of listing. Source: Company data, Credit Suisse research Figure 8: India's e-tailing market can conservatively be US$60-90 bn in size by 2020 India China 2014 2020 (low case) 2020 (high case) 2007 2014 Total population (mn) 1,267 1,363 1,363 1,318 1,364 No of internet users (mn) 253 545 613 211 660 Internet penetration (US$) 20% 40% 45% 16% 47% Per capita GDP 1,631 2,889 2,889 2,651 7,330 Number of online shoppers (mn) 38 191 245 55 372 As % of internet users 15% 35% 40% 26% 56% Per capita spend on online retail (US$) 104 318 362 135 1,233 As % of per capital GDP 6% 11% 13% 5% 17% E-tailing market size (US$ bn) 4 61 89 7 458 % of retail sales 0.7% 7.1% 8.9% 0.6% 11.0% As % of GDP 0.2% 1.5% 2.3% 0.2% 4.6% Source: iResearch, IAMAI, Credit Suisse estimates
India Internet Primer #2 2 05 August 2015 Ten lessons from China India at the 'tipping point', based on the China experience While there are some differences, the Indian and Chinese markets are similar in terms of From 0.2% of GDP in 2007, population, a growing middle class and rising aspirations, lack of organised retail choices Chinese e-tailing rose to 5% for a large segment of the population, poor logistics infrastructure and a cash economy. in 2014, an 80% CAGR from The Indian market seems to be behind the Chinese one by 4-10 years on several key US$7.4 bn to US$458 bn parameters—per capita nominal GDP, smartphone and internet penetration, online shopping as a proportion of retail, the number of online shoppers and their average spend, etc. The Chinese e-tailing market has leapfrogged from US$7 bn in 2007 to US$458 bn in Indian e-tailing was US$4 2014 and has grown at 80% CAGR since then—this bodes well for India. bn in 2014, 0.2% of GDP Ten lessons from China In our first extensive look at the sector last year (The modern day gold rush), we explored 1. Additive, not disruptive the Indian internet landscape in great detail. In this note, we explore ten lessons from the China experience. Structurally, the sector is well-positioned for rapid growth. While e- 2. Benign regulations commerce can be somewhat disruptive, it is likely to be net accretive for the Indian 3. Inevitable consolidation economy and Indian regulators could do well to take advantage of that. It is not curtains for the brick-and mortar-companies—those nimble enough to adopt omni-channel strategies 4. Price wars will stop, but can survive and thrive. As in China, mobile is likely to be the biggest driver of e-commerce not now and internet companies will need to structure their overall strategies around mobile. O2O Amazon: India ≠ China can be a very big segment and can offer significant opportunities to both existing and new 5. players. Ancillary services such as logistics could also witness huge growth; however, e- 6. It's all about mobile commerce companies are unlikely to be dominant players in payments, in our view. 7. O2O can be big Scale has advantages and consolidation is inevitable. The price wars will eventually 8. Logistics is the subside but that can take some time due to the availability of significant capital and current backbone profitability targets can likely get pushed out. An important difference with China is that Amazon seems to be getting it right in India! 9. E-commerce companies may not dominate Finally, the Chinese experience shows that age and profitability are not pre-conditions to payments go public. The age of the Chinese companies when they went public varied widely and many were not profitable. Also, while eventual profitability is sacrosanct in our view, share 10. Listing is not dependent price performance so far in China seems to be more driven by revenue growth rather than on age or profitability by profitability metrics. Indian e-tailing can conservatively be a US$60-90 bn market by 2020 Indian e-commerce has grown into a US$14.6 bn market (excluding B2B) in 2014. Travel is the largest segment with over 60% share, followed by e-tailing (27%), categories such as real estate, local classifieds and online ticketing which continue to grow, while several new categories such as online payments, taxi hailing, food delivery and grocery delivery have been getting a lot of investor attention. As discussed above, the Indian market appears to be 4-10 years behind China. Even after taking significant haircuts to some of China's internet metrics in 2014 (for example, 40-45% internet penetration in India by 2020 vs. China's current 47%, 35-40% proportion of internet users that shop online vs. China's 56%, per capita online spend of 10-12.5% of per capita GDP vs. China's 17%), Indian e-tailing can conservatively be a US$60-90 bn market by 2020. At this level, it would be 1.5% to 2.3% of India's GDP, vs. China's current 4.6%! Though investment activity in the e-commerce sector has significantly picked up over the last couple of years, it has been on the private side. There are only three listed companies in the sector at the moment: Justdial (OUTPERFORM, Mcap: US$1.1 bn), InfoEdge (NEUTRAL, Mcap: US$1.5 bn) and MakeMyTrip (NOT RATED, Mcap: US$0.7 bn).
India Internet Primer #2 3 05 August 2015
Alibaba (OUTPERFORM, Mcap: US$197 bn) and VipShop (OUTPERFORM, Mcap: US$11.7 bn) are our top picks among the China e-commerce names.
Figure 9: India and China e-commerce valuation comparison Mkt cap P/E (x) PS (x) ROE (%) EV/EBITDA (x) FCF yield (%) Revenue growth (%) Company (US$bn) 2014A 2015E 2016E 2014E 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E China: Online Platform Tencent 175.47 44.4 34.9 27.1 13.7 10.8 8.1 30% 32% 31% 34.5 24.1 18.4 3.2% 1.3% 3.9% 30% 26% 26% Qihoo 360 7.16 27.0 16.8 12.4 6.2 4.4 3.4 31% 34% 33% 21.4 8.9 5.5 2.8% 7.4% 8.0% 107% 41% 34% YY 3.28 18.6 17.6 13.6 6.1 4.2 3.2 39% 34% 34% 17.2 12.3 7.0 -8.2% 5.0% 8.6% 97% 50% 32% Momo 3.02 -75.3 75.3 23.8 67.5 18.5 8.8 -37% 9% 25% -43.1 -11.6 -31.8 n.a n.a n.a n.a 265% 111% Weibo 2.84 -565.4 60.7 21.6 3.4 6.5 4.9 0% 6% 16% 1,401.5 45.8 10.8 n.a n.a n.a n.a 42% 36% Renren 1.33 23.2 -14.0 -12.5 16.0 18.9 1.1 12% -9% -10% -19.9 -6.9 -8.7 n.a n.a n.a -47% -15% 57% China: Online Ad–Portal
Sina 2.37 53.0 67.5 29.8 3.7 3.4 2.9 2% 2% 6% 310.5 26.6 9.6 17.1% -0.8% 3.0% 17% 11% 20% People.cn 3.98 33.3 25.7 19.0 15.5 11.4 6.6 14% 15% 17% 45.5 38.7 27.5 n.a n.a n.a 54% 36% 28% Sohu 1.86 -15.5 -23.0 2,100.5 1.1 0.9 0.8 -10% -8% 0% -8.3 5.4 3.7 3.5% -11.1% -7.8% 19% 18% 18% China: Online Ad–Video Youku 3.76 -42.3 -16.3 -17.9 5.5 3.8 0.5 n.a -8% -7% 34.1 29.6 13.7 3.5% 2.5% 6.6% 33% 53% 34% LeTV 14.75 247.5 125.0 81.8 13.3 6.2 4.0 14% 16% 20% 82.4 36.9 n.a n.a n.a 188% 114% 56% China: Online Ad–Search Baidu 60.69 26.5 32.5 26.0 7.7 5.7 4.4 27% 21% 23% 20.8 23.1 16.9 3.9% 4.1% 4.7% 53% 35% 29% China: e-commerce–Physical Goods VIPShop 11.13 58.1 34.3 19.9 3.1 1.8 0.8 49% 53% 49% 53.1 21.2 10.4 2.2% 6.3% 9.9% 122% 72% 49% Jumei 2.68 40.3 36.3 24.2 4.0 2.8 0.6 11% 14% 20% 33.7 34.3 18.1 2.3% 4.0% 5.2% n.a 80% 41% Alibaba 196.82 36.7 30.6 23.5 17.4 14.0 11.4 94% 40% 21% 46.2 45.0 40.6 2.1% 3.6% 4.5% n.a 46% 33% JD.com 45.69 3,670.0 8,257.5 125.1 2.4 1.6 n.a n.a n.a n.a n.a 307.4 61.5 n.a n.a n.a n.a 52% 37% Dangdang 0.56 35.2 -67.3 42.7 0.4 0.3 0.3 15% -6% 10% 14.9 187.8 12.4 -4.7% -5.2% 3.6% 26% 27% 20% HC International 0.54 12.3 13.8 8.8 3.4 3.0 n.a 18% 15% 17% 9.7 21.1 15.1 n.a n.a n.a 15% 16% 32% China: Travel Ctrip 10.17 96.2 81.2 33.9 9.8 6.9 4.8 8% 6% 16% 974.0 79.8 28.2 1.9% -5.2% 4.7% 33% 44% 36% Qunar 5.29 -35.5 -13.7 -49.0 18.6 9.5 6.0 -133% 17% 5% -43.1 -11.6 -31.8 n.a n.a n.a 106% 96% 58% Tuniu 0.74 -10.9 -7.7 -8.2 1.3 1.0 0.7 -30% -79% 170% -6.8 -2.5 -2.3 -10.3% 7.3% -1.3% n.a 102% 75% China: e-commerce–Services 58.com 6.86 180.2 -28.9 -76.4 19.6 10.1 7.8 6% -33% -7% 464.7 -28.7 -52.3 -0.7% -1.6% -0.9% 82% 114% 59% Autohome 4.32 33.5 26.2 20.3 12.8 8.3 6.2 28% 30% 39% 25.6 20.5 13.9 n.a n.a n.a 75% 58% 33% SouFun 2.93 12.0 107.9 -205.0 4.4 3.6 2.7 41% 12% 25% 8.4 96.2 -154.5 -3.8% -3.7% -2.8% 10% 21% 31% Bitauto 2.35 21.0 40.2 15.8 4.4 3.8 2.7 n.a 9% 12% 23.9 18.5 3.4 n.a n.a n.a 67% 67% 40% 51jobs 1.82 18.9 17.6 14.8 5.9 5.5 4.8 13% 16% 17% 13.8 17.1 12.9 n.a n.a n.a 15% 9% 14% E-House 0.90 11.5 14.4 12.6 1.0 0.8 0.7 8% 8% 6% 4.0 87.6 25.8 n.a n.a n.a 24% 18% 15% Zhaopin 0.75 20.3 19.1 16.9 4.3 3.6 3.1 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 19% 18% Jiayuan 0.22 31.4 28.7 16.1 2.2 1.8 1.4 n.a n.a n.a n.a n.a n.a n.a n.a n.a 22% 25% 28% India: e-commerce Infoedge 1.53 210.0 80.4 50.8 13.5 11.3 8.8 6% -1% 3% 241.6 69.2 42.6 -2.6% -1.3% 0.4% 22% 19% 29% Justdial 1.19 57.2 51.7 34.9 16.7 13.4 10.1 24% 16% 22% 47.5 39.5 26.8 1.6% 1.5% 2.7% 23% 25% 32% Makemytrip 0.57 -146.0 172.8 59.8 11.7 9.5 7.7 -3% -7% -3% 86.8 41.5 25.9 0.8% n.a n.a 28% 23% 23% Source: Thomson Reuters, Credit Suisse estimates
India Internet Primer #2 4 05 August 2015 India at the 'tipping point', based on the China experience While there are some differences, India and China are similar markets in many respects. These are the two largest countries in the world in terms of population, they have a large rural base, a growing middle class, an underdeveloped organised retail market (particularly in rural and Tier 3/4 cities), poor logistics and a large cash economy. China's e-commerce market leapfrogged After a sustained period of high economic growth, China has grown into a larger and From <1% of GDP in 2009 relatively more prosperous market than India. Its per capita GDP has grown to to ~5% in 2014 ~US$7,600, nearly 5x India's per capita GDP of ~US$1,600 in 2014. The overall e- commerce market has grown rapidly to US$2 tn in GMV (including B2B) and the online consumer shopping (B2C+C2C) market recorded a GMV of over US$450 bn in 2014. China's e-commerce has continued to deepen its penetration in core product categories, such as apparel and electronics, and expanded rapidly in emerging categories—such as food & beverages, maternity & baby, cosmetics & beauty, and healthcare. Consumer e-commerce GMV as a percentage of GDP has increased from <1% in 2009 to ~5% in 2014, led by increasing penetration in existing categories, introduction of new categories as well as new business models. It has already grown into the world's largest e- commerce market with an expectation of further impressive growth.
Figure 10: China's e-commerce market (B2C+ C2C) has crossed US$ 450 bn and is expected to reach US$1 tn by 2017 1,400 160%
1,200 140%
120% 1,000
100% 800 80% 600 60%
400 40%
200 20%
0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
B2C+C2C e-commerce market GMV (US$ bn) % growth [RHS]
Source: iResearch, Credit Suisse research
India Internet Primer #2 5 05 August 2015
India is 4-10 years behind China on several key e-commerce parameters
Figure 11: India's e-commerce market is 4-10 years behind China on several key parameters
Organised retail Online shopping penetration penetration Online Internet shoppers penetration China (1999): ~10% China (2007): 0.6% India (2014): 9-10% India (2014): 0.7% China (2006): 43 mn China (2008): 23% India (2014): 38 mn India (2014): 20%
Urbanisation GDP per-capita (US$) Spend per online Smartphone buyer (US$) penetration China (1997): ~33% China (2004): 1,498 India (2014): 32% India (2014): 1,487 China (2007): 135 China (2010): 13% India (2014): 104 India (2014): 14% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (-17) (-16) (-15) (-14) (-13) (-12) (-11) (-10) (-9) (-8) (-7) (-6) (-5) (-4) Year (years from 2014)
Source: Credit Suisse research Based on several parameters (including per capita GDP, internet penetration, smartphone penetration, number of online shoppers and the money spent by the average online shopper), India appears to be 4-10 years behind China. Indian internet also appears to be at a point similar to the 'tipping point' for China internet. Chinese e-commerce Since 2007 (when China's internet penetration was similar to India and the proportion of (excluding B2B) has grown online retail shopping was also nearly the same as India), China's e-commerce sales at 80% CAGR—from (excluding B2B) have seen an 80% CAGR—from US$7.4 bn (in 2007) to ~US$458 bn in US$7.4 bn in 2007 to 2014. US$458 bn in 2014. India's internet penetration is six years behind China, while smartphone penetration is just four years behind China. However, the number of online shoppers and average spending by online shoppers is eight years and seven years behind China, respectively. The overall e-tailing penetration is six to seven years behind China's levels in 2014. With just 8-9% organised retail penetration, India is significantly behind China (15-16 years) in this segment. We believe this provides significant room for both the brick-and-mortar and e- tailing players to co-exist. Overall, increasing smartphone penetration (helping in higher internet penetration), increasing number of first-time online shoppers and increasing shopping by the existing shoppers (due to growing comfort) should help India's e-commerce leapfrog as well—a trend that was witnessed in China over the last 7-8 years.
India Internet Primer #2 6 05 August 2015
Figure 12: Per capita nominal GDP 7-8 years behind China Figure 13: Internet penetration six years behind China
8,000 China: GDP per capita (US$) 50% China internet penetration 45% 7,000 40% India (2014): 20% 6,000 India (2014): US$1,487 35%
5,000 30%
4,000 25% 20% 3,000 15% 2,000 10%
1,000 5%
- 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Worldbank Source: Internetlivestats, Credit Suisse research
Figure 14: Just four years behind China in smartphone Figure 15: Online penetration is just below 1%, same as penetration, India is evolving as a mobile first market where China was in 2007-08
45% China smartphone penetration 12% China: Online shopping as %age of retail sales
40% India (2014): 14% 10% 35%
30% 8% India (2014): <1%
25% 6% 20%
15% 4%
10% 2% 5%
0% 0% 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: eMarketer, Credit Suisse research Source: iResearch, IAMAI, Credit Suisse research
Figure 16: The number of online shoppers is still Figure 17: Average online shopping per shopper is also significantly low, similar to China's level in 2004-05 significantly low, 7-8 years behind China
400 Online shoppers (mn) 1,400 Spend per online shoppers (US$)
350 1,200
300 1,000 250 India (2014): ~38 India (2014): 104 800 200 600 150 400 100
50 200
0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: iResearch, Credit Suisse research Source: iResearch, Credit Suisse research
India Internet Primer #2 7 05 August 2015 Ten lessons from China
Figure 18: Ten e-commerce lessons from China
It is additive rather than purely Age and disruptive Regulatory profitability not environment necessarily pre- should be benign conditions to list in the long term
E-commerce Multiple players companies can co-exist but unlikely to be scale has its dominant payment advantages players in India 10 e-commerce lessons from China Price wars can Logistics is the cease but may backbone take time
O2O can be a big For Amazon, India thing ≠ China
It’s all about mobile
Source: Credit Suisse research
■ Structurally, the sector is well positioned for rapid growth and should aid the As in China, mobile will be overall economy as well: Lack of physical retail infrastructure which is structurally an important driver positive for e-commerce and new category additions, existing category expansion, increasing smartphone penetration, rising consumer aspirations and increasing consumer comfort with online channels will drive rapid growth. Brick-and-mortar players are still lagging in terms of omni-channel strategies but are likely to account for a reasonable share in e-commerce going forward. While e-commerce is obviously O2O can be big somewhat of a disruptive phenomenon, it can be net additive to the economy. As in China, mobile is likely to be the primary growth driver for e-commerce in India. And, similar to China, O2O has significant scope in India given a large services economy and a large base of local mom-and-pop stores. While the regulatory environment can be a bit of an irritant in the near term (as the central and state governments grapple with applying existing laws on them), it should be benign in the long term.
■ While scale has advantages, price wars may take time to subside in India: Given A key difference is that high fragmention in most of the segments, consolidation is inevitable in India. The Amazon seems to be getting larger players with scale will enjoy networking benefits as well as operating economies it right in India of scale. Discounts have been common so far in e-commerce and significant availability of capital may keep the price wars on for some time. A significant difference, however, is that unlike in the case of China, Amazon appears to be getting its strategy right in India, in our view.
■ Ancillary services can witness significant growth: Given the poor logistics 3PL will be important but infrastructure and complexities, third-party logistic (3PL) firms will play a key role. different types of players in Cash is likely to remain the primary mode of payment. In online payments and payments financial services, however, there is no clear winner at this point—unlike in China, banks have been early movers in India adding to the number of players competing in this segment. E-commerce companies are unlikely to be dominant players in payments, in our view.
India Internet Primer #2 8 05 August 2015
■ Age and profitability are not necessary preconditions to go public: Many Chinese companies have gone public while making losses and while eventual profitability will matter, share price performance so far seems to have been driven by revenue growth for many of them rather than by profitability. Though public listing is still some time away for the larger Indian e-commerce firms, similar to Chinese internet firms, they may prefer listing on the US exchanges.
India Internet Primer #2 9 05 August 2015 #1. Additive rather than purely disruptive “In the US, where retailing has long been an established industry for more than 100 years, e-commerce is the icing on the cake. But in China, where retailing as a market is still relatively new, online retailing is the cake.” —Frank Lavi, CEO, Export Now E-tailing has been disruptive to some extent for the traditional retail in developed markets 39% of the online spending such as the US, causing many firms to rejig their strategy to multi-channel retail. in China has been net new Incremental growth in e-tailing in such economies is largely the shift of spending from contribution to consumption brick-and-mortar to online. On the other hand, e-tailing has had an additive impact on China's economy. Unlike the general perception that e-tailing has a cannibalistic impact on brick-and-mortar retail, e-tailing has led to an increase in overall spending in China. According to a McKinsey Global Institute analysis across 266 cities in China, 39% of the overall online spending has been net new contribution to consumption. Interestingly, this proportion has been higher (57%) for the Tier 3/4 cities.
Figure 19: Online spending in China had the impact of increasing overall consumption; the impact was even more pronounced in Tier 3 and Tier 4 cities Total online spending (= substitution of offline spending + Incremental contribution to consumption)
Overall 61% 39%
Tier 3/4 cities 43% 57%
Substitution of offline spending Incremental contribution to consumption
Source: McKinsey Global Institute analysis, data for 2011 Lack of physical infrastructure aids e-commerce China is a geographically-diverse developing country and it is difficult for retailers to have a China has a quarter of US nationwide presence. A study by Euromonitor indicates that offline retail infrastructure in retail space (per capita) China (square meter/capita) was less than one-fourth that in the US and less than half that in Europe in 2013. The retail infrastructure is particularly weak in non-Tier 1 and Tier 2 cities. With increasing income levels, led by export-led growth in China, the population in these Smaller cities spend more of cities has rising aspirations. However, given limited retail reach in these geographies, this their disposable income demand was largely unaddressed. E-tailing firms in China have done well to tap this online market. As shown below, according to a study by McKinsey Global Institute, the wallet share dedicated to e-tailing as a proportion of total disposable income is significantly higher in Tier 3 and 4 cities in China as compared with Tier 1 and 2 cities. We note that this analysis is based on existing online shoppers. Given online shopping penetration is still low in these cities, there is potential to get further growth from these cities.
India Internet Primer #2 10 05 August 2015
Figure 20: China's retail infrastructure is significantly low Figure 21: Tier 3 and 4 cities are estimated to have a compared with that of developed markets larger wallet share directed to e-commerce
3.0 Offline retail infrastructure (m2/capita, 2013) 8,000 30% 7,000 25% 2.5 6,000 20% 5,000 2.0 4,000 15%
1.5 3,000 10% 2,000 1.0 5% 1,000
0 0% 0.5 Tier-1 Tier-2 Tier-3 Tier-4
Online consumption per online shopper (RMB) 0.0 USA Germany UK Japan China Wallet share dedicated to e-tailing (% of disposable income) - RHS
Source: Euromonitor Source: McKinsey Global Institute analysis, data for 2011 E-commerce adoption by smaller cities can benefit India E-commerce can impact consumption in India in two ways: (1) convenience-driven spending, and (2) supply-driven spending. While the former is more of an urban phenomenon, where there is a shift from offline to online medium due to more attractive pricing and convenience, the latter is more of a smaller city (or rural) phenomenon. We believe e-commerce can drive incremental consumption in smaller cities. We believe that India's current situation is very similar to China. A significant proportion of 65% of Snapdeal's revenue the country's population resides in smaller cities (only ~12-15% of the population resides is from smaller cities in cities with population more than 500,000), and a substantial portion of the retail market is still unorganised. This means that residents in smaller cities do not have access to modern retail and trending fashion products. However, the aspiration of these residents has been increasing. This is made evident from Snapdeal's (one of the top three e- commerce players in India in terms of GMV) geographical sales profile—over 65% of the company's sales are from Tier 2 cities and smaller, with sellers being spread over 5,000 cities and towns. Though some of this growth may be due to the discount-led strategies currently followed by Indian e-commerce firms, we believe these trends are sustainable. Similar to China, smaller cities should be a key part of e-commerce growth in India.
India Internet Primer #2 11 05 August 2015
Figure 22: A significant part of India lives in smaller cities Figure 23: And only 8% of the retail market is organised
90% % of population in the respective city categories 120% 80% 100% 70%
60% 80%
50% 60% 40% 40% 30%
20% 20%
10% 0% 0% India China Indonesia Thailand Malaysia Taiwan US More than 1 mn Between 500,000 0.1mn to 0.5mn Below 0.1 mn and 1 mn Organised Unorganised
Source: India Census 2011, Credit Suisse research Note: data for FY12-13. Source: KPMG, Crisil, Credit Suisse research Traditional retailers in the US and China have an omni-channel strategy In both the US and China markets, the first sector to feel the impact of e-commerce was Traditional retailers can traditional retail. Since the rise of Amazon, brick-and-mortar retailers have struggled to avoid disruption using an hold on to the wallet share of the shopper. According to McKinsey & Company estimates, omni-channel strategy between 2008 and 2013, e-commerce sales grew ten times faster than in-store retail sales in the US. China is also facing somewhat similar challenges. For example, once dominating home appliance retailers in China, Gome and Suning, have experienced revenue growth moderation and profit declines due to increased competition from e-tailing firms such as Jingdong (JD.com) and 51buy (known as Yixun, was acquired by Tencent, and was subsequently sold to JD.com). Continued expansion in e-tailing is causing many of the traditional players to relook at their physical store portfolios and launch omni-channel strategies (use new additional channels, particularly online, to complete a transaction). Though every brick-and-mortar retailer has been impacted to some extent from the e- tailing evolution, the nimbler ones have been quick to evolve. Macy's (a US-based traditional retailer) is an apt example—it has been named as the 2014 mobile retailer of the year. It has utilised image recognition, mobile payments, same-day delivery and event- driven mobile commerce and even employs a chief omni-channel officer. On the other hand, some of the less nimble players, such as JCPenney, seem to have been challenged—there have been employee lay-offs and store closures. 'Click and pick' has become a very popular omni-channel strategy for the retailers. There is an effort to expand online presence by some traditional retailers. As shown Seven of the top 15 e-tailers below, most of the major traditional retailers in the US have their own online operations. in China are traditional firms While China does not have as large traditional brick-and-mortar players as the US, seven of the top 15 e-tailers in China are traditional firms. The proportion of online-only retailers is much higher in China in e-tailing sales, however.
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Figure 24: Several traditional retailers have adopted a multi-channel strategy in the US and China (the multi-channel retailers are highlighted) US China Top-15 companies by Market Online only/ Top-15 companies Market Online only/ online sales share multi-channel by online sales share multi-channel Amazon.com 17.9% Online only Tmall 43.5% Online only Apple Inc 5.6% Multi-channel JD.com 14.4% Online only eBay Inc 5.1% Online only Suning Appliance 2.9% Multi-channel Wal-Mart 2.3% Multi-channel Beijing Xiao Mi 2.5% Multi-channel Liberty Interactive Corp 1.7% Multi-channel Vipshop Holdings 2.0% Online only Best Buy 1.7% Multi-channel Wal-Mart 1.9% Multi-channel Macy's 1.7% Multi-channel Tencent 1.5% Online only Sears Holdings 1.5% Multi-channel Amazon.com 1.3% Online only Target 1.2% Multi-channel Apple Inc 1.2% Multi-channel Home Depot 1.2% Multi-channel Dangdang.com 0.8% Online only Newegg.com 0.9% Online only VANCL 0.7% Online only Office Depot 0.9% Multi-channel GOME 0.6% Multi-channel Costco Wholesale Corp 0.9% Multi-channel Jumei International 0.6% Online only Williams - Sonoma 0.9% Multi-channel Dell Inc 0.4% Multi-channel Gap 0.8% Multi-channel Shanghai Media 0.3% Multi-channel Source: Euromonitor, Credit Suisse research Indian traditional retailers are feeling the pressure; omni-channel strategies still in an initial phase All the major brick-and-mortar stores are feeling the pressure from e-tailing firms, largely due to the predatory pricing followed by these firms. This is true for electronics and book stores in particular and all brick-and-mortar stores in general. This was clearly evident in this festive season in India (in October 2014), when big discounts offered by Flipkart, Amazon and other e-tailing players in India diverted some of the sales from the brick-and- mortar retailers. Realising the threats from online companies, many physical retailers are experimenting A few Indian retailers target with omni-channel strategies. For example, while Godrej's Nature's Basket is pushing 10% of their sales from sales through its own omni-channel presence as well as tie-ups with online market-places, online in the next few years consumer durables retailer Croma has joined hands with Snapdeal to expand its online reach. Shoppers Stop (an Indian lifestyle retail chain) has been investing aggressively in the business and targets to achieve 10% of its sales online in the next 2.5 years from the current significantly low levels. Similarly, Arvind Lifestyle (a company with several fashion brands) and Future group (one of the largest retail groups in India) have also set targets to achieve ~10% of their brand sales from their e-commerce platforms in the medium term. Looking at the global experience, we believe that early investments by the brick-and- mortar retailers in omni-channels can help these firms retain their wallet shares with their customers. The addressable market is large enough (organised retail in India is still ~8% of overall retail) and this should provide some breathing space to traditional retailers. The nimbler firms will succeed while those that cannot keep pace with changing consumer preferences may witness a loss in market share and may eventually fade away.
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Figure 25: Major retailers have been investing aggressively in omni-channels; Indian retailers' omni-channel strategy is still in an initial phase 35.0% % of revenue from online sales
30.0% Medium term goal of 10% revenues from 25.0% online. The current online presence is 20.0% negligible.
15.0% Indian retailers 10.0%
5.0%
0.0%
* As % of domestic sales, ** Online grocery sales. Source: Company data, Euromonitor, Credit Suisse research New categories create incremental demand The evolution of e-tailing market depends on two factors—the depth of the market (i.e. Clothing, personal care are number of online shoppers) and the breadth of the market (i.e., the categories of examples of online merchandise available for sale online and their adoption). Both the US and China have categories in China with expanded the product categories over a period of time. While standardised products such high growth and penetration as books and electronic appliances were the most obvious categories to begin with, gradually, many other categories were brought within the purview of e-tailing and penetration has now increased significantly in categories such as apparel and appliances.
Figure 26: There were significant changes in Taobao's top 10 categories—household and jewellery were late additions Ranking 2006 2007 2008 1H 2009 1 Cell phone Garment Garment Household ↑ 2 Laptop Cell phone Cell phone Garment ↓ 3 Garment Cosmetic Cosmetic Cell phone↓ 4 Cosmetic Household Household Cosmetic↓ 5 Camera Appliances Outdoor Sports Outdoor Sports 6 Health Products Prepaid Phone Card PC & Accessories Jewellery↑ 7 PC & Accessories Camera Jewellery Books, music and movies 8 House & Home PC & Accessories Laptop Laptop 9 Food Laptop Appliances Appliances 10 Prepaid Phone Card Food & Health products Prepaid Phone Card Camera ↑ Source: iResearch, company data, Reproduced from CS China report 'China's e-commerce market: a new retail boom' dated 12 November 2009.
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Figure 27: Globally, electronics and appliances' e-tailing Figure 28: There was a steep increase in online penetration increased rapidly penetration in China across categories in two years
Consumer electronics Books Consumer appliance Traditional toys and games Apparel and footwear Consumer electronics Consumer healthcare Beauty and personal care Cosmetics Home and garden Food and drink Apparel Home care
0% 2% 4% 6% 8% 10% 12% 14% 16% 0% 5% 10% 15% 20% 25% 30% 35%
2013 2008 2012 2010
Source: Euromonitor, Credit Suisse Source: iResearch
Figure 29: Apparel became a large category in China… Figure 30: …driven by women/children items
250 China' online sales in apparel category 16% 14% 13% 14% 200 12%
150 10% 8% 6% 100 6%
3% 4% 50 2% 2%
0 0% 2007 2008 2009 2010 2011
Online apparel sales (RMB bn) Online as % of total - RHS
Source: Source: iResearch, WIND, CS Asia Pacific e-commerce Source: Company data as disclosed in 2011, CS Asia Pacific e- primer, May 2013 commerce primer, May 2013
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Figure 31: Maternal, baby is already US$20 bn+ in China… Figure 32: …and its online penetration has grown rapidly
China online maternal and baby industry China online maternal and baby industry 60.0 120% 12.0%
50.0 100% 10.0%
40.0 80% 8.0%
30.0 60% 6.0%
20.0 40% 4.0%
10.0 20% 2.0%
0.0 0% 0.0% 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
GMV (US$ bn) % growth (RHS) Online penetration
Source: iResearch, Credit Suisse research Source: iResearch, Credit Suisse research While increasing the breadth of product offerings led to an evolution of e-tailing, there have been some new consumption categories that have emerged and became popular in China, thanks to e-tailing. According to a study by Kantarworldpanel (a consumer behaviour and insight analytics firm), in some of the nascent categories of products for which the offline market is not yet fully developed in China, there is new demand being created by e-tailing. A significant 80% of incremental revenue in categories such as nutrient solid drinks, nutrient supplements and colour cosmetics were estimated to come from online sales, while less than 20% of incremental sales were from offline channels in 2013.
Figure 33: Online drives consumption significantly in certain nascent categories in China
Source: Kantarworldpanel Several new categories expanding rapidly in India Similar to other markets, e-tailing took off in India with electronics and books, which continue These include fashion, to do well, as they have not yet reached maturity. Over the past couple of years moreover, grocery, personal care and there has been increasing adoption of online shopping in fashion (apparel, footwear and furniture accessories). Vertical players, such as Myntra (now acquired by Flipkart) and Jabong appear to be growing well. In addition, there are several smaller players such as YepMe, Yebhi, FashionAndYou and Koovs, and some niche players such as Zivame and PrettySecrets. Grocery, which accounts for the largest share in the consumption basket, has also been
India Internet Primer #2 16 05 August 2015 gaining popularity, though in a localised format. Penetration remains very low, though. Several other categories, such as personal care, furniture and furnishings, are also witnessing an increase in interest. We believe that the growing comfort of consumers with online shopping should accelerate penetration in some of these categories. Consumers are also maturing somewhat regarding their online usage and are willing to experiment with new categories. For example, according to Business Standard, Hero MotoCorp (a leading two-wheeler manufacturer in India) has clocked sales of 100,000 motorcycles and scooters in the online marketplace, Snapdeal, within about five months of its online sales launch. Tata Housing (a housing developer) has sold ~1,000 apartments online over the past 20 months through several online platforms, including Snapdeal (a B2C e-tailing portal) and Housing.com (real estate portal).
Figure 34: India's e-tailing penetration is significantly behind China across the categories 35% E-tailing penetration across categories
30%
25%
20%
15%
10%
5%
0% Fashion* Consumer electronics* Home appliances* Books * Mobile and accessories**
China India
* China data is for 2012 ** China data is for 1H2013. Source: iResearch, China Internet Watch, Credit Suisse research The MSME segment played a big role in China China has the world’s largest manufacturing base, with one of the lowest production costs Taobao and Tmall helped in and widest product ranges. Due to the global financial crisis, many export-oriented the creation of several local manufacturers shifted their production focus to the domestic market and started selling brands called "Tao brands" products online. Taobao was a pioneer in bringing these MSMEs (micro, small and medium enterprises) onto an e-tailing platform. The most basic services on taobao.com, such as opening a shop, setting up a standardised store front and an Alipay account, are free and available to all merchants or individual second-hand sellers. The success of Taobao and Tmall has helped in the creation of several local e-tailing brands called "Tao brands". Alibaba has over 8.5 mn annual active sellers on Taobao and Tmall combined. A pick-up in MSME in India can impact 'middlemen' Unlike China, manufacturing accounts for only a smaller proportion of India's GDP (16% in 2013) and a large number of the MSMEs in e-tailing marketplaces are traders or dealers in either branded goods or goods manufactured by a third-party or imported. For example, most of the mobile accessories sold online are made in China and electronics is largely a branded product market. Even on a smaller manufacturing MSME base, penetration of MSMEs is significantly low. A direct sales model by manufacturing MSMEs has the potential to negatively impact the middle layer of retailers and traders. The impact is somewhat visible in the electronics and mobile/electronics accessories segments, particularly in Tier 1 cities.
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There have been some recent initiatives to encourage MSMEs. Indian e-tailing companies Leading Indian e-commerce are investing in training them to use e-commerce platforms and helping them to catalogue companies are encouraging their products. State Bank of India (India's largest public sector bank) has partnered with MSMEs Amazon and Snapdeal to provide financing to them. Snapdeal is providing logistics support by leasing out warehouses on a no-profit-no-loss basis, while Amazon is investing in setting up performance centres, upgrading logistics networks and developing mobile platforms and tools to help MSMEs. Flipkart has been working with various government bodies and associations such as the Federation of Indian Micro and Small & Medium Enterprises (FISME) and National Centre for Design & Product Development (NCDPD) to boost manufacturing in India. Moreover, Shopclues.com (another e-tailing marketplace) has also been aggressively investing in growing its dedicated MSME marketplace, with a product portfolio more diverse than its peers'.
Figure 35: Significant scope exists to increase SME listings in India, particularly in Tier 2 and 3 cities
Numbers of merchants on the platform (estimates) Over 8.5 mn
~150,000
Over 100,000
Over 50,000
~35,000 Over 25,000
Note: These are numbers quoted by the media or mentioned by companies on their website. Source: Media sources such as Forbes, Economic Times, company data, Credit Suisse research Overall, given India's demographics, improving per-capita income and low level of e- commerce penetration, we believe that e-tailing can have an additive impact on overall consumption spending, similar to what happened in China. While there could be some disruptive impact on brick-and-mortar retailing and some negative impact on some of the intermediaries (such as retailers and dealers), it should be more than offset by overall higher consumption. Also, we expect divergent fortunes for traditional brick-and-mortar players—the ones quick to adopt an omni channel creatively should do well.
India Internet Primer #2 18 05 August 2015 #2. Regulatory environment should be benign in the long term Chinese government intervened little in e-commerce The Chinese government has allowed the e-commerce industry to develop without a great deal of intervention. Regulators have followed a protective approach for local e-commerce firms and with some tax incentives to these (that are also available to all hi-tech companies), the local government policies have been accomodative towards e-commerce firms. Despite a large market share, Alibaba has not been subject to any monopoly restrictions, even while making acquisitions. The government has taken some regulatory initiatives to regulate the sale of fake products on C2C websites, such as Taobao, for several years, which also helps in increasing consumer confidence. There have also been some restrictions on the foreign ownership of e-commerce businesses though the government has indicated some freeing up of these restrictions. This was driven by the large benefits accruing to the economy As highlighted in the earlier section, e-commerce had an additive impact on China's economy. Rather than just replacing the sales from brick-and-mortar stores, e-commerce led to new demand creation. This increased consumption in an investment-heavy Chinese economy. Restrictions on FDI in B2C e-commerce in India Indian regulations prohibit foreign direct investment (FDI) in multi-brand retail, including FDI restriction restricts e-commerce (B2C e-commerce). The e-commerce industry requires significant inventory models and can investments and highly efficient operations to run successfully and, in this context, the FDI inhibit M&A restriction can be an impediment. This has been forcing companies to structure themselves in a way that they operate purely as marketplaces. For example, Amazon, which has preferred an inventory-based model globally, has transitioned to a complete marketplace in India. Companies, such as Flipkart, have hived off their inventory operations to comply with these norms and have been increasing their exposure to third- party merchants. Given concerns regarding logistics and consequently, the customer experience (given limited experience of the third-party merchants), these companies have invested in their own '"fulfilment" operations, assisting the selling merchants with warehousing, packaging, delivery and reverse logistics. FDI restriction could also potentially impede consolidation between a marketplace and an inventory-based model. A few positive developments recently There have been some positive developments on the FDI front. After turning down the idea of FDI in B2C e-commerce in June 2015, the central government has engaged with state governments on this subject and some of the states have supported FDI in e-commerce. However, there is a strong lobby from brick-and-mortar retailers against such FDI. Complex indirect taxation regime in India and sub- optimal supply chain There are many taxes levied by the Centre, the state governments and various local GST introduction can bodies at different stages of the supply chain, such as excise duty, central sales tax (CST), prevent disputes with value-added tax (VAT) and octroi (an indirect tax). In addition, the state governments and individual states and various local bodies often have different taxation rates and policies. optimise the supply chain E-commerce companies have warehouses in certain states, such as Karnataka, Haryana and Maharashtra, and supply goods across the country. There have been several instances of demands for VAT from the states where e-commerce companies maintain their warehousing. For example, Amazon has been involved in disputes with the Karnataka
India Internet Primer #2 19 05 August 2015 government regarding applying VAT on all dispatches from its warehouses in that state. Similarly, the Kerala government had issued a fine against many e-commerce retailers for sales tax evasion and banned Amazon from selling certain goods from its warehouses. Suboptimal supply chain Due to these complexities relating to the inter-state transfer of goods, many of the warehouses have been sub-optimally set up. Futhermore, due to stringent compliance procedures for inter-state road transport, the transport time is significantly higher. This is the reason most e-commerce companies use air transport for shipments which increases the overall cost structure. GST can reduce the complexities; overall tax cost may increase but shouldn't impact the competitiveness A single Goods and Service Tax (GST) is targeted to be implemented in India from April 2016 by the Indian government. With the implementation of GST, many of the above problems will be solved with a single GST that will subsume all current taxes into one tax and stitch together a common market by dismantling fiscal barriers between states. While the overall tax incidence may increase, due to a higher likely revenue neutral rate (RNR), it may not impact the overall cost competitiveness of the e-commerce firms compared with brick-and-mortar retailers. Brick-and-mortar retailers will also have to face some impact from higher RNR, while e-commerce firms should benefit from a more efficient supply chain network.
Figure 36: Comments on GST from the top e-commerce firms "The big positive would be the smooth movement of goods. Currently, in surface transport, there are several stoppages. This delays the delivery. There would be more clarity on taxation from states." "It will be quite expensive. There will be some negative impact in the short term." "Operationally, it is a huge benefit. Many times, we had to shut operations in certain states—this caused disruption. The opportunity cost of losing business and the process-related cost of managing inefficiencies can be avoided." Note: Comments from top e-commerce companies such as Flipkart, Jabong and Myntra Source: Credit Suisse research. Regulations should not hamper sector growth in the long term While these regulatory challenges have some impact on the cost dynamics and smooth functioning of e-commerce companies, these are not serious impediments to the sector's growth. The government's efforts for GST implementation look credible and should be net positive for the sector. There is still no clarity on FDI; however; if that rule is relaxed, companies will have more flexibility for their operations. Given the growth potential of the sector and the possible net additive benefits from e- commerce (as witnessed in China), we think that any adverse major government intervention is unlikely.
India Internet Primer #2 20 05 August 2015 #3. Multiple players can co-exist, but scale has its advantages Multiple players have existed in China and the US though larger players have gained market share Both the US and China's e-tailing markets have been characterised by a few large While China is more e-tailers and a long tail of relatively smaller players. While China's B2C e-commerce fragmented, both markets market is relatively concentrated, with the top-three players accounting for ~80% of the have a long tail gross merchandise value (GMV), the US e-commerce market is relatively more fragmented—with the top-three players accounting for only 29% of overall market GMV. In China, even other segments of the e-commerce market, such as travel, search and social media, are highly concentrated. Scale clearly has advantages in an e-commerce business. For an inventory-based e-commerce player, scale provides better bargaining power, and for a marketplace, scale implies a larger number of users, leading to more traffic. For a classifieds firm, scale on both sides of the equation (users and business listings) creates a "network effect" and can help the firm gain significant competitive advantage and enjoy a premium. In both the markets (the US and China), the larger firms have gained market share (in Tmall's share rose from terms of GMV) over a period of time. In China, Tmall's market share in the B2C online 51% to 67% in 2011-14; retail market has increased from 51% in the quarter ending March 2011 to 67% in Amazon US from 7% to December 2014—and this has largely been at the expense of the non-top 10 players that 18% in 2007-14 lost their share from 15% in March 2011 to 5% in December 2014. Similarly, in the US market, Amazon's market share has increased from 7% in 2007 to 18% in 2014, while that of non-top 15 players has come down from 66% in 2007 to 55% in 2014.
Figure 37: China has a long tail of smaller players; larger players have gained market share
China: B2C online vendors' market share (Mar 2011) China: B2C online vendors' market share (December 2014) Tmall Tmall Non top-10 JD.com Non top-10 JD.com 15% Vipshop 5% Suning Suning 3% Suning Vipshop 3% 1% Vipshop Vipshop Gome Gome Yihaodian Yihaodian Suning Dangdang JD.com Dangdang 4% 16% Tmall Amazon China Amazon China Tmall JD.com 51% 16% Tencent 67% Tencent Vancl Vancl Others Others
Source: iResearch, Bloomberg, Credit Suisse research
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Figure 38: The US e-tailing market is much more fragmented, but larger players have gained market share there as well
US: Online vendors' market share - 2007
Non top-15 Amazon.com 66% 7% eBay 7% Dell 3%
Amazon.com eBay Dell Sears Newegg.com Liberty Interactive Wal-Mart Target Apple JC Penney HP Circuit City Office Depot Best Buy Sony Non top-15
Source: Euromonitor, Credit Suisse estimates Alibaba has had sustainable profits, while smaller peers have struggled and been inconsistent Among the major listed Chinese e-tailing firms, only Alibaba has generated consistent profitability over the past five years. We believe that scale has had significant role to play in sustainable profit generation. Given the high network effect, once an e-commerce firm achieves critical mass, the incremental cost of customer acquisition is relatively low. Also, scale brings efficiency at several levels, particularly in areas such as logistics.
Figure 39: Larger scale usually makes it easier to achieve profitability PAT margin 370 42 4 2 1 60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0% Alibaba JD Vipshop Dangdang Jumei
2010 2011 2012 2013 2014
Note: The figures in the rectangle represent CY14 GMV (in US$ bn) to reflect the relative size of the companies. Source: Company data, Credit Suisse estimates.
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Vancl case study Starting in 2007 as a men’s shirt e-tailer, Vancl quickly became the leading online apparel brand in China. It began with an inventory-based model with its own brands. It had a market share of 28% in 2009 and was financed by venture capital (VC) firms such as IDG and Ceyuan Ventures. The growth was strong with more than a 100% CAGR in GMV over 2008-12. However, the growth slowed down over the past couple of years, due to stiff competition from the likes of Tmall, JD and Dangdang. Given its own branded inventory, the business was not able to provide as wide a choice as offered by some of its peers operating with marketplace models. Realising this limitation, management ventured into the marketplace model, opening the platform for third-party brands. However, bigger marketplaces had inherent advantages in terms of high traffic volume, and in many cases, the larger marketplaces have exclusive deals with brands that prevent the brands from setting up stores with other marketplaces. Vancl has now lost growth momentum and its share in online B2C GMV has declined from ~2% to below 0.1%.
Figure 40: After a strong growth phase, Vancl was hurt by Tmall's scale 1200 300%
1000 250%
800 200%
600 150%
400 100%
200 50%
0 0% 2008 2009 2010 2011 2012 2013 2014
Vancl GMV (US$ mn) Vancl GMV growth (RHS) Overall e-tailing GMV growth (RHS)
Source: iResearch, Euromonitor, Credit Suisse research
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Chinese online travel market example China's online travel industry has a history of profitable growth. However over the past three to four years, several next- generation companies have entered the market and intensified competition. While Ctrip and Elong were the first- generation online travel companies, several new companies such as Qunar, Kuxun, Tuniu, Uzai and Lvmama, besides several other smaller players, entered the market. There has been an intense pricing war in all the segments of online travel. The common incentives were higher rebates (in many cases unconditional) to the users and lower commissions from the airlines and hotels. This led to margin pressure on most of the online travel players and some consolidation in the industry. Companies, such as Ctrip, are consolidating their market positioning through acquisitions—both for expanding their inventory as well as expanding their product offerings. Ctrip also made an unsuccessful attempt to acquire Qunar in May 2015. The hope is that the bigger players will continue to grow larger.
Figure 41: Ctrip has more than a 50% share but there is a Figure 42: Ctrip's and Elong's margins have fallen in three long tail (2014) years
OTA market share in China 40% EBIT margin
30% Others 24% 20%
10%
Ctrip 0% 54% 2010 2011 2012 2013 2014 Feiren -10% 2% 118114 3% -20% LY 5% -30%
Elong Ctrip Elong 9% Source: Company data, Credit Suisse research Source: Company data
Some niche firms have done well though While Alibaba has dominated the China's e-commerce market over the past several years, Two relatively small Chinese gaining market share at the cost of several smaller players, there have been instances of players—Yihaodian and niche firms being able to create a strong positioning for themselves in the market. A Vipshop—have maintained couple of such examples are Yihaodian and Vipshop. or even increased share Yihaodian: An evolving category, intense customer focus were the keys to success Despite being a relative latecomer in China's e-commerce market, Yihaodian has been reasonably impressive in scaling up its business. Now fully owned by Walmart, Yihaodian commenced operations primarily as an online grocery store in 2008 (one of the early movers in this area in China), and then consistently expanded its product portfolio to include household products, cosmetics, electronics and apparel. The key differentiating factors for the company were: (1) strong control over logistics; and (2) an innovative concept of augmented reality 3D virtual stores. It has several of its own distribution centres across key locations and uses technology for real-time tracking of orders, traffic and activities across the locations. Given its association with Walmart, the company also shares resources in sourcing and logistics with Walmart. The focus on customers is high with employee salaries, bonuses and promotions linked to the customer experience index, a metric closely tracked by the company.
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Vipshop: Banking on the 'flash sales' opportunity Vipshop was started as a discount retail platform for the "excess inventory" of various brands—thereby solving the problems of Chinese domestic retail brands that had lacked an effective inventory-dumping channel offline for a long time. Vipshop's scale and growing user base help brands in effectively launching large promotional events in a short period of time on a single platform, retrieving cash flow without hurting brand image, and reaching out to customers who are not accessible otherwise. Vipshop's fulfilment and warehousing management expertise have been one of the key success factors. It turns its entire inventory nearly every five days. Also, the average return rates are high in the business, making the barriers to entry high. Increasingly, brands are adopting Vipshop as a mainstream online sales channel and there is also growth in new categories, such as cosmetics and mother/baby goods.
Figure 43: Both Vipshop and Yihaodian have maintained market share despite the dominance of Alibaba
3.5% China B2C online vendors' market share
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0% 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14
Vipshop Yihaodian
Source: iResearch, Credit Suisse research Significant M&A activity China has witnessed significant M&A activity over the past few years, as the e-commerce Most Chinese M&A has sector evolved. A large part of e-commerce M&A activity in China has been focused on been focused on increasing increasing the breadth and depth of offerings rather than purely gaining scale. This could the breadth of offerings be explained by a relatively concentrated market profile in most of the e-commerce segments. The three cash-rich Chinese e-commerce giants—Alibaba, Tencent and Baidu—are leading the investment activity in the market. For example, Alibaba has invested in businesses ranging from online education, financial platforms and location-based solutions, to internet television and logistics. Tencent's investments are also wide ranging, including companies in e-tailing, taxi bookings, online travel, online real estate, and other O2O (online to offline) segments. Similarly, Baidu has been largely focusing on O2O. Some instances of consolidation in competitive segments There have also been some instances of market consolidation due to competitive pressure in some segments—such as online taxi bookings and online classifieds. After an intense pricing war (with several freebies and offers), the top-two online taxi booking app providers, Didi and Kuaidi, eventually merged in 2015. The online classifieds company, 58.com, acquired its peer, Ganji, also in 2015. The expected benefits include operating
India Internet Primer #2 25 05 August 2015 leverage and relatively lower sales and marketing spends. The Youko-Tudou acquisition in 2012 was another instance of market consolidation for the purpose of gaining scale. While Youku had a 22% share in the online video market, Tudou was the second-largest player with ~14% market share. In the three cases above, the #1 player acquired the #2 player to gain significant market leadership. There has been no major M&A activity in the e-tailing space so far, as the market is dominated by Alibaba. On the other hand, the online travel segment is witnessing significant investment activity and entry of new players due to the high market potential.
Figure 44: Several M&A and investment transactions in 2014 in China—service expansion was the main focus area Company Target Invest. amt % stake Sector Remarks (US$ mn) Tencent Didi Taxi 100 n.a. O2O Leading taxi booking app in China Baidu Nuomi 111 100% O2O Leading groupbuying site in China Vipshop Lefeng 133 75% e-commerce Leading cosmetic B2C platform Tencent 17u.cn 83 n.a. Online Travel Leading OTA in China, previously investee of Tencent Alibaba TutorGroup 100 n.a. Education English learning education group Tencent Dianping 400 20% O2O Leading dining website in China Tencent Leju 180 15% Online Real Estate Online real estate service subsidiary of E-house Tencent CJ Games 500 28% Gaming CJ Game is the game subsidiary of CJ E&M Alibaba Hundson 539 100% Internet Finance Leading vendor of financial platform Alibaba Autonavi 1,326 100% O2O Digital map content and navigation and location-based solutions Alibaba TangoMe 217 20% Mobile Internet US-based mobile messaging services offering free voice, video and text messaging to consumers globally Alibaba Youku Tudou 1,220 17% Entertainment One of China’s leading internet television companies Alibaba OneTouch 325 100% Logistics Export-related services tailored to the needs of small businesses in the PRC Ctrip ly.com 200 n.a. Online Travel Leading online leisure travel company in China Tencent Navinfo 195 11% O2O Navinfo is Baidu's map data provider Tencent JD 1,540 17% e-commerce The largest online direct sales company in China Alibaba Evergrande FC 196 50% Entertainment One of China’s leading internet television companies Alibaba UCWeb 1,233 100% Mobile Internet Leading mobile products company Alibaba Kabam 120 n.a. Gaming An interactive entertainment company that develops and publishes multiplayer social games. Tencent Wanda, Baidu 122 15% O2O Co-founded an e-commerce company with focus on O2O service Baidu Wanda, Tencent 122 15% O2O Co-found an e-commerce company with focus on O2O service Tencent Dingxiangyuan 70 n.a. Healthcare The largest doctor network in China and leading medical app Alibaba Shiji Technology 458 15% Online Travel Leading IT company in the hospitality industry Tencent 58.com 759 25% O2O Leading online local marketplace Tencent Guahao.com 100 n.a. Healthcare Online hospital registration platform Tencent China LotSynergy 57 7% Lottery A technology company dedicated to the lottery business Tencent Koudai 145 10% e-commerce Mobile e-commerce recommendation app Sohu 56.com 130 100% Entertainment Leading video sharing websites in China Tencent 4:33 Creative Lab 110 25% Gaming Korea-based game studio JD Misfit 400 n.a. Mobile Internet Smart wearable devices start-up company in the US Tencent Didi Taxi 700 n.a. O2O Leading taxi booking app in China, co-invest with Temasek and DST JD Tuniu 50 7% Online Travel Leading online leisure travel company Baidu Uber 200 n.a. O2O Strategic partnership with Uber in technology innovation, internationalisation, and O2O Tencent BreadTrip 50 n.a. Online Travel Travel sharing app, C-series investment led by Tencent Source: Company data, Credit Suisse research
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Given high fragmentation in many segments in India, consolidation is inevitable India's e-commerce market is highly fragmented. There are only a few segments (such as A clear market leader exists search, online job search, social media and online video) where one can identify a clear in very few segments and market leader. Ample availability of funding has ensured continuous investments by firms funding is plentiful in a highly competitive environment. There is heavy discounting and marketing-led competition in each of the segments. While Flipkart, Snapdeal and Amazon are competing neck and neck in horizontal e-tailing, Myntra/Jabong/Yepme are competing in the fashion category besides a slew of smaller players. In furniture, the trio FabFurnish, Urbanladder and Pepperfry are competing in the underpenetrated market. Similarly, BigBasket, Localbanya and relatively new ZopNow are competing for market leadership in the grocery segment. The vertical players also face competition from the horizontal players in many of the categories.
Figure 45: India's e-commerce market is very fragmented in each segment
Source: Company, Credit Suisse
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M&A activity has picked up recently "A large internet company of our size has to take mergers and acquisitions very seriously. This year we have large plans for acqui-hires and strategic acquisitions and we want M&A to drive our innovation engine. Myntra and Mime 360 have been successful acquisitions for us and we are looking at a lot of deals in the technology and mobile space." – Sachin Bansal, CEO, Flipkart "We may end up making a total of ten (acquisitions) this (financial) year, subject to something being there that is interesting… If tomorrow there is something that brings similar strategic value, would we be open to paying whatever price it is? Absolutely... But looking at the landscape in India; there aren't that many other breakout companies. But we will assess such future opportunities on merit, and not price." – Kunal Bahl, CEO, Snapdeal (after the Freecharge acquisition in April 2015) In the past one year, there has been a significant pick-up in M&A activity in India. Some of M&A has picked up though these include consolidation and some have been for adding on to the acquirer's not just for consolidation capabilities. While the Flipkart-Myntra, Snapdeal-Freecharge and Ola-Taxiforsure acquisitions garnered a lot of media attention, there have been several other smaller yet meaningful acquisitions. There has been a marked change in the M&A approach of the e- commerce firms. There have been a few signs of consolidation within the e-tailing, online taxi booking, restaurant search and travel space (see the figure below). Zomato has been very acquisitive but its acquisitions are focused on international expansion. Recent technology-led acquisitions by Snapdeal and Flipkart Both Snapdeal and Flipkart have made several technology-led investments over the past one year, largely focused on mobility. For example, Snapdeal acquired Letsgomo, Martmobi and Dooztop (focused on building mobile and search capabilities), Flipkart acquired Adiquity and Ngpay (again, both focused on mobility). Snapdeal also acquired a minority stake in GoJavas to create a logistics ecosystem. No clear strategy yet for generating synergies from some of the large acquisitions Freecharge is not complementary to the existing business of Snapdeal, at least at this point of time. While the user base of Snapdeal and Freecharge is largely mutually exclusive (Freecharge's user base is largely in the 15-25 year age group while Snapdeal's users are in the 25-35 age group), Snapdeal has not tried to monetise Freecharge's users through cross-selling. The user can access Freecharge's services on Snapdeal, but vice versa is not yet possible. Similarly, though the Flipkart-Myntra and Ola-Taxiforsure acquisitions were more towards industry consolidation, there have been no cross selling synergies—i.e., the platforms are still working independently. Hence there is limited user monetisation of the acquired entity. More consolidation likely in the market The Indian e-commerce market is still very underpenetrated in many categories and there While market penetration is is ample scope for multiple players to co-exist. However, given that the current growth low, there are too many phase is driven by aggressive pricing, the ability to scale up depends on the availability of players in some categories funding. The smaller players are in a Catch-22 situation, as investors want to see relative growth before providing funding and the growth, in turn, depends on the availability of funding. In such a situation, there is scope for market consolidation, with larger players acquiring some of the smaller ones. Markets, such as real estate and travel, have become hyper competitive and may be the among the first to see some consolidation. Players such as Jabong, FabFurnish, and Bluestone have shown that niche vertical players can co-exist with the horizontal players, but even these vertical players are facing competition, with three to four players in each of the vertical category. The smaller players could be acquired by the horizontal or the larger vertical players.
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Figure 46: Some acquisitions in the Indian e-commerce sector Acquirer Target Acquisition Purpose Acquirer's Consideration Description date segment (US$ mn) Cardekho Gaadi.com Sep-14 Scale and category Car classifieds 11 The acquisition helps Cardekho to evolve expansion the pre-owned car market. Timesinternet Coupon Dunia May-14 Category expansion E-commerce NA A coupon code website. conglomerate Flipkart Adiquity Mar-15 Technology E-tailing NA A mobile ad network that allows app developers and mobile publishers to earn revenue from their mobile inventory. Flipkart Ngpay Sep-14 Technology E-tailing NA Mobile payment platform. Flipkart Myntra May-14 Scale and category E-tailing 370 An online fashion retail company. expansion Flipkart Letsbuy Feb-12 Scale and category E-tailing 25 An electronic retailer. expansion Flipkart Chakpak.com Nov-11 Category expansion E-tailing NA Bollywood portal. Flipkart acquired the rights to the digital catalogue. Flipkart Mime360 Oct-11 Technology E-tailing NA Provider of exchange platform connecting content owners with content publishers. Flipkart WeRead Dec-10 Technology E-tailing NA A social book discovery engine that enables users to recommend and discover books, search for authors, rate and review books as well as share and network with other book lovers. Mom and Me Babyoye Feb-15 Category expansion E-tailing NA A babycare product company. (Mahindra group) Snapdeal Letsgomo Jun-15 Technology E-tailing NA Provides end-to-end mobility solutions including building mobile strategies, conceptualisation of applications and mobile sites, implementation and hosting. Snapdeal Freecharge Apr-15 Category expansion E-tailing 450 A mobile payments firm for mobile recharge, DTH recharge and several other bill payments. Snapdeal RupeePower Apr-15 Category expansion E-tailing NA A financial marketplace—an originator of financial products, particularly loans. Snapdeal GoJavas Mar-15 Logistics E-tailing 19 (20% stake) Gojavas is an e-commerce logistics company with clients such as Jabong, FabFurnish, Healthkart, Yepme and Lenskart. Snapdeal Martmobi Mar-15 Technology E-tailing NA Martmobi helps vendors build mobile apps and sites. Snapdeal Exclusively.com Feb-15 Scale and category E-tailing NA An online luxury fashion store. expansion Snapdeal Doozton Apr-14 Technology E-tailing NA An online product discovery technology platform. Foodpanda Justeat Feb-15 Scale Food NA Restaurant listing and food ordering. Foodpanda Tastykhana Nov-14 Scale Food NA Restaurant listing and food ordering. Zomato MaplePOS Apr-15 Technology Food NA Android based point of sale product for restaurants. Zomato Urbanspoon Jan-15 Scale Food 55 Australia-based restaurant listing Zomato Mekanist Jan-15 Scale Food NA Turkey-based restaurant listing Zomato Cibando Dec-14 Scale Food NA Italy-based restaurant listing Zomato Gastronauci Sep-14 Scale Food NA Poland-based restaurant listing Zomato Lunchtime Aug-14 Scale Food NA Czech Republic-based restaurant listing Zomato Obedovat Aug-14 Scale Food NA Slovakia-based restaurant listing Zomato MenuMania Jul-14 Scale Food NA New Zealand-based restaurant listing BigBasket Delyver Jun-15 Logistics Grocery NA A hyperlocal delivery start-up. Proptiger Makaan Apr-14 Scale Real estate NA Property listing and classifieds player. Ola Taxiforsure Mar-15 Scale Taxi booking 200 An online taxi aggregator. Yatra Travelguru Jul-12 Scale and category Travel NA An online hotel distribution network. expansion Yatra BuzzinTown Jan-12 Category expansion Travel NA A website providing details of deals and events. Yatra MagicRooms Aug-11 Scale and category Travel NA Operates an internet-enabled global expansion distribution system for hotels. Source: Company data, Media sources such as Economic Times, Business Standard and VCCircle, Credit Suisse research
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Jabong Started in 2012, Jabong is a leading fashion vertical specialist e-commerce player with a product portfolio that includes footwear, apparel, jewellery and accessories. The company recorded GMV of ~US$220 mn and made EBITDA losses of ~US$75 mn in 2014. Rocket Internet has more than a 20% stake in Jabong. Business model/strategy The company's strategy is based on three pillars: (1) a large assortment (many brands in an affordable price range); (2) customer services (cash on delivery, "open-box" delivery and exchange); and (3) brand positioning (through magazines, sponsoring "Fashion Weeks", etc). Jabong has exclusivity with some brands; in fact, there is generally 6-12 months exclusivity before others can tie up. Jabong and other Rocket Internet investee companies in the fashion segment have formed GFG (Global Fashion Group). This will likely help in creating private label products (there can be synergies such as access to a design team in London and Paris, a manufacturing facility in China and technology). Competition, profitability and consolidation Industry-level profitability could take 2-3 years depending on pricing behaviour, but Jabong expects other companies to remain aggressive for now. There are sporadic instances of irrational pricing. The verticals have evolved in India earlier than the other markets. Fashion is more complicated for horizontals to crack and has required brand positioning. Verticals can be more profitable. There can be consolidation in the industry—and verticals can be consolidated. On logistics The company has its own warehouses and also uses logistics firms, such as GoJavas (earlier a part of Jabong), Ecom Express and Delhivery. These innovative logistics companies are reducing overall costs. Air cargo is a major cost item. The return rate is ~30%. Cash on delivery (COD) is ~60%. It should come down, but not significantly. All the digital payment solutions are already available and there is unlikely to be any new major disruptive force that can bring this below 50%. The cost of COD is not materially different for the company from credit cards, however. Smaller cities form 50% of the GMV. There are infrastructure challenges related to the availability of reliable delivery and COD in these locations.
India Internet Primer #2 30 05 August 2015 #4. Price wars can cease, but may take time Pricing has always been an integral part of the e-commerce strategy in China as well as in the more mature US market. Besides inherent cost advantages, the internet also leads to more transparent pricing as price discovery is more efficient. Switching costs are low for shoppers, which further reduces the pricing power of the e-commerce companies. Hence, pricing has extensively been used as a tool to survive in a competitive environment and to acquire new clients or retain existing clients. Consumer focus on discounts can be sensed from the sales reported by China's largest e- Singles' Day sales rose to commerce platforms (Taobao and Tmall) during Singles' Day (an annual event that takes 2.4% of Alibaba's revenue in place on 11 November every year) in China, when discounts offered on the sites are high. 2014 from 1.9% in 2012 The Alibaba group reported GMV of over US$9 bn on 11 November 2014. This was a steep growth from the US$5.8 bn sales in 2013 and US$3 bn in 2012. Also interestingly, the proportion of Singles' day sales to the annual sales (for the 12 months ending December) for Alibaba has increased from 1.9% in 2012 to 2.4% in 2014.
Figure 47: China witnesses significant traction in online shopping on Singles' Day (11 November) and this has been increasing over the years 10.0 3.0%
9.0 2.4% 2.3% 2.5% 8.0 1.9% 7.0 2.0% 6.0
5.0 1.5%
4.0 1.0% 3.0
2.0 0.5% 1.0
0.0 0.0% US$ bn 2012 2013 2014
Singles' day sales Singles' day sales as % of Alibaba's annual retail GMV (RHS)
Source: Company data, Credit Suisse research Discounts were common in Chinese B2C e-tailing "I think low price is something a customer always wants and there is always the philosophy that either you want to offer customers the best price or you want to play smart. For traditional companies or offline companies, the information is not transparent: one location is different from another and hence it is hard for customers to compare, so may be they can do things differently. But for online businesses, people easily check up your prices, compare them and even complain about them. We receive a lot of such complaints every day. We will keep a low price policy forever." – Shi Tao, Vice President, JD.com
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Figure 48: In 2009, there were significant price differentials between online and offline prices across categories Product Category Offline price Discount in price relative to offline stores (%) (Rmb) Taobao Paipai Eachnet Youa Average Sharp handset–9130 Handset 3,580 17 20 25 12 19 Apple Laptop–MB990CH/A IT 9,498 6 7 2 4 LiNing basketball shoes–2BMC369-2 Apparel 366 50 45 0 40 45 Dior perfume–J'adore L'absolu 75ml Cosmetics 1,250 46 29 53 26 39 Sony Camera–T900 Digital 2,450 11 16 2 -22 2 Supor pan–PC32T Household 387 13 46 29 29 29 JAK dried vegetable 150g Food 17 18 26 26 30 25 China Mobile front payment card Rmb100 Front payment 100 5 2 1 1 2 Swatch children's watch–ZFPN029 Accessories 398 40 40 46 45 43 Zhui Fengzheng de Ren Book 25 25 25 0 -20 8 Meadjohnson milk powder–A+1 900g Baby 230 10 4 0 5 5 The North Face hiking bag–AS9U 35L Outdoor 1,198 26 24 25 Philips recorder–AZ1022 Electronics 488 31 39 28 28 31 Average 23 25 19 15 21 Source: Reproduced from Credit Suisse China report 'China's e-commerce market: A new retail boom' dated 12 November 2009. Offline prices are taken from a typical offline distribution channel for each product, e.g. YongLe for handset and IT, Yaohan for apparel In China, the e-tailing players—both marketplace as well as inventory-based—have lower A fragmented market cost structures as compared to the brick-and-mortar retailers, and that gives them the accentuates price discounts ability to price competitively. While inventory-based e-tailers (such JD.com, Suning, VipShop, Gome and Dangdang, besides several other small players) have cost advantages in terms of the absence of store fronts and higher bargaining power due to bulk buying, marketplace based e-tailing firms eliminate the extra cost of intermediaries, particularly in countries such as China as many of the SME manufacturers directly sell goods on online stores. But even considering this natural cost advantage, Chinese independent e-tailing firms (inventory based e-tailers) have often engaged into irrational pricing strategies, offering unrealistic discounts to garner market share among themselves and from the relatively smaller brick-and-mortar stores.
Figure 49: While Tmall accounts for two-thirds of China's online B2C market, the remaining one-third is highly fragmented China: B2C online vendors' market share (December 2014) Tmall Vipshop Suning 3% JD.com 3% Suning
JD.com Vipshop 16% Gome Yihaodian Dangdang Amazon China Tmall Tencent 67% Vancl Others
Source: iResearch, Bloomberg, Credit Suisse research A good example of the pricing war was in China's online electronic appliance markets during 2012. In August 2012, the CEO of JD.com (erstwhile 360Buy.com), posted a blog in his Weibo (China's micro blogging website) account that the company would sell major
India Internet Primer #2 32 05 August 2015 home appliances at no profit for the next three years and also promised that prices at 360Buy.com would be 10% below those of Suning and Gome (home appliance retailers with online operations as well). Suning, Gome, Dangdang and Yixun joined 360Buy.com in offering discounts that led to a pricing war. Another more recent example is the pricing war between online taxi booking apps in China Online taxi has seen —between Kuaidi (backed by Alibaba), Didi (backed by Tencent) and Uber (though a rationality post consolidation smaller player, with investments from Baidu). With adequate funding available, these companies burnt money aggressively in marketing and in discounts, and were outspending one another. Both Didi and Kuaidi are the dominant players, collectively accounting for over 90% of the market (according to estimates by Analysys International). Eventually, both these companies merged in February 2015, with a rumoured valuation of US$6 bn for the combined business. Two months after the merger, the valuation of the business was US$8.8 bn as investors now have more clarity on the business model as the irrational pricing war has come to a halt. Besides this, some companies have been using incentive schemes such as "cash back" and loyalty points to attract new customers and retain their existing customer base. Amazon had its own history of intense price battles Amazon also has its own history of intense price battles with the likes of Walmart, Toys R Us, and Barnes and Noble to gain market leadership. Amazon uses dynamic pricing quite effectively to compete with its offline peers and also forces peers to adjust their prices. According to a study by Boomerang (a software firm making price-tracking software), Amazon identifies the most popular products on its site and consistently prices them under the competition. On the not-so-popular categories which have little impact on price perception (such as cables bought with a TV), Amazon uses profitable pricing.
Figure 50: Amazon (US) follows a dynamic pricing mechanism to remain competitive in popular goods categories
Number of changes in price of highly competitive goods (such as electronics, toys and 4000 housewares) - 2013
3500
3000 Amazon 2500 Walmart 2000 Target Best Buy 1500 Toys R Us 1000
500
0 Week of Black Friday Week after Black Friday 2 weeks after Black Friday
Source: Forbes, Internet Retailer (2013) Low customer loyalty leads to pricing competition Although both online penetration and online spending per user have increased in China in The % of Chinese shoppers the last several years, there has also been an increase in the options available. According using a single site dropped to an analysis by CNNIC and iClick, the proportion of shoppers using only one shopping sharply from 2009 to 2012 website has declined significantly in China between 2009 and 2012. As online shoppers have multiple options, many e-commerce sites compete for the wallet share of the same
India Internet Primer #2 33 05 August 2015
"shared" customer. Chinese e-commerce companies adopted pricing-led strategies in several instances to retain their customers.
Figure 51: Consumer spending spread over multiple shopping sites
90% Proportion of shoppers using one shopping website only
80%
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0% 2009 2010 2011 2012
Source: CNNIC, iClick Non-pricing initiatives to address customer loyalty Chinese e-commerce companies are incrementally focusing on non-pricing factors such Delivery, analytics and user as delivery services, data analytics and user experience to create user loyalty. Many B2C experience are used to e-commerce players have offered free shipping, same day delivery and loyalty coupons. foster loyalty Though online buyers still accord a high degree of importance to prices, other factors are becoming more important as well.
Figure 52: Pricing remains a major factor for online shopping but others are also relevant 80
70
60
50
40
30
20
10
0 Better deals, less Less time Foreign branded Easier to compare Better range and Uniqueness expensive consuming products variety
Tier-1 Tier-2 Tier-3 Tier-4
Source: KPMG China's connected consumers survey, 2014
What Taobao did to create customer loyalty During the initial days of e-commerce in China, buyers and sellers who were new to the system struggled with trust and logistical issues. Taobao addressed these issues through its call centre (that is said to be the largest in the world) as well as by launching an innovative instant-messaging tool called Taobao WangWang that allows online merchants to communicate with consumers in real time.
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Furthermore, given frequent instances of fake products being delivered by Taobao merchants, there have been concerns regarding the credibility of merchants. Taobao has a seller-credibility rating system that allows buyers to rate and post feedback on merchants. This increases the credibility about the products being sold on the platform. Price wars have sustained for some time now in India Unlike China, India's e-tailing market is relatively more fragmented. The top three Indian e-tailing is more players—Flipkart (including Myntra), Snapdeal and Amazon—account for a major share of fragmented than in China the overall e-tailing GMV in India, and are followed by a long tail of vertical specialists and smaller horizontal players. Similar to other e-tailing markets, pricing has been the primary growth strategy of the Indian e-tailing firms to compete among themselves and to shift spending from offline players. Much of the incremental user base addition, particularly in the Tier 2 and Tier 3 cities, is through deals and discounts. All the Indian e-tailing firms have offerings such as cash on delivery, same-day delivery What could have been and a 15-day return policy. These have now become hygiene factors, rather than differentiators have now differentiators, and it is difficult to differentiate across platforms on these factors. There become 'hygiene factors' have been several instances of all e-tailing players resorting to discounting tactics to attract user traffic during major shopping events such as Diwali (the festive period creates the largest shopping event in India). The recent mega electronic sale in May 2015 is another instance of such behaviour. Snapdeal launched "Snapdeal India Mobile Day" on 25 May 2015. Amazon followed by offering up to a 50% discount on electronics and healthcare products with guaranteed one-day delivery. Flipkart followed by offering "guaranteed superhit deals" on electronic products.
Figure 53: Several instances of e-tailing firms trying to outprice each other
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Source: Media sources such as Times of India, Credit Suisse research Commission rates are lower compared to the US Indian e-commerce firms are using all possible means to generate more volumes. As Amazon India charges less discussed above, while discounting on the customer side continues to be one of the major commission from merchants customer acquisition strategies, marketplaces are also using low commission rates (or than Amazon US referral fees) as a means to attract more sellers (merchants) on their platform. For example, while Amazon US charges 15% commission for categories such as "baby care and toys", "electronic storage devices", "health and beauty" and "household appliances", Amazon India's commission rates are 6-7% (under the ongoing promotional rate scheme). Flipkart's rates are also lower than the Amazon US commission rates in most of the cases. Companies also run campaigns from time to time with subsidised special commission rates. For example, Snapdeal was offering registration with "zero" commission between 1 May 2015 and 30 June 2015 (for some specified number of transactions). Amazon was also offering promotional commission rates for several categories that were one-third that of standard commission rates in many cases. Flipkart introduced a "seller advantage week" from 13-18 July 2015, offering 0% commission to the merchants registering during this period on the sales made from 20 August-5 September 2015.
Figure 54: Indian e-commerce marketplaces' commission rates are lower than in the US for most categories Categories Flipkart Amazon India* Shopclues Amazon US Automotive 14% 5% 12% 12% Baby care & toys 7% 5-8% 14% 15% Books & media 9% 12% 15% 15% Clothing 15% 15% 15% 15% Computers, laptops, printers and other components 6% 4-5% 5% 6% Electronic storage device 6% 5% 5% 15% Accessories 11% 8% 11% 15% Games 7% 12% 11% 8% Software 9% 5% 15% Eyewear & accessories 15% 11% 15% Footwear & accessories 13% 11% 15% 15% Health & beauty 6% 5% 15% 15% Home & kitchen 5% 5% 15% 15% Home decor 8% 5% 15% Home furnishing 13% 7% 15% Household appliances 7% 7% 6% 15% Jewellery 20% 15% 17% 20% Travel 14% 11% 15% Mobiles & cameras 10% 5% 6% 8% Sports & fitness 11% 10% 12% 15% Note: The rates were extracted from company websites as on 28 May 2015 * Rates under the promotional scheme Source: Company data, Credit Suisse estimates
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Low loyalty makes RoI on customer acquisition unfavourable User loyalty also seems relatively low in India at the moment, anecdotally. The Significant cash burn at the e-commerce sites are still not able to differentiate among themselves, online shoppers are moment relatively indifferent between the various e-tailing sites/apps and the shopping decisions are still influenced by the deals and discounts to an extent. With a lower-than-optimal level of commission rates (using Amazon US as a benchmark), discounting and a high cost of customer acquisition, the e-commerce companies are burning significant cash at the moment.
Figure 55: Indian e-commerce firms are making significant losses; the losses would have further increased in FY15 40 100 30 80 20 10 60 0 40 -10 20 -20
-30 0 -40 -20 -50 -60 -40 Flipkart Internet Pvt Ltd Amazon India Snapdeal Jabong Myntra
Net revenue PAT Gross revenue PAT
Source: Registrar of Companies filing for the year ending March 2014, Credit Suisse research No structural signs of change in pricing strategy We believe that the situation is unlikely to change in the next two to three years, given the Low penetration in the lower fact that Tier 2 and 3 cities and the population at the lower end of the pyramid in even Tier end of the pyramid and 1 cities are still significantly underpenetrated. Pricing could be an important factor, companies' deep pockets to especially for this section of the population. Additionally, the e-commerce firms are armed keep pricing aggressive with funds. Flipkart and Snapdeal have raised around US$1.9 bn and US$0.9 bn, respectively, in 2014 itself and Amazon India also has a commitment from its parent of US$2 bn of investments. Paytm has also jumped into e-tailing after around US$0.6 bn of investment in 2015, led by Alibaba. However, over a slightly longer term, there should be some pricing sanity in the market, as was the case in China. In our conversation with merchants as well as general commentary in the market, we observe that there has been some moderation in the aggressive pricing strategy adopted by the Indian e-tailing firms over the past few months after the Diwali and year-end discount events. But, these are not sustaining as a new player commences a price war each time. Early initiatives to bring in pricing rationality Our conversations with the leading e-commerce companies indicate that there are some initiatives to reduce the discounting practices over the past few months. According to a report in Economic Times, Snapdeal has asked its merchants to raise its margins (commission rates) to fund the two-week advertising campaign for a home décor sale. However, a new player (Paytm) has entered the market with backing from the Alibaba group and has aggressive expansion plans. This may hamper the pricing rationalisation initiatives of the larger players.
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Cashback is the new flavour of the season While the concept of cashback is not exactly a new phenomenon in an Indian context, we This helps client retention have seen increasing usage of this by e-commerce players to increase client retention and and repeat purchases to encourage repeat consumption. Users of this strategy include taxi sites, payment/wallet companies and even smaller O2O players. While this concept is yet another customer acquisition strategy (with the related costs), we believe that this may probably work better than a pure discounting strategy, as this ensures a high probability of repeat consumption. This may be an intermediate stop in the path to lower discounts eventually at some point of time.
India Internet Primer #2 38 05 August 2015 #5. For Amazon, India ≠ China Amazon is sub-scale in China
Figure 56: Amazon has remained a sub-scale player in China and has lost market share
Amazon China - B2C e-commerce market share
3.5%
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2.0%
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0.0% 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14
Source: iResearch, Credit Suisse research Amazon entered the Chinese market with the acquisition of Joyo.com in 2004, later Its market share is dropping this name in favour of Amazon China and shortening its local website URL to <1%…and down from 3% 'www.z.cn'. Despite a relatively early move and technological superiority over Alibaba four years ago during the early days (due to its investments in the US), Amazon has struggled to capture a significant share of the Chinese e-commerce market. Its market share in China's B2C e- commerce market was below 1% in 4Q CY14 and there has been a market share loss (the market share stood at over 3% in 1Q CY11) over time. The key reason has been its inability to attract adequate traffic share. As the organic traffic share remains low, Amazon has recently opened a store on its rival Alibaba's B2C marketplace, Tmall, after a long negotiation.
Figure 57: Amazon has recently opened a store on Alibaba's B2C marketplace Tmall
Source: Company website
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MNCs in general have struggled in China “EBay may be a shark in the ocean, but I am a crocodile in the Yangzte river. If we fight in the ocean, we lose; but if we fight in the river, we win.” – Jack Ma, Founder, Alibaba Amazon is not the only US company to have struggled in China. China has historically Lack of localisation, been a tough market to crack for many US internet companies. EBay and Yahoo entered language and government the market quite early with high hopes, but failed to live up to their expectations. Social policies, in some cases, networking players, such as Facebook, MySpace and Twitter have never managed to gain have been reasons a significant foothold in China and Google has also remained a sub-scale player with a meagre 10% market share, next to Baidu, which has a dominant 82% share in the online search market. Lack of localisation, language and government policies, in some cases, have been major factors behind the low level of international competition in China. For example, Google search content has been constantly scrutinised by China's regulatory authorities and access to Twitter and Facebook is routinely blocked.
Figure 58: MNCs have a sub-scale presence in various categories of the Chinese internet Segment Fragmentation Key players with International Key international market share competition players E-tailers (B2C) Low Alibaba (Tmall): 61% Low Amazon, Wal-mart, JD: 16% eBay Suning: 3% Online travel (OTA Low Ctrip: 54% Low Priceline market) eLong: 9% Search engine Low Baidu: 82% Moderate Google Google: 10% Online classifieds Low Soufun:27%; Low Craiglist 58.COM:38%; Ganji:16% E-commerce logistics Low UPS, GLP etc (market High UPS, GLP, FedEx share not available) Online payment Low Alipay: 50%, Tenpay: Low Paypal processors 20%, Chinaums: 11% Gaming Low Tencent: 40.7%; Low Blizzard Netease: 16%; Shanda 8% Streaming multimedia Low Youku: 25% Low Youtube content iQiyi: 20% Sohu: 10% Tencent Video: 10% Source: iResearch, Credit Suisse China research More particularly for Amazon, a lack of localised strategy seems to have been a significant factor behind its lack of penetration in the Chinese market, despite its competitive prices. Our discussions with industry experts indicate that Amazon was not able to create a positioning in the mind of the people and the marketing approach was not local. For example, unlike Alibaba, which ran campaigns every few weeks to keep users hooked to its platform, Amazon stuck to its global policy, running campaigns only during some specific days of the year. We also learn that the decision making was not completely localised, causing delays. "They (Amazon) rely heavily on the system, the technology. But their policies, local strategies, and local marketing are kind of not flexible enough. That’s why they are behind us in China. We make a very quick decision based on the market challenge. But I don’t think Amazon is doing that. What Amazon does in China is follow its global model and global process. If they apply the model in Germany, France or Japan, they also do it in China. They don’t consider if there are specific challenges and customer needs. That’s the difference between us and Amazon." – Shi Tao, VP, JD.com
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However, many MNCs have succeeded in India Unlike China, MNCs have been relatively more successful in India across several sectors. MNCs dominate some Some examples are Hyundai and Honda in passenger vehicles, Apple and Samsung in categories in India, e.g., mobile phones, Samsung, LG and Sony in consumer electricals, HUL, Nestlé and Colgate Google, Facebook, in FMCG, and Dominos and Pizza Hut in consumer staples. The same has been true for WhatsApp the Indian internet sector. MNC players have a presence in most of the internet categories in India and some of them dominate their respective categories. For example, Google dominates the search and video streaming market (Youtube) and Facebook and WhatsApp dominate social media. Even in the O2O categories, there are MNCs such as Olx, Foodpanda, Uber and Groupon. This suggests that MNCs have found it much easier to adapt to the Indian market compared to China. There have been some structural advantages such as wide acceptance of the English language and a relative lack of regulatory hurdles.
Figure 59: MNCs are present in many internet categories in India and dominate some Segment Key players International players' dominance E-tailers (B2C) Flipkart, Snapdeal, Amazon, Paytm and Moderate several others Online travel MakeMyTrip, Cleartrip, Yatra, Agoda Moderate Search engine Google High O2O (including classifieds) Housing.com, 99acres, Olx, Quikr, Justdial, Moderate Google, Zomato, Foodpanda, Ola, Uber, Naukri, Monster, Groupon, Coupon Dunia E-commerce logistics Largely courier firms such as Blue Dart, DHL, Moderate Gati , and Fedex and captive divisions of Amazon and Flipkart. Online payment (wallets and Paytm, Mobikwik, Citrus, PayU, DirecPay, Low gateways) Paypal, Billdesk, BillJunction, CCAvenue Gaming Imangi Studios, Kiloo, SYBO games, High Fingersoft, Rovio Entertainment, Reliance Big Entertainment Streaming multimedia content Youtube, Dailymotion High Source: Credit Suisse research Amazon seems to have learnt lessons from China; following a flexible and localised strategy in India Unlike in the case of China, we believe that Amazon should be able to compete efficiently with homegrown e-commerce leaders, such as Flipkart and Snapdeal. There are structural market-specific reasons as well as the company-specific initiatives for this belief. Structural factors
■ Relatively more fragmented market in India: There is a structural difference between India and China's e-commerce markets. Unlike China, where Alibaba soon obtained a dominant market share, India's e-commerce market is much more fragmented. This reduces the ability of one firm to control the market.
■ Better familiarity with India: Amazon has had some familiarity with the Indian market Amazon has been in India and people here, given its presence in India for several years even before operating for many years through its the online marketplace. It has had a technology centre (the Indian operating centre is development centres Amazon's largest centre outside the US) for many years. The company is thus familiar with local laws and in dealing with locals. Furthermore, Amazon was also a reasonably well-known brand and a few buyers in India were actually using Amazon's US website for buying books and movies that were not easily available in India.
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Company-specific initiatives Besides these above structural factors that increase Amazon's probability of success in India, it is also applying what it has learned from the China experience, with a significant focus on localisation.
■ Focusing on user engagement through a localised approach: Amazon is following a more localised approach in India. Its recent 'Aur dikhao' (Show more) campaign targeting the traditional Indian population and its sponsorship of the Indian Premier League or IPL (one of the most popular events across India attracting significant attention) have been great strategies to engage more users and position the company as a localised player. Amazon has also been introducing new product categories. This localised approach, together with among the best user experiences, has helped its business gain traction.
Figure 60: Amazon's 'Aur dikhao' (Show more) campaign Figure 61: Amazon has extended its product portfolio to include traditional apparel
Source: Google images Source: Credit Suisse research
■ Support to merchants: Similar to other e-commerce marketplaces in India, Amazon is also focused on engaging, onboarding and supporting merchants. It did a pilot project "Amazon Chai (tea) Cart", offering free tea, cold water and lemon juice to merchants in Panchkula, a small town in India (an Amazon-trained person educated the interested sellers on the process of selling online, about the seller-specific services such as FBA (Fulfilment by Amazon), Amazon Easy Ship, and also introduced them to Amazon). It is also opening an exclusive call centre for merchants (it will be managed by a third-party outsourcing firm). . "They (India and China) are very different. You'll see the growth rate in India is very rapid. We talked about this last year and are increasing our investment. I think the biggest difference is the focus on sellers and the connection of sellers. A big part of the challenge there is helping sellers all across India to succeed and grow their online businesses. You'll see from our press release that we've launched some new apps for that so that helps them manage their inventory better and also respond to customer inquiries. So that's probably the biggest difference that we see between India and China, but it is still very, very early on in India." – Thomas J. Szkutak, CFO, Amazon
■ Greater management focus after missing out the China opportunity: Given the The parent committed fact that Amazon has not been able to capitalise on the China opportunity to the US$2 bn investments to its extent it had expected, management seems to be very keen on establishing itself in Indian operations last year India. Within one year of its operations, India has become Amazon's fastest market to have crossed US$1 bn GMV so far. Amazon's founder and CEO, Jeff Bezos, had visited India in September 2014 and announced US$2 bn investments in Amazon
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India and also met the Indian Prime Minister, Narendra Modi. While globally, an inventory-based model is the preferred one for Amazon, it has started with the marketplace model in India, given restrictions on foreign investments in B2C e- commerce in India. There have been several initiatives taken by Amazon's management to make a case for allowing B2C e-commerce foreign investments in India. India has been a frequently discussed topic in its recent quarterly earnings calls as well. Given India is the fastest growing e-commerce market, management is looking at it as a big opportunity.
Figure 62: Amazon's founder and CEO Jeff Bezos was in India in 2014 and announced US$2 bn in investment plans
Source: Google images Source: Google images According to data from comScore, Amazon had the largest number of unique visitors in May 2015 among the big-three Indian e-commerce players, edging marginally ahead of Flipkart. Amazon India had 23.6 mn unique visitors (a 142% YoY increase), Flipkart had 23.5 mn (80% YoY) and Snapdeal had 17.9 mn (90% YoY).
India Internet Primer #2 43 05 August 2015 #6. It's all about mobile Smartphone disrupted e-commerce in China E-commerce evolved in China on the broadbased infrastructure built by the Chinese Mobile-based online government since its ninth five-year plan in 1993. However, there has been a marked shopping increased from 2% change in user preferences over the past four years. Mobile devices have taken over as in 2011 to 33% in 2014 the preferred online shopping platform from desktops—the share of mobile-based online shopping (in B2C and C2C online retail) has increased from a meagre 2% in 2011 to ~33% in 2014 according to iResearch. Alibaba (Tmall+Taobao) now derives 51% of its revenue from transactions completed using mobile devices (vs. 11% in March 2013). The key driver for this shift in consumption pattern, as to be expected, has been increasing smartphone penetration, led by declining smartphone costs and improving internet speed. Several new users from rural China have been using cheap smartphones to shop online and existing users are also shifting from desktops to smartphones. While the user experience (the ability to seamlessly browse through products) was an issue to begin with, users have got comfortable buying products on mobile devices over a period of time.
Figure 63: Mobile is evolving into a preferred online Figure 64: 51% of Alibaba's (Tmall + Taobao) GMV comes shopping destination in China from mobile devices
120% 60% Alibaba - mobile GMV as % of overall GMV
100% 50%
80% 40%
60% 30%
40% 20% 20% 10% 0% 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 0% Share of PC online shopping Share of mobile shopping Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
Source: iResearch, Credit Suisse research Source: iResearch, Credit Suisse research India is largely a mobile-first market With low broadband penetration, particularly in the Tier 2 and 3 cities, and increasing penetration of low-cost smartphones, mobile internet has become a dominant force in India as well. The young population is comfortable with (and many prefer) using mobile devices for everything. A large chunk of incremental internet users is mobile internet users. As shown in the figure below, over 65% of internet traffic in India comes from mobiles, compared to more than 35% in China and over 30% in the US. While Indian e-commerce firms began with desktop shopping sites, they have been quick to realise and develop the mobile opportunity. Although desktop still accounts for a large share of revenue for most firms, there has been a notable shift in mobile traffic share. This was driven by the launch of mobile apps by these companies. For example, mobile's share of overall traffic for Flipkart has increased significantly to ~70-75% over the past 12 months. It is a similar case for its other e-tailing peers. Online fashion retailer Myntra (owned by Flipkart) has gone one step further by shutting down its desktop site, hence becoming a mobile-only player—the first such in India. There were press reports (from LiveMint) recently that Flipkart officials were suggesting that Flipkart may follow suit later this year.
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Opportunity and challenges for Indian players The growing mobile adoption of e-commerce bodes well for Indian e-tailing players, as broadband penetration is still significantly low in the country. However, low 3G penetration (less than 10% in India versus ~40% in China) and a significantly inferior quality of internet access (average speed of 2 Mbps versus 3.4 Mbps for China, according to Akamai), make the task challenging, as poor connectivity leads to frequent transaction failures on mobiles. Companies are working to optimise apps to operate on weak networks.
Figure 65: India is largely a mobile-first market Figure 66: Major Indian players are serious about mobile 120% Nigeria % traffic from mobile devices 100% India 100% UK
China 80% 75% 70-75% Japan 60-70% US 60% Over 50% Brazil Germany 40% France 20% Russia
0% 20% 40% 60% 80% 100% 0% Russia France Germany Brazil US Japan China UK India Nigeria
Source: Statscounter, Credit Suisse research Source: The above data has been collated from management interviews and various media forums, e.g. Livemint, Indiaretailing etc. Mobile-only strategy can be a double-edged sword Besides Myntra, some other e-commerce start-ups are following a mobile-only strategy. O2O firms, such as Grofers, Taskbob and Zopper also have only Android and iOS apps, while Ola cabs is also shifting app-only. So far in India, a typical online shopper's journey has started with the desktop and then moved on to apps. However, with the increasing use of smartphones, this is changing somewhat. We believe that going with mobile-only strategy has benefits as well as some negative App-only may make sense consequences. While for e-commerce players with location-based offerings, an app-only for location-based offerings strategy may make sense given the location mapping features of smartphones, there is no such incentive for a traditional e-commerce firm. On the positive side, this allows e-commerce firms to focus on the user engagement. Mobile-only can allow for Mobiles and desktops need a very different "push" strategy for offerings and by much better user concentrating on one segment, the user experience can be far superior. It can also create engagement a loyal user base dedicated to using a single or just couple of apps and being better engaged. It also lowers the user's ability to make price comparisons across other e- commerce portals (currently, buyers have a tendency to open multiple e-commerce portals on separate windows of the internet browser); however, that "arbitrage" is not sustainable. However, such a strategy may result in excluding a part of the target segment. Many However, a part of the target online shoppers are still comfortable using e-commerce portals on their desktops. segment could get excluded Furthermore, there are some instances of browsing on a mobile and ordering on the desktop. A proportion of users also research and place orders from their offices, given better internet speeds. Weak mobile internet connectivity in India makes shopping on the move challenging in many cases. Transaction failure rates can be high particularly in a network with fluctuating speeds and drops.
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Yihaodin's experience shows customers' choice for desktops continues In China, there are some mixed trends regarding mobile usage. For example, Yihaodian management, in an interview in September 2013, indicated that mobile traffic peaks in the evenings and weekends while personal computer traffic peaks in the early afternoons and during weekdays. Orders on apps are usually smaller, but with a higher frequency and people using both devices are more loyal and sticky. The current strategy of desktop+mobile could be more appropriate at this stage in India, in our view We agree that India is evolving as a largely mobile-first market and the percentage share of mobile in online shopping is likely to further increase. Mobile can also provide a better user experience. However, a mobile-only strategy could reduce the target market. The current strategy of desktop+mobile looks more appropriate, in our view, at this stage of e- commerce evolution. We do not believe that cost or management bandwidth is a significant constraint at the moment for large e-commerce firms. Myntra Myntra is the largest fashion-focused vertical e-commerce firm in India. It was acquired by Flipkart in 2014 for more than US$350 mn, but continues to operate as an independent business. The company has recently shut its desktop to become an app-only platform. Business model Myntra is largely an inventory-based e-tailer. Marketplace is small (~20% of its overall business) and the number of sellers is ~500. The company also sells private brands that account for 20% of the GMV. The top 10 cities account for 45-50% of sales. Mobile forms a greater proportion of revenue in smaller cities. On discounts Currently, discounts are driving a significant volume of sales. The company has been following a strategy of moving away from discounts. It is trying to use social engagements, such as push notifications, to engage customers and create stickiness. Logistics The overall logistics cost is 9-10% of revenue, of which payment gateway charges are 1- 1.5%. Myntra has its own delivery network and uses 3PL as well. The share of 3PL is ~25- 30% of the total logistics requirement and this may increase with Tier 2 cities. Mobile is cash-on-delivery (CoD) centric (CoD is 80-85% in the case of mobile transactions). Cash handling charges are low in owned logistics. The undelivered return rates are high in CoD transactions (~20%) versus zero for credit card payments. The company believes that having own wallets may not make much of a difference. Also, wallets are much more expensive (cost of ~2%+). Reasons for the app-only strategy The biggest change that the company has witnessed is that customers are moving to a mobile platform. A large chunk of Myntra's traffic already came from mobile devices. Apps provide a more personalised experience to the user and the conversion ratio is better for the company.
India Internet Primer #2 46 05 August 2015 #7. O2O can be a big thing O2O e-commerce: The next mega wave in China Over time, China's e-commerce market has evolved and internet usage has gone beyond simple information exchange, entertainment and physical goods purchases. Several service categories, such as travel, catering, home services, ticketing, real estate, auto and beauty, have moved online. Using location-based features, O2O platforms (online to offline) offer local search capabilities and reviews of service providers—providing convenience to the user. For service providers, it is an efficient marketing channel. Credit Suisse China internet research analyst, Dick Wei, points out in 'The next mega CS estimates a US$65 bn wave: O2O service e-commerce,' dated 16 April 2015, that the internet is expected to GMV for O2O in China revolutionise the services sector after doing the same to physical goods transactions. He estimates a Rmb408 bn (~US$65 bn) GMV for O2O services (online to offline) in 2014 for China. Several start-ups have been incorporated in various service categories in the past couple of years. The three Chinese internet giants—Alibaba, Baidu and Tencent—have also invested in certain key categories through M&A and by building in-house teams.
Figure 67: O2O e-commerce landscape in China
Source: Credit Suisse China research Moving from marketing to transaction facilitation Starting as marketing platforms for merchants/service vendors, O2O platforms have generated large user traffic through information and reviews. However, they have evolved over time to include features, such as sales lead generation and transaction facilitation. Categories, such as travel, have become mature, while real estate, auto and local/life services are still evolving.
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Figure 68: Digitisation roadmap in China
O2O
Note: Local/Life services cover catering, entertainment, hotel, wedding services, parent-child related services, beauty and hairdressing, etc. Source: Credit Suisse China research. Penetration in China is still low versus e-commerce The penetration story in China's O2O services e-commerce sector is much lower O2O penetration in China compared to that in physical-goods e-commerce. It took physical goods e-commerce more now stands at 2008 levels of than ten years to garner ~10% of retail sales in China. With infrastructure more advanced physical e-commerce than before, our Chinese internet team believes that overall penetration may reach those levels after at least three to five more years. Using a physical-goods e-commerce penetration trajectory as a reference, O2O penetration in China stands at 2008 levels.
Figure 69: Local lifestyle O2O market penetration is low and increasing
80.0 GMV and penetration of local lifestyle O2O market 7.0%
70.0 6.0%
60.0 5.0% 50.0 4.0% 40.0 3.0% 30.0 2.0% 20.0
10.0 1.0%
0.0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017
GMV (US$ bn) % penetration [RHS]
Note: Includes segments such as catering, entertainment, beauty and hairdressing, hotel, wedding service and parent-child related services. Source: iResearch, Credit Suisse estimates.
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Figure 70: China O2O categories—key segments, players and funding/valuation Company Category Funding/valuation (US$ mn) O2O platforms 58.com Online classifieds platform 7,013* MeiTuan Group buying: customer can place order online, get coupons 7,000 and use them while making buying goods/services. Dianping Local life information and transaction platform 4,050 Baidu Nuomi Local group buying > US$250 Taodiandian Mobile catering service NA Taxi Didi Kuaidi Online taxi hailing 8,750 Uber Online taxi hailing NA Yongche Online taxi hailing (premium) 200 PPzuche P2P online car pooling It has raised ~US$70 mn till now. Takeout/Food delivery Eleme Online food ordering platform It has raised over US$450 mn till now. Baidu Waimai Online food ordering with third-party logistics firm for delivery. NA Daojia Online food ordering with in house delivery team It has raised ~US$150 mn till now. New/used car transactions Huimaiche New car: by submitting specific purchase requirements on Owned by Bitauto Huimaiche, customers receive biddings from qualified local dealers. Youxinpai Online bidding platform. Also provides services such as title It has raised ~US$460 mn till now. transfer, logistics and financing. Cheyipai Provides online trading platform and also provides value added It has raised ~US$75 mn till now. services. Renrenche Provides online trading platform, quality guarantee and 14 day It has raised ~US$25 mn till now (rumours of US$60 return service. mn Series C funding) Auto aftermarket services Kalading Booking through WeChat platform (car maintenance and US$10 mn Series A funding. inspection) Chemayi Online platform for maintenance and repair booking It has raised ~US$22 mn till now (Series B round) Y1S It has offline workshops and online platform for auto repair and NA maintenance. Real estate SouFun Provides marketing, listing, e-commerce and other value added 3,027* services. FangDuoDuo Real estate marketing service platform It has raised ~US$130 mn till now (Series B round) Personal care Helijia Online ordering platform for manicure, eyelash care, make-up 300 and pedicures KungFu Bear Online ordering platform for massage NA Laundry Edaixi O2O laundry service It has raised ~US$23 mn till now (Series A round) 24tidy O2O laundry service NA Others Aihuishou C2B electronic product recycling platform: users submit It has raised ~US$10 mn till now (Series B round) information of devices to be recycled; the system informs the recyclers who then bid for the products Fabao.cn Online legal consulting service NA Huixiaoer Online platform for meeting venue booking and hosting NA solutions Shequ001 Local e-commerce with provision for delivery 330 * Market cap. Source: Credit Suisse research;
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O2O e-commerce in India rising in some segments…and investments flowing in As in the case of China, there has been decent adoption of e-commerce channels in taxi, Taxi, real estate and real estate and restaurant search and food ordering. While online taxi has a transaction- restaurants are early O2O enabling business model, real estate portals and the online food platforms to a large businesses extent are currently used as classifieds platforms. All these segments have attracted significant investments over the last couple of years. The companies have also been aggressive in expanding their business with more focus on scale than profitability. India has not yet witnessed the adoption of O2O platforms for physical retail stores. Unlike China, couponing portals are not big marketing channels for offline stores. There are several couponing sites such as Coupon Dunia, Coupon Dekho, Price Raja and Freekamaal; however, these have largely been the marketing platforms for e-commerce portals and restaurants. There are some developments in offline couponing though such as the recent launch of offline deals in groceries and clothing by Coupon Dunia and the emergence of some true O2O physical goods platforms such as Shopsity and Niffler. Local (and hyper local) e-commerce has been another fast evolving market. Several e- Local/hyper local is picking commerce platforms have emerged for services ranging from restaurant search, online up as well grocery ordering, laundry pick-up, courier pick-up and home services (such as plumbers, electricians and cleaners). Grocery has the largest scale among these local e-commerce segments. Additionally, hyper local O2O physical e-commerce is also available through websites such as Zopper. The other segments are still evolving.
■ Online taxi: Similar to the Chinese market and markets in other countries, India's online taxi market has attracted significant funding. According to industry estimates (by RedSeer Consulting), the overall taxi market in India is ~US$9 bn (this excludes auto rickshaws, still a predominant mode of transportation in many of the major cities). A major chunk (over 90%) of this is unorganised and yet to join the aggregator network. A large underpenetrated market, together with structural growth factors such as India's large urban population, inconvenient public transport system, increasing purchasing power and improving lifestyles are the major variables driving these investments. Ola cabs has raised ~US$675 mn so far and is valued at US$2.5 bn. Uber India, backed by its global parent, has also been receiving significant funding from the parent.
■ Online real estate: Online real estate is another such O2O services category. There are multiple players, all focusing largely on classifieds services. The underlying growth factors for this market are significantly low penetration of online classifieds in the real estate industry (most of the advertising currently happens in newspapers and on other offline mediums). Companies such as Housing.com and Commonfloor.com have raised US$120 mn and US$60 mn, respectively so far, and 99acres is being funded by its parent, Infoedge.
■ Online restaurant search and food ordering: Restaurant search and food ordering has also emerged as a large category with healthy funding activity. The National Restaurant Association of India (NRAI) estimates India's organised food service market at US$13 bn (in 2013) and expects it to grow to US$28 bn by 2018. A large part of this is in urban India, which is the target market for online food companies. While Zomato and Foodpanda have become global players and have been aggressive in their M&A strategy, smaller firms such as Tinyowl and Swiggy have managed to get substantial funding (cumulatively ~19 mn each) within a short period of starting operations. There are several more new entrants such as Grab.in, SpoonJoy, Yumist, with operations in few major cities or localities.
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Figure 71: Online taxi and real estate & restaurant classifieds have witnessed significant investment activity Category Total funds Last valuation Last fund raising Remarks raised (US$ mn) (US$ mn) Ola Cabs Online taxi 675 2,500 Apr-15 Housing.com Online real estate 120 ~250 Dec-14 Taxiforsure Online taxi 200 200 Mar-15 Acquired by Ola 99acres Online real estate NA NA Oct-14 Infoedge (99acres' parent) raised ~US$125 mn for investment in 99acres Meru Cabs Online taxi 85 NA Mar-15 CommonFloor Online real estate 60 NA Jan-15 PropTiger Online real estate 37 120 Nov-14 India Property Online real estate 19 NA Dec-13 Zomato Online food 163 660 Apr-15 Operations in multiple geographies Foodpanda Online food 110 200 Mar-15 Operations in multiple geographies TinyOwl Online food ~19 NA Feb-15 JustEat.in Online food NA NA Feb-15 Acquired by Foodpanda Tastykhana Online food NA NA Nov-14 Acquired by Foodpanda Swiggy Online food ~19 NA Jun-15 Source: Multiple media sources, Credit Suisse research Hyper local grocery is a focus area for investors Grocery, in particular, has witnessed significant investor interest over the last couple of years. Working couples in larger cities have been the primary targets for these local grocery platforms. The opportunities are large—according to the NSSO (National Sample Survey Office) survey, groceries (including vegetables, fruits, dairy, processed food and beverages, besides the general grocery) accounts for the largest chunk of urban household spending. Several start-ups have cropped-up and received seed funding as well as more advanced rounds of funding. While a partnership with local mom-and-pop shops is the most common model (used by players such as Localbanya, Zopper, Grofers, Aaramshop and PepperTap), BigBasket has an inventory-based model.
Figure 72: Several local e-commerce start-ups have emerged Company Category Total funds Last valuation Last Remarks raised (US$ mn) (US$ mn) fundraising Fashalot Fashion portal NA NA NA Fashion products discovery platform. Wooplr Fashion portal 10 NA NA Fashion products discovery platform. Doesn't supports transactions. Aaramshop Grocery NA NA NA Doesn't charge from merchants or customers. Charges advertising companies for advertising and analytics. BigBasket Grocery 46 Over 100 Sep-14 Inventory-led model Grofers Grocery Over 80 Over 100 Jul-15 Partnering with local mom-and-pop stores. Delivery within 90 minutes. Localbanya Grocery 20 NA Jan-14 Partnering with local mom-and-pop stores. Express delivery at extra charges. PepperTap Grocery 12 NA Apr-15 Partnering with local mom-and-pop stores. Delivery within two hours. ZopNow Grocery 10 50 Apr-15 Partnering with local mom-and-pop stores. Delivery within three hours. Taskbob Home services 1 NA Apr-15 Home services marketplace (services such as handymen, cleaning services and chauffeur services) LocalOye Home and professional 5 NA Apr-15 Services such as tutors, home services services Lookup Local marketplace 3 NA May-15 Instant messaging app that connects businesses and users Zopper Local marketplace 25 NA Jun-15 Electronics and consumer goods Source: Credit Suisse research
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Figure 73: Grocery accounts for a large chunk of overall urban household spending NSSO urban consumption across categories
Vegetables, fruits and dairy 12% Others Grocery 34% 15%
Beverages, Refreshments, Processed foods 9%
Durable goods Clothing and footwear 5% Conveyance 6% 6% Medical Education 6% 7% Note: For 2011-12. Source: NSSO, Credit Suisse research
BigBasket BigBasket is a leading online grocery firm with its own logistics across the cities it operates in. BigBasket has presence in cities such as Mumbai, Bangalore, Hyderabad, Chennai, Delhi and Pune and has plans to have increase its presence to 50 cities by March 2016. The company also sells a few private label products. Business model Unlike other grocery e-tailers, BigBasket believes in having control over the inventory. It sources products from several suppliers, stores them in its own warehouse and manages the delivery. All deliveries are done the same day. BigBasket uses algorithms to minimise wastage (on the perishable goods) and keep inventory days low. NCR is the largest market for the company. CPG accounts for nearly half the business followed by staples (~20-25%) and fresh products (~15-20%), CoD is currently ~50% and return rate is as low as 1%. Financials and targets BigBasket generated Rs2.1 bn (US$34 mn) revenue in FY15 with ~10% month on month growth. It targets to achieve Rs18 bn (US$290 mn) revenue by FY17 and expects operations level break-even in 2-3 years. Each city works as a separate business and according to management, margin break-even may be sooner for some of the more matured cities. Management expects 7-8% steady state EBITDA margins. Flipkart, Amazon and Snapdeal expanding into groceries, Justdial eyeing overall O2O Given the large untapped opportunities in O2O, larger horizontal e-commerce firms have also taken some initiatives in in this segment. Flipkart, Amazon and Snapdeal have recently expanded their product portfolio with the addition of groceries. Amazon has launched Kirana Now—an on-demand delivery service which sources from local mom- and-pop stores and guarantees deliveries within two-four hours. The pilot version has been launched only in Bengaluru as of now. Snapdeal has tied-up with Godrej's Nature's Basket for selling its product online with one-day delivery periods. While Flipkart does not have a presence in grocery yet, it plans to start this offering towards the end of 2015.
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Justdial's 'Search Plus' initiatives are interesting but we are sceptical on execution Justdial is the largest local classifieds portal in India. While it has a large user base, it is currently not directly monetising it as its revenue accrues solely from the merchants through classifieds. In an effort to monetise this user base, the company has launched 20 services so far, and it collectively refers to these as 'Search Plus'. These include, for example, O2O e-commerce, travel bookings, movie bookings, doctor appointments, grocery shopping, and buying from chemists—many of them falling into the O2O category. While these services are already available on the Justdial platform, the monetisation process will be gradual. The company plans to launch an intensive advertisement campaign but may not initially monetise these services, i.e., it may allow merchants to make free use of the platform to create familiarity for merchants and consumers and to generate adequate volumes. Eventually, it will monetise these services—for example, it may charge a merchant 100 bp for each transaction or a doctor a certain amount per appointment or a flat monthly fee to the doctor for being listed on the 'Search Plus' platform. As highlighted in our note The core business by itself justifies an upgrade dated 11 May 2015, Justdial may face two primary challenges
■ Competition with well-funded players: It will compete with well-funded players in practically each of its target segments. For example, it will compete with the likes of Amazon, Flipkart and Snapdeal in e-commerce, with Meru, Ola, Uber in taxi booking, with Bookmyshow for movie bookings, etc. Many of these players are flush with funds and are willing to "buy" customers and burn significant cash to grab market shares. In the current stage of the evolution of online commerce in India, we notice irrational behaviour by some of these players which can continue for some time. And we think that Justdial will either need to participate in such behaviour or will lag the other players. Justdial's management has so far focused on "profitable growth'' and seems to be following the same philosophy for the 'Search Plus' business. While this is sensible, given the current environment of land grabbing, Justdial's approach may not succeed.
■ Customer experience: The second challenge would be on the customer experience front, in our view. Justdial does not intend to significantly invest in customer fulfilment and logistics—areas in which many e-commerce players are investing heavily. Thus Justdial will have to either deliver a unique portfolio of goods that no other online platform does or will have to promise superior services such as faster delivery periods. It plans to sign up with many of the smaller businesses—a sort of O2O commerce model. Such businesses have traditionally operated on a very small scale and we are unsure whether it will be able to meet customer expectations in an increasingly online world. Furthermore, Justdial seems to be spreading itself too thin given the number of services it intends to enter into.
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Zopper Started in 2012, Zopper is an app-only hyperlocal marketplace (with no logistics operations). It allows users to search and choose a local offline merchant offering the best price for a product. The user can also order goods on the app. The company is largely focused on electronic goods. It has ~2 mn monthly active users and close to 6,000 merchants on the platform. Business model Zopper's management believes that its local marketplace has unique advantages for consumers as well as for merchants. The consumer gets faster delivery (as the merchants are in the close vicinity) and there is convenient after-sales service. This model is particularly helpful to smaller merchants, who are generally left behind by the larger e-commerce marketplaces. In general, the hyperlocal model results in lower working capital days (as in most of the cases, merchants collect payment on delivery in cash) and lower return rate as compared to e-commerce sites. The interface is very easy to use for merchants with no need to upload any picture of the products (there is an inbuilt list of major products across brands). According to management, Zopper prices are either in-line or lower than online for large and heavy electrical products in 90% of the cases. Prices may not be as competitive for smaller products such as mobile phones. Zopper has ~120 people in Delhi, Noida and Bengaluru, with nearly half in products and engineering, ~25% in sales and the balance in customer and sales support and operations. Key challenge in the business The key challenge, according to management, is to convert the consumers who are viewing the product on the Zoppers app into actual buyers; instances of users viewing online and then shopping by visiting the local store are quite high. Zopper plans to address this by offering complementary services such as warranty and exchange. Future plans The company has a target of US$100 mn annualised GMV during the upcoming festival season.
India Internet Primer #2 54 05 August 2015 #8. Logistics is the backbone
Figure 74: Logistics value chain for an e-commerce transaction
Front end services Back end services
Last mile delivery Packaging
Payment Gateway
Cash on Delivery Vendor management
Customer Cards on delivery E-commerce portal/app
Prepaid wallet Warehouse management
Reverse pick-up
Delivery Customer Service management
Source: Dion research and analysis, Credit Suisse research Logistics has been one of the key factors behind the success of e-commerce in China as This by itself is a sizeable well as the US and significant incremental investments have been made in this area. The industry in China key elements in the logistics value chain are delivery (including warehousing) and payments. China has evolved in a long way on both these aspects and both of these, by themselves, are significantly large industries in China now. China's e-commerce logistics eco-system comprises three players: local express delivery firms, multinational players and in-house logistic operations of e-commerce firms. Of these, local express delivery firms have the longest history. Multinational players were allowed in the Chinese market only in 2005 and in-house logistic operations is a more recent phenomena. China's e-commerce logistics benefited from the exports physical infrastructure built over the last 20 years. Part of this has been used for the domestic e-commerce market. But only a small part of this is in the modern logistics segment. Different approaches by Chinese e-commerce firms Historically, third-party providers have taken care of logistics in China. However, as the Combination of own + third- focus shifts from price-led competition to more customer service-oriented differentiation, party; logistics platforms online retailers are incrementally taking control of the logistics function. For example, JD, a turning profit centres as well leading e-commerce firm, is developing its own distribution network of warehouses and fleet and delivery persons, following the “asset heavy” approach of Amazon. The company has commenced its own logistics services initially in a few select cities. Alibaba, on the other hand, prefers a relatively "asset-light” approach. Alibaba has partnered with third-party logistics firms to establish a logistics platform called Cainiao. The purpose is to build a logistics network in next 5-8 years that can deliver goods cross China within 24 hours of the order being received. There is a trend of e-commerce firms using open logistics platforms—that can be open to other e-commerce firms as well as B2C e-commerce sellers. This makes logistics a profit-centre from a traditional cost-centre operation. Some companies are hiving off the logistics operations into a separate unit to let it operate completely differently according to market conditions.
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Figure 75: Logistics infrastructure at some Chinese e-commerce firms Warehousing Delivery Alibaba NA* 3PL JD Owned+rent Owned+3PL Amazon.cn Owned+rent Owned+3PL Suning Owned Owned+3PL Vipshop Rent 3PL Dangdang Rent 3PL Vancl Rent 3PL Yihaodian Rent Owned+3PL Yixun Owned+rent Owned+3PL Gome Owned+rent Owned+3PL * Alibaba has invested in JVs and firms that have warehousing operations. It does not manage any warehouses by itself. Source: Company data, Credit Suisse note by China internet team – "E-commerce logistics: Carrying the load" dated 19 May 2014
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Alibaba controls logistics through Ali Logistics, using a network of third-party providers During the initial phase of Alibaba's evolution, it relied on third-party delivery firms for logistics. However, as sales grew, it realised the potential logistics bottlenecks. Alibaba launched its logistics platform called Ali Logistics in 2009. As a centralised logistics information system, Ali Logistics collects all the data from customers, merchants as well as third-party logistics companies, and organises the ordering, warehousing, and delivery activities in real-time. In effect, this reduces the logistics burden of merchants by providing them with a one-stop logistics service. In order to further improve the online shopping experience, Tmall entered into strategic collaborations with third-party logistics companies to provide tailored services, such as delivery within 24 hours, night-time delivery, and payment-on-delivery in many cities across China. It has recently started investing in logistics to make delivery faster and more reliable. In May 2013, Alibaba collaborated with eight companies, including Intime, Fosun Group, Forch Group, and five major logistics companies, to start the Cainiao Network Technology Co Ltd aimed at building a China Smart Logistics Network (CSN). Cainiao has an open platform and works in partnership with several local and international logistics and delivery firms. In May 2015, Cainiao announced a major expansion in warehouse capacity. The plan is to nearly quintuple the warehouse space from the current 54 mn sq ft. The overall plan is to invest US$16 bn over the next five to eight years and a large part of this is likely to be in warehousing. This will also support Alibaba's initiatives on developing the online grocery market. Alibaba has also invested in a few other companies to expand its logistics and distribution network: it has made a US$364 mn investment in Doogymart, the logistics arm of Haier and has taken a minority stake in YTO express, one of the logistics partners of Cainiao.
Figure 76: Ali Logistics + Cainiao network structure
Source: Company data, Credit Suisse research
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Third-party express delivery firms preferred for delivery Third-party express delivery firms have gained immensely from the success of the e- commerce market in China. The market is very fragmented with the presence of many small logistics service providers. The larger players such as FedEx and TNT are largely focused on high volume markets. Despite these limitations, China's e-commerce market has witnessed a steep growth over the last several years. There is also a new breed of express delivery companies with specialised offerings—such as Yamato China which is a cold chain delivery company for fresh food online retailers.
Figure 77: Chinese logistics companies have gained from the success of e-commerce
160 Online shoppping express revenues (Rmb bn)
140
120
100
80
60
40
20
0 2007 2008 2009 2010 2011 2012 2013
Source: 100EC.cn Third-party logistics remains the mainstream solution As highlighted by our China internet team, in a note dated 19 May 2014 E-commerce Lack of scale will prevent in- logistics: Carrying the load, many of the e-commerce firms in China have used a hybrid house logistics for all approach—i.e., a combination of in-house and third-party express delivery companies. In- locations house logistics can be very flexible and customised, and can provide some competitive advantage. However, given the packaging volume of one shopping site is limited, their networks are confined to core cities where enough orders can be generated. In other places, they still have to collaborate with third-party express firms to deliver products. Given the above factors, third-party logistics is likely to remain the mainstream solution in China, with in-house logistics acting as an important supplement. Better user experience through value added services Given limited touch points, e-commerce companies in China are focusing on creating a Cash on delivery, try-on, better user experience at the last-mile delivery stage. This is done through facilities such night delivery are examples as cash on delivery, "try-on" at the door, night delivery and reverse logistics. Express companies and convenience store chains are exploring a co-operative model. For example, public self-pickup lockers are being laid out by JD and Suning in colleges, communities, central business districts and metro stations, where population density is high, in some big cities. Last mile connectivity to rural areas There has been a rapid growth in e-commerce volumes from rural regions. According to Rural is important as it an estimate by AliResearch, online shopping sales from villages in China is likely to touch forms 10% of sales US$74 bn in 2016. Rural buyers on Taobao, make up over 10% of the total sales, up from ~7% share a couple of years back.
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There have been some significant investment plans to improve the last mile connectivity in China. Alibaba is investing ~US$1.6 bn to build 1,000 county-level operation centres and 100,000 village-level service stations over the next three to five years. Similarly, JD.com has plans to set-up 500 brick-and-mortar service centres in underdeveloped counties in 2015 and to appoint tens of thousands of extension agents. Suning also has plans to open 10,000 depots covering ~25% of the rural area in the next five years. Alibaba has also partnered with China Post for sharing the logistics to develop the e-commerce marketplace in rural China. It is also looking at the online opportunity in farm products. Alibaba provided a platform with add-on services that created a pull factor Taobao's policy of allowing free listings of businesses and transactions on the platform Rating, communication had a great impact on attracting a large number of small businesses and the sellers were between buyers/sellers, charged only for using Alipay, Alibaba's online payment wallet. Only the businesses that payment, supply chain, wanted to advertise (in terms of preferred listing) had to pay and upfront investments were delivery, and financing also minimal. The listing procedure was very simple: a seller, that could even be an individual, needed to register on the website (one could even login using a Weibo/Alipay account). Alibaba's small business rating system, worded feedback, and platform, where buyers and sellers could chat and share photos, helped to create trust for buyers and provided sellers a large marketing platform. Taobao also provided logistics including the Taobao supply- chain management platform (e56.taobao.com) to help merchants handle inventory. Alibaba's initiatives to provide financing to small and micro enterprises through its affiliate Ant Credit also helped in development of the market. After the success of Taobao, Tmall had a pull factor, where brands wanted to take advantage of the increasing online shopping in China. Alipay solved the payment problems in China to some extent Similar to India, China is a cash economy. As there was not enough protection from the COD and escrow payment banking system for buyers and credit cards were not very popular across China, cash on platforms are popular delivery (COD) was the dominant approach for B2C e-commerce. Based on research by our China internet team in 2009, cash on delivery (COD) was the most popular payment method. Most B2C companies indicated that about 50-70% of revenue was settled by COD. Besides COD, Alipay was the second most popular payment method, as seven of the eight B2C companies accepted Alipay and that normally accounted for 10-20% of the total revenue. Most of the companies interviewed indicated that credit card payment was an insignificant portion. On the other hand, third-party escrow payment platforms, e.g. Alipay, Tenpay, had already become the dominant ones for the C2C segment. In 2009, ~70-80% of Taobao GMV was settled through Alipay. This was due to the escrow feature offered by Alipay. While for some e-commerce firms, such as Yihaodian, the proportion of COD has come down (to ~20% from ~70% share in 2008), it is still a popular means of payment due to some customers' lack of trust in both online payment systems. Cash on delivery is still used as a value-added service in several cases and it remains a most commonly used payment method along with third-party payment options. Alipay case study As the banking system had not provided enough protection for buyers and credit cards were not very popular across the country, cash on delivery (COD) was the dominant approach for e-commerce in the initial days of e-commerce. In 2009, CoD was over 50% of the payments for many e-commerce firms. While the credit card ecosystem has grown
India Internet Primer #2 59 05 August 2015 in China over the last few years, third-party vendors, particularly Alipay have dominated the e-commerce payment segment. The biggest contributor to the success of the third- party players was the trust factor. Alipay provided an escrow account, which was debited only after the customer received the goods and was satisfied with them. With concerns over the quality of the product and lack of an effective redressal mechanism, Alipay was well accepted. Furthermore, third- party online/mobile payment providers such as Alipay have direct arrangements with the banks for funds settlement; this allows them to avoid the processing charges of UnionPay. In 2010, Alipay along with eco-system partners such as handset chip vendors, system solution providers and mobile app providers established the Secure Payment Industry Alliance (SPIA) and introduced a mobile payment product, the first secure mobile payment product in China. It was an open platform for mobile app developers so that it could be easily integrated with other mobile apps. Its wallets have become very popular among China's online shoppers. Alibaba accounts for only around half of Alipay's business now and it has been monetising the large user base through a bunch of additional services including SME financing and fund management (for the surplus funds in the accounts). Logistics remains a challenge in India Logistics is one of the largest cost items for e-commerce firms, after marketing. According Logistics forms 6-8% of to Technopak (a retail advisory firm), a typical e-tailer spends 6% to 8% of its GMV on revenue for a typical e-tailer logistics. However, to improve customer satisfaction, Indian e-commerce players have been spending 7% to 15% of sales on logistics. India has similar logistics issues as China: last mile delivery constraints (there are several Two key issues: last mile thousand pin codes in the country with no large logistics firm that has a comprehensive delivery constraints and lack presence) and lack of modern warehousing facilities. The traditional smaller local courier of warehousing firms are not well equipped to handle e-commerce specific challenges such as non- standard sized packages, cash on delivery and reverse logistics. These challenges are even more relevant for the rural parts of India, that are likely to contribute significantly to the incremental growth in e-commerce. Another challenge is the cost of delivery. A large proportion of shipments is currently done through air, which leads to a higher cost of delivery. This also results in an inability to fulfil orders due to short-supply of air capacity, particularly during large promotional events. While pricing still remains a priority, customer fulfilment is also becoming an important factor for consumers. E-commerce firms are trying to differentiate and more effectively compete against offline players with initiatives around faster and more predictable delivery. This has also raised the level of customer expectations. However, the standard of infrastructure is still not supportive of this. Some initiatives by the larger e-commerce players to address the logistics challenges Flipkart (through E-kart), Amazon and a few relatively smaller e-commerce firms such as Major investments planned Shopclues have been investing in logistics over the last couple of years. They have set-up in fulfilment by Amazon, their own fulfilment facilities to have better control over delivery; they have their own Flipkart and Snapdeal warehouses across the major cities that account for a larger share of business. For example, Amazon has Fulfilment by Amazon (FBA) and Flipkart has Flipkart Advantage. This addresses one of the primary challenges that merchants face while selling online. A merchant listed on the company's platform can send its products to the e- tailers' fulfilment centre, which stores the products for multiple merchants in its tech- enabled warehouses. Upon receiving an order from the customer, the e-tailer (through its fulfilment centre) ships the seller's products to the customer.
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Besides the fulfilment operations (that involve use of own warehouses by the e-tailers), the marketplaces also offer shipment assistance, such as a platform that helps in selecting the best available courier option to ship products and shipment tracking. Marketplace fulfilled as well as assisted fulfilment operations together account for a larger share of shipments for many of the e-tailing companies. Snapdeal's 'Safeship' platform and Amazon's 'Easy Ship' are examples of this. A significant part of Amazon's US$2 bn committed investment in India operations is likely to go into logistics. Similarly, Flipkart and Snapdeal are also investing aggressively in logistics; for example, Flipkart is likely to invest US$80-100 mn in 2015 into supply chain1 and Snapdeal also indicated plans to invest US$200 mn in the next one year in March 20152.
Figure 78: Fulfilment by Amazon (FBA) Figure 79: Snapdeal's 'Safeship' logistics platform
Source: Company website Source: Company website Third-party logistics firms will play an important role Though companies such as Flipkart, Myntra and Jabong have in-house delivery 3PL includes traditional capabilities, they have been partnering with third-party courier and logistics firms for better logistics companies and e- coverage and last mile delivery. Amazon also partners with third-party courier firms for commerce dedicated ones delivery such as BlueDart, FedEx, Gati and India Post. Companies such as Snapdeal do not have any in-house logistics capabilities and rely solely on third-party service providers such as BlueDart and GoJavas (Snapdeal has recently acquired a 20% stake in GoJavas for US$19 mn). There are two categories of third-party e-commerce logistics companies: (1) traditional logistics providers such as BlueDart, DHL, FedEx, Gati, DTDC, First Flight and Patel Logistics—these companies have a larger reach but do not traditionally have e-commerce specialisation (but are building it now); and (2) e-commerce specialist logistics companies —these companies provide customised solutions. Firms such as Delhivery, E-com Express and GoJavas provide not only delivery services, but also end-to-end warehousing solutions. These firms are growing fast and also receiving private funding.
1 http://economictimes.indiatimes.com/industry/services/retail/after-amazon-flipkart-to-join-express-delivery- race-cos-logistics-unit-ekart-to-compete-with-on-demand-startups/articleshow/47712805.cms 2 http://www.livemint.com/Industry/TONbgELyYiAWbdBiiAMxSJ/Snapdeal-in-talks-to-acquire-GoJavas-for- up-to-Rs200-crore.html
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There is also a trend towards sharing of logistics infrastructure. For example, GoJavas, which was earlier Jabong's exclusive delivery arm, has been carved out as a separate entity and now derives a large chunk of its revenues from clients such as FabFurnish, HealthKart, Yepme, Lenskart and Snapdeal. Given the capital intensive nature of logistics operations, the last mile connectivity 3PL is important due to high challenges and challenges of managing a separate workforce, we believe third-party investments required and logistics service providers will play an important role. WS Retail (earlier a part of Flipkart last-mile constraints and now the largest seller on Flipkart) is likely to hive off its logistics arm E-kart. Flipkart expects to increase the share of third-party shipments from the current 15% to ~30-35% over the next 12 months. Delhivery Delhivery is a fast growing logistics solutions provider with several e-commerce firms including Flipkart as its clients. Started as a hyperlocal express delivery service firm for flower, bakery and food items, it has grown into a logistics specialist providing a full range of services, including procurement, warehousing, packaging and last mile delivery. The company has presence in ~175 cities and is continuously expanding. Business model Delhivery has three types of customers: (1) e-commerce companies, (2) brands such as Wildcraft and (3) small and medium enterprises. For e-commerce clients, Delhivery provides IT support (including inventory and order management), fulfilment and logistics services (including handling of payment). For the brand clients, Delhivery offers omni- channel solutions, demand analytics, fulfilment, warehousing and delivery. For small and medium enterprises which are typically listed on marketplaces, Delhivery helps in order management, warehousing and shipping. The revenue model depends on the service: for transport, it is a per consignment basis model; for warehousing, it is per unit stock; and for IT support, there is a fixed charge or a % of revenues. The company manages the whole shipping network, including distribution centres on its own. Business targets Delhivery currently has reach to over 200 cities and has 11 fulfilment centres. According to media articles, the company has fulfilment space of ~1 mn sq. ft and plans to increase it further. It also has plans to increase its reach into rural cities. COD may remain the primary mode of payment With a large cash economy, low penetration of electronic banking credit card usage and a COD has high returns and trust deficit among customers (particularly in Tier 2 and 3 cities), a large proportion of e- working capital needs tailing transactions happen through cash on delivery, which is an inefficient way of payment. This also increases the instances of return of goods sold. This not only increases the working capital requirement, it also adds another layer of cost for e-tailing firms and logistics challenges. We believe that the COD component currently accounts for ~55-60% of online shopping transactions (excluding travel booking) for many companies and that this number has not materially changed over the last couple of years. While there are several other payment mechanisms in India, their penetration as well as acceptability remain low. Companies such as Paytm and PayU have their wallets and banks have been aggressively promoting the usage of their own wallets besides debit/credit cards and net banking. E-commerce portals such as Flipkart also have their own wallets but the usage is still limited.
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Unlike China, where Alipay and Tenpay revolutionised e-commerce payments, India does not seem to have any similar large scale online payments player emerging soon. Our conversations with industry participants indicate that the share of cash is unlikely to More spending from smaller change significantly in the next couple of years. A likely material contribution of Tier 2 and cities can keep COD high 3 cities in the incremental growth of e-commerce and rigid habits of the users will keep the COD percentage high for the foreseeable future. Snapdeal's experiment with 'cards on delivery' Snapdeal has introduced a new payment option: cards on delivery. This is just a replacement of the widely accepted COD payment method and addressed to active card users who do not want to pay in advance. The delivery person carries a card reader (similar to the POS device) that can process payments. This is already a well-accepted method of payment in China. Snapdeal is launching this initially in 200 cities in partnership with GoJavas. Wallets can lower the high transaction failure rate While mobile transactions are increasing with growing smartphone penetration, poor network quality in India leads to several transaction failures at the time of online payment, mostly done through net banking and credit cards. This has been one of the major challenges for e-commerce firms to provide a good online shopping experience to users. Mobile wallets can be helpful in facilitating smaller ticket size purchases even in weaker mobile networks and can decrease transaction failure rates. Takeaways from a conversation with a mid-sized merchant The merchant has been working with several e-commerce vendors including Flipkart, Jabong, Myntra and Paytm, selling products such as perfumes, artificial jewellery, kitchenware, sports and stationery. How does the logistics work? There are four models. Model 1: Self fulfilment (Flipkart, Snapdeal, Patym get the products picked-up by courier companies). Model 2: After the order is received, persons from a company such as Shopclues will pick it up, pack it and deliver it to the customer. Model 3: E-tailing sites will keep the inventory on behalf of the merchant and there is direct invoicing by the merchant. If products are not sold for 10/15/30 days, it will be returned back. There will be no invoicing on stock transfer. Model 4: Stock is kept by e- tailing players such as Jabong and Myntra (recorded as sales) and the merchant gets paid once the goods are sold. If the e-tailer's warehouse is in another state, there is a levy of tax for inter-state transfer (Form C). In all cases, payments are routed through the e-tailer. How do the commercials work across companies? Payment terms? Working capital assistance? Commission rates differ across products: mobiles may have 5% commissions due to smaller margins, perfumes may have 10-11%. Merchants are paid within 7-10 days of sale. Payment gateway charges for all are paid by the merchant, though some e-tailers (such as Shopclues and Paytm) are currently not charging anything. The average charge for courier is Rs50. The e-commerce companies arrange for tie-ups with banks for working capital but there is no added benefit on account of this. What is the average discount that these companies offer and what is the directional trend? They are losing money though the discounts are reducing. There are no special incentives to merchants for events. Private labels can show any level of discount as there is no fixed retail price: they can simply show a higehr retail price and pretend to offer larger discounts. Branded products have 30-35% distributor margins.
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Round-tripping (a merchant buys an item back from an e-commerce site that is selling at a price lower than the cost price) still goes on but is becoming less as there are checks and limited sales now to an individual. Regulatory/procedural issues for merchants Merchants are supposed to cut TDS (tax deducted at source). E-tailers return the money after cutting commissions instead of paying back the entire money. TDS needs to be deposited and claimed back from the e-tailer.
India Internet Primer #2 64 05 August 2015 #9. E-commerce companies unlikely to be dominant in payments in India Online payments leapfrogged in China While online payments started in China with plastic money (debit and credit cards) and online banking facility provided by banks, third-party payment firms have become an increasingly important part of the overall payment ecosystem. While this segment was largely unregulated till 2010, the People’s Bank of China (PBOC) started regulating the sector by announcing a licence requirement in June 2010. However, it has been accomodative in growing the segment—about 270 entities have been issued licences to provide third-party payment services. The growth of third-party payment firms has been largely driven by the booming e-tailing Third-party payment market. Both online payment service providers (desktop and laptop) and mobile payment providers have over $2 tn service providers (including wallets) have witnessed exponential growth over the last few payment GMV in China years and are now estimated to have payment GMV of US$1.3 tn and US$975 bn, respectively. The use of these payment modes is not limited just to online retail. Categories such as E-tailing is just 32% of total online ticket booking have seen faster adoption of third-party payment and there has been online payments emergence of new categories such as fund purchases.
Figure 80: Third-party internet payment market is growing Figure 81: Internet payment is not restricted to just online at a fast clip in China retail
9,000 140% 120% Internet payments GMV share across the niche markets 8,000 120% Others 7,000 100% 100% 6,000 Online games 80% 5,000 80% B2B e-commerce 4,000 60% 60% Payment for telecom 3,000 service fees 40% 40% 2,000 Air ticket booking 20% 1,000 20% Fund purchase 0 0% 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 0% Online shopping 2006 2010 Dec-14 China third-party internet payment GMV (US$ bn) % growth (RHS)
Note: This includes all online transactions including transfers. Note: for online payments through desktops and laptops. Source: iResearch, Credit Suisse research. Source: iResearch, Credit Suisse research. E-tailing firms are leading the charge E-commerce firms dominate the third-party payment market in China and Alipay, in particular, has a large market share. Its Alipay 'wallet' is an escrow account that has been a major force behind the success of Taobao (Alibaba's C2C marketplace). Given traditional concerns on the quality of the products (due to fake products) and lack of any effective redressal mechanism historically, online buyers appreciated the payment protection offered by Alipay. Social media companies such as Tencent and Baidu also have their own wallet. Tenpay (owned by Tencent) has the second largest market share among the third-party payment service providers.
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The 'Red Envelopes' of Wechat Tencent’s Wechat messaging platform allows friends to give each other red envelopes— online envelopes with a certain amount of money in it. This is based on a tradition where red envelopes filled with money are given to family members and friends. They also have provided a feature to make it a competitive game—in a group of 50 people, for example, a “hongbao” or red envelope giver can set it up so that only the first 20 people to “grab” an envelope would get any money.
Figure 82: Third-party payment is a preferred choice… Figure 83: …for all age groups; the youth prefer mobiles Payment methods often used by China internet users in 70.0% Penetration of e-payment methods across user age groups 2014 60.0% Third party online payment 50.0% Third party mobile payment 40.0% E-bank 30.0%
POS machine 20.0%
Mobile banking 10.0%
0.0% WeChat Bank Mobile banking E-bank Third party online Third party mobile payment (through payments Prepaid card payment PC and laptops)
0% 20% 40% 60% 80% Under 25 26-35 Above 36
Note: Sample: N=3462; The data is collected from an online survey Sample =19185; N (e-payment users) =3462; The data is collected conducted via iUserSurvey and iClick from January to February 2015. from online survey conducted via iUserSurvey and iClick from January Source: iResearch, Credit Suisse. to February 2015. Source: iResearch, Credit Suisse.
Figure 84: E-commerce firms dominate both the third-party online (desktop and laptop) and mobile payment markets China's third party online payment share - 2014 China's third party mobile payment share - 2014 Lakala IPS Others YeePay 4% 3% 3% Alipay 3% China PnR Tenpay Tenpay 5% 11% Lakala 99bill 7% Umpay Bestpay China Mobile Alipay Ping AnPay Chinaums 49% 11% 99bill Others
Alipay Tenpay 82% 19%
Source: iResearch, Credit Suisse research. Source: iResearch, Credit Suisse research. Limited participation of banks and telcos in payment Mobile network operators (MNOs) in China are mainly restricted as communication and internet infrastructure enablers. Despite their scale, they have not been able to establish a significant positioning in the financial market. Similarly, banks also have had limited
India Internet Primer #2 66 05 August 2015 success in monetising the wallet opportunity. Banks, including China Union Pay (the only network authorised to handle the RMB denominated card transactions in China until May 2015; Visa and Mastercard are allowed to have local operations only from June 2015) have also struggled to compete with third-party payment providers. Banks and MNOs are targeting the NFC opportunity After losing out on the 'wallet' opportunity to third-party providers, banks and MNOs are Banks, MNOs may be better targeting the NFC payment market. NFC is very different from mobile Internet payment as positioned in NFC payments it needs special hardware and telecoms standards. Banks and MNOs are therefore relatively better positioned to monetise this. China’s current NFC payment standard involves Union Pay, banks and telecom operators. As a result, if a Chinese customer pays through the NFC device, the telecoms operator, card issuing bank, acquiring bank and Union Pay will all get a commission. The value chain is significantly different in a typical third-party payment system. A third- party payment provider works directly with the banks to facilitate the settlement of funds, bypassing the China Union Pay's card system. Consequently, the fees in these agreements are significantly lower than the bank card transactions. Eco-system development is supportive in China as more and more 4G handsets with NFC functionality are entering the market. However, these are still early days for NFC adoption in China and the true success will depend on user satisfaction. E-commerce firms compete with banks in online finance “If banks don’t change, we’ll change the banks.” – Jack Ma, December 2008 Besides payments, e-commerce firms have also expanded operations in financial product This is especially true in distribution, P2P financing (informal loan marketplace that connects investors with P2P lending and financial borrowers), SME lending, online deposits and crowd funding (of equity). Of these, financial product distribution products distribution and P2P lending are particularly gaining traction in China. In a way, e-commerce firms have been creating some real competition for traditional banks. The banks' traditional channel advantage has been somewhat challenged by the reach and convenience of the internet.
Figure 85: China's online finance has moved beyond the basic payment services and competes with banks in lending and distribution
Online Payment
Online P2P/SME Deposits lending Internet Finance
Financial products Crowd funding distribution
Source: Credit Suisse research
India Internet Primer #2 67 05 August 2015
P2P is a fast growing online finance segment P2P platforms have been fast growing in China—they connects the lender and borrower, typically for small ticket loans. P2P credit has become an effective alternative to bank credit in China for many small businesses and individuals, and had a credit volume of US$53 bn according to P2P001 in 2014 (a widely followed website in China for internet lending). However, there have been concerns on the authenticity of some of these funds due to several cases of fraud or absconding P2P owners, according to industry data provider Wangdaizhijia. Lufax: The largest Chinese online P2P platform and the third largest globally Lufax is the largest Chinese online P2P lender and also among the largest P2P lenders globally. Launched in 2012, it originated loans worth US$2.3 bn in 2014 and was valued at nearly US$10 bn in the latest round of funding in April 2015. However, its business model is slightly different from US peers such as CreditEase and Lending Club. Unlike the US players that are online-only, Lufax also operates about 100 storefronts across 80 cities, where borrowers can arrange loans. It also does not make automated credit decisions but interviews first-time borrowers over the phone. Lufax uses its internal credit rating system and third-party databases for credit appraisal and guarantees all the loan transactions executed on its platform. Online financial product distribution Similarly, there are several active online mutual fund distribution platforms in China witnessing rapid growth due to significantly lower distribution fees compared to the banks. Some smaller funds have benefitted from this channel as well. Tianhong case study: A small fund that benefitted from online channels Tianhong used to be one of the smallest fund management firms in China before 2013, but after its collaboration with Alibaba in 2Q13, its AUM rose to one of the biggest within three quarters. An iResearch survey indicated that Tianhong had become the preferred mutual fund brand of 25% of internet users. We believe that from now on, the importance of online third-party channels will only increase. It is possible that one day, third-party will replace commercial banks as the most important mutual fund sales channel in China. (Source: Credit Suisse: Tides beneath the sea surface, August 2014, iResearch) Internet investment products: A recent but well-received offering Internet investment products, led by Yu'E Bao (owned by Alibaba), have gained popularity in China since their launch in 2013. Similarly, there has been rapid growth in crowd sourcing platforms that help small businesses raise equity funding from multiple small investors.
Figure 86: Major Chinese e-commerce firms have built a diversified finance portfolio Alibaba Baidu JD Suning Tencent Online payment √ √ √ √ √ P2P lending √ √ Non-P2P lending √ √ √ √ √ Crowd funding √ Fund distribution √ √ √ √ √ Supply chain √ financing Online deposits √ √ √ Source: Company data, Credit Suisse research
India Internet Primer #2 68 05 August 2015
Still nascent in India, though positive developments in the ecosystem India is a large cash-based economy. A large chunk of payments are currently done 97% of consumer through cash and a significant proportion of the banked population still uses bank transactions (in nos.) are in branches for many of the transactions, including cash deposits, withdrawals and fund cash… transfers. While there has been some traction in mobile banking and prepaid instruments (most notably, mobile wallets), these still remain a significantly smaller part of overall consumer payments, that could be in the range of US$1.2-1.3 tn. Most of the current initiatives are in payments and online distribution/origination of the financial products. According to estimates from RupeePower, the share of online originated credit is currently ~7.5% and this is likely to increase to 40% over the next four years, in a US$67 bn retail credit market. Online insurance policy origination is another evolving model in India. Currently, it is a US$120-150 mn premium market and can grow to as high as US$2-3 bn over the next three to four years. Besides payment, and to an extent loans and policy distribution, online finance is yet to …while small, mobile show any significant adoption in other categories such as lending (including P2P lending), banking and prepaid are crowd funding, fund distribution and online deposits. There are obviously regulatory growing fast constraints in some of these segments as well. As discussed above, each of these online services have become a large market in China.
Figure 87: A large proportion of consumer transactions in Figure 88: Though small, there is some traction in mobile India are in cash banking and prepaid instruments (PPI) 18 100.0 % cash consumer transactions volume India - Payments statistics 16 90.0 80.0 14 70.0 12 60.0 10 50.0 US$ bn US$ 8
40.0 6 30.0 4 20.0 2 10.0 0 0.0 FY12 FY13 FY14 FY15
PPI Mobile banking
Source: Mastercard Advisors' Cashless Journey report Source: RBI High government focus to reduce cash transactions While over 90% of consumer transactions are in cash currently, the new government is The government's steps to extremely focused on reducing the proportion of cash transactions in the economy as part reduce "black money" can of its drive to drastically reduce the incidence of tax evasion and clamp down on help online payments undeclared income. Various steps being considered and debated currently include mandating electronic payment for all transactions exceeding Rs0.1 mn, incentives for consumers or tax rebates for merchants for electronic payments, and rationalising charges. These steps can result in significant growth in online payments.
India Internet Primer #2 69 05 August 2015
Policybazaar Policybazaar.com is a policy comparison website, which helps customers research and compare the features of different insurance policies within a category and also buy the policies from the platform. Infoedge, Intel Capital and Inventus Capital are the primary shareholders. Business model A significant chunk of the revenue comes from policy sales and the rest from lead generation and advertising. Call centre accounts for a large portion of employees (~85%). Initially, Policybazaar derived a majority of its revenue from advertising. However, with government regulating aggregators reducing the maximum advertising income per product to a significantly low amount, the company had to change the business model to a sales driven platform. Regulatory issues have had a significant impact on insurance aggregators. Overall market opportunity The market size for online premiums is currently US$120-150 mn and this can grow to US$2-3 bn in the next 3-4 years. Policybazaar has 45-50% market share. Can any of the Indian e-commerce firms develop a large practice in payments? Looking at how Alibaba developed Alipay as a multi-service online finance services Indian e-commerce players platform, which is now looked on as a competitor to the traditional banks in China, one are taking first steps in wonders if India's larger e-commerce players can become large online financial players as payments well. In India, Snapdeal and Paytm have taken some initiatives to grow themselves into integrated online players, both organically as well as through acquisitions. Snapdeal was the first e-commerce firm to enter the financial services segment with the acquisition of a majority stake in RupeePower, an online distributor of financial products in March 2015. Snapdeal has also acquired an online recharge and bill payments firm, Freecharge for US$450 mn and has a target of achieving US$1 bn of gross transaction value (GTV) on the Freecharge platform by the end of 2015. Paytm, on the other hand, is a traditional online payment and recharge platform, and has entered into the e-commerce business in early 2015. E-commerce is already ~40% of its overall revenue and management expects it to become ~60% of the revenue by end-2015. Snapdeal seems to have slightly more comprehensive online financial service offerings, due to its two acquisitions. Paytm, is however betting big on its semi-closed loop wallet with a tie-up with several third-party vendors such as cab hailing apps (Uber, Ola), Bookmyshow, Jabong and FabFurnish. Among the two, Paytm seems to be following in Alibaba's footsteps: the transactions are free on the Paytm website for the merchants and they are charged only for the use of Paytm's payment platform. This is not surprising given that Alibaba's arm, Ant Financial (which runs Alipay), holds a ~25% stake in Paytm. The other two leading e-commerce players, Amazon and Flipkart, do not have online financial product offerings but given their pace of product expansion and appetite for acquisitions, it may not take them long to have some comprehensive offerings in this segment.
India Internet Primer #2 70 05 August 2015
Figure 89: Together with Freecharge, Snapdeal has relatively larger online financial service offerings
Source: Company website Source: Company website However, there are several players in the payments segment in India (banks, payment But the likely number of companies, e-commerce firms, wallets, telecom companies) and given the competitive payment players is huge dynamics in India, we believe it would be difficult to create as large and dominating an online finance business as Alibaba. We believe some of the standalone online financial businesses may eventually be acquired by the large e-commerce firms and two or three large conglomerates may emerge. Freecharge Freecharge is an online payment platform founded in 2010. It was acquired in 2014 by e- commerce major, Snapdeal for US$450 mn. With ~20 mn users in India, Freecharge has become one of the most common online recharge methods. Over 85% of Freecharge's transactions take place on mobile (vs ~5% a year back). Business model Freecharge provides an online platform to recharge prepaid mobile phones, DTH and data cards as well as for bill payments. Whenever the user makes a payment for recharge or bill-payment through Freecharge, he is entitled to discount coupons equivalent to the amount paid. Freecharge partners with over 300 premium brands that include food stores, restaurants, e-commerce portals, retail outlets and brands (such as a Puma). Freecharge earns revenue from three sources. (1) Commission from brands: There are different business models. For example, some brands pay for branding services while some pay based on actual footfalls (coupon redemption). (2 Commission for recharge/bill payment. (3) Fee from customers: Customers pay a nominal amount in the form of processing fees. Of these three, recharge/bill payment is a linear model as Freecharge needs to pay payment gateway charges, that average ~1.4-1.5%. The brand commission business is growing fast and there is scope to increase penetration. Some of the brands such as Costa Coffee and Baskin Robbins use Freecharge exclusively. Targeting US$100 bn utilities payments market in India Utilities payments is a US$100 mn market in India and is currently driven offline. Freecharge expects payments to reach US$1 bn by the end of FY16. Also, of the 75 mn mobile top-ups done in a day, only 2-3 mn are done online currently.
India Internet Primer #2 71 05 August 2015 #10. Age and profitability not necessarily pre-conditions to list Age of the company and profitability have not necessarily mattered in China While the average age of the Chinese e-commerce companies at the time of their listing While the average age was was 8 years, there have been examples of companies that were listed at a fairly early 8 years, companies were 4- stage of their life cycle. For example, while companies such as 500.com (12 years), 15 years old during IPO Dandang (11 years), Soufun (11 years), JD.com and Boyaa Interactive (10 years) were listed at a later stage of their life cycle, there are several instances of young e-commerce players getting listed. VipShop, Youku, Tencent, Bitauto, Jumei and Weibo—all were 4-5 years old at the time of their listing. Also, there have also been quite a few examples of companies that were making losses at Of the 21 companies we the time of their listing as well. For example, of the 21 Chinese e-commerce companies looked at, five made losses that we looked at, five were making losses at the time of listing, while a couple of them at the time of their IPO were nearly breaking even. The e-commerce companies that had been around for 4-6 years at the time of listing had median revenue (trailing full year) of US$74 mn, companies which had been around for 6- 10 years at the time of listing had median revenue of US$117 mn and those with over 10 years of history had median revenue of US$225 mn.
Figure 90: Age has not been a factor for Chinese IPOs… Figure 91: …and neither has profitability
Alibaba* Autohome 500.com Alibaba Dangdang Tencent Soufun Boyaa Interactive JD.com Soufun Boyaa Interactive 500.com Qunar Qihoo RenRen 51jobs 58.com Jiayuan Jiayuan Bitauto Tuniu RenRen Baidu Baidu 51jobs Jumei Qihoo Dangdang Autohome JD.com Weibo 58.com Jumei Qunar Bitauto Tuniu Tencent Weibo Youku Vipshop Vipshop Youku 0 2 4 6 8 10 12 14 16 -80% -60% -40% -20% 0% 20% 40% 60%
Age at the time of listing (in years) EBIT margin at the time of listing
* Calculated based on the NASDAQ listing of Alibaba in 2014. Alibaba Source: Company data, Credit Suisse research was also listed during 2007-12 on the Hong Kong stock exchange. Source: Company data, Credit Suisse research
India Internet Primer #2 72 05 August 2015
Major Indian IPOs likely some time away The Indian e-commerce sector has really taken off over the last couple of years. Several companies such as Flipkart, Zomato and Quikr have been operating for some years now but have started scaling up significantly only during the last couple of years. While the market opportunity is large, most of the e-commerce segments have severely competitive dynamics and the current strategy of the firms seems to be to build a moat around themselves by scaling up and outsizing their competitors. In this process, most of these companies are incurring heavy losses. The private capital interest has significantly increased in India and there does not seem to be a dearth of capital for some time. Our conversations with leading e-commerce players indicate no plans of public listing even Public investors may want at in 2016, though of course, things could change. The general thought process among the least a path to profitability, if e-commerce firms seems to be that a public listing could restrict their ability to not actual profitability aggressively invest in the business and that public investors may want to see at least a concrete path to profitability, if not actual profitability itself. While a smaller e-tailing platform, Infibeam has filed a Draft Red Herring Prospectus with the regulator SEBI for a potential IPO, we do not think any larger e-commerce IPOs are likely to follow any time soon.
Figure 92: Several e-commerce companies in India have been operating for some time
16 Age of the companies Average Age at the time of listing age of 14 Chinese e-
12
10 Current age of unlisted Indian e-commerce companies
8
6
4
2
0
Source: Company data, Credit Suisse research
India Internet Primer #2 73 05 August 2015
Revenue has been the primary driver for Chinese e- commerce stocks rather than margins For e-commerce firms, the growth versus margins debate has always been important and most companies have focused on the former. While investors discuss profitability of companies (or the lack thereof), Chinese e-commerce stock performance over the past two years seems to have been driven by revenue as well. We have analysed the two-year forward revenue and margin estimates as at 31 December For stocks, positive revenue 2012 with the actual reported numbers for the year ending December 2014 for several surprise has overridden Chinese e-commerce companies listed on or before 2013. We have observed that despite negative margin surprise significantly lower profitability relative to initial expectations in many of these companies, the stock performance has been impressive for many (see the figure below)—companies have been rewarded for strong revenue performance. For example, Baidu's reported 2014 revenue was 23% above the consensus estimates for 2014 as at 31 December 2012 and its actual margins were 22 percentage points below the initial consensus expectations. Yet, the stock price more than doubled during the period. 58.com, Qunar, Baidu and Qihoo have witnessed an increase in stock price over December 2012-14 despite the actual 2014 EBIT margins coming significantly below the 2014 estimates as on December 2012. Vipshop had an impressive 9x increase in the share price over December 2012-14—actual margins met expectations and the actual revenue was 2x consensus estimates. However, we believe that profitability is extremely important—the source of funds will not We think profitability is very be infinite for the companies and business models will need to have sustainable cash important—funding is finite flows. Also, during bear phases of stock markets, we think that the focus on profitability increases significantly and stocks that disappoint on this front can get brutally punished.
Figure 93: Revenue has been the primary driver for Chinese e-commerce stocks rather than margins
500.0% 50 EBIT margin (actual 2014 vs. 2014 estimate as on Dec-12, in percentage points) - [RHS]
0 400.0%
-50 300.0%
-100
200.0% 964% -150
100.0% -200
0.0% -250
-100.0% -300 Tencent 51jobs Baidu Soufun Dangdang Qihoo RenRen Vipshop Qunar* 500.com* 58.com*
Revenue (actual 2014 vs. 2014 estimate as on Dec-12) Share price performance over Dec 2012-14
* Qunar, 500.com and 58.com were listed in 2013. Hence, we have compared the 2015 expected revenue and margins as on 31 December 2013 with the current estimate for 2015. Similarly, share price performance is for the period between 31 December 2013 to till date. Source: Company data, Thomson Reuters, Credit Suisse research
India Internet Primer #2 74 05 August 2015
Some investors are different across India and China, non-VC investor participation as well The majority of India's early and mid-stage investors have been global rather than India- focused. Accel Ventures, Sequoia, Helion, Norwest, IDG and Metrics have participated significantly in the early investing in the e-commerce firms besides local venture funds such as Nexus Venture Partners, Kalaari Capital, Inventus Capital and Blume Ventures. While some global e-commerce funds such as Accel, IDG, Sequoia and Tiger are active in both the Indian and Chinese markets, there is also a noticeable difference among the investor lists of the two countries. There is no trend, however, that can be inferred out of these different sets of investors though.
Figure 94: Some funds that participated in Chinese e-commerce have not actively invested in India yet while India has also seen some new investors Active investment In China In India Active investment In China In India Active investment In China In India Accel Partners √ √ Hillhouse Capital √ √ Rocket Internet √ √ Apax Partners √ Iconiq Capital √ √ SAIF Partners √ √ Asia Alternatives √ IDG Ventures √ √ Sapphire Ventures √ Management Bain Capital √ Ignition Partners √ √ Sequoia Capital √ √ Bertelsmann SE √ √ Intel Capital √ √ Siguler Guff & Company √ Bessemer Venture √ Investment AB Kinnevik √ Silverlake √ Partners BlackRock √ √ Investor AB √ Softbank √ √ Blue Ridge √ JAFCO √ √ Steadview Capital √ Canaan Partners √ KPCB √ √ Sutter Hill Ventures √ √ Capricorn Investment √ Lightspeed Venture √ √ T. Rowe Price √ Carlyle √ Lion Rock √ √ TA Associates √ √ CyberAgent Ventures √ Mandra Capital √ Temasek √ √ DCM Ventures √ Matrix Partners √ √ Tenaya Capital √ √ Dragoneer Investment √ Maverick Capital √ √ The Phoenix Fund √ DST Global √ √ Mayfield √ √ Tiger Global √ √ Falcon Edge Capital √ √ Morgan Stanley √ TPG √ Farallon Capital √ Mousse Partners √ √ TR Capital √ Fidelity √ √ Naspers √ √ Treeline Asia √ Foundation Capital √ NEA Ventures √ √ Trustbridge Partners √ General Atlantic √ Norwest Venture Partners √ Tybourne Capital √ GIC √ √ Ontario Teachers' Pension √ Valiant Capital √ Fund Google Capital √ Orchid Asia √ Vy Capital √ √ Granite Global Ventures √ √ Qatar Investment Authority √ √ Walden Int √ √ Greenoaks Capital √ √ Qualcomm Ventures √ √ Warburg Pincus √ √ Helion Venture Partners √ Redpoint Ventures √ Wellington Management √ √ Highland Capital √ Ribbit Capital √ Zodius Capital √ Notes 1. This list has been compiled from multiple sources and hence is not likely exhaustive; 2. This list includes only global funds; 3. Cells highlighted in indicate the funds that actively invest in Chinese e-commerce firms but have not yet invested in Indian e-commerce firms, while those with background indicate funds that have invested in Indian e-commerce firms but not in Chinese e-commerce firms. Source: Various media sources, Credit Suisse research.
Hedge funds and other crossover investors' participation is increasing in India, similar to other markets Similar to other markets, hedge funds and other crossover investors such as asset management companies and, family offices have invested in Indian e-commerce and their participation in the Indian e-commerce market has picked up significantly over the last
India Internet Primer #2 75 05 August 2015 year. For instance, Flipkart's recent round included late-stage investors such as DST Advisors. Similarly, hedge funds such as Myriad Asset Management and Tybourne Capital Management participated in the recent Snapdeal funding. Tiger Global Management has been very active in India: it participated in several deals including Olacabs’ Series E funding, and Quikr’s Series H funding. Indeed, according to analysis by CB Insights, 82% of Tiger’s new investments this year have been in India and at the early-stage, 71% of which have come at the Series A level. As in the case of China, where e-commerce giants such as Alibaba, Baidu and Tencent have invested in several e-commerce companies at several stages (Alibaba and Tencent have their own private equity arms), India is also witnessing increasing investments by leading players such as Flipkart and Snapdeal into other e-commerce start-ups.
Figure 95: Hedge fund and other crossover investments Figure 96: This has been similar to trends observed have increased significantly globally Investment by Hedge funds and other crossover investors Investment by Hedge funds and other crossover investors 1,400 in Indian Tech 30 6,000 in global physical goods e-commerce 70
1,200 25 5,000 60
1,000 50 20 4,000 800 40 15 3,000 600 30 10 2,000 400 20
200 5 1,000 10
0 0 0 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15* 2008 2009 2010 2011 2012 2013 2014 1Q2015
Dollars (US$ mn) No of deals [RHS] Investment (US$ mn) No. of Deals [RHS]
* Until 4 May 2015. Source: CB Insights Source: CB Insights
India Internet Primer #2 76 05 August 2015
Lock-up expiry can sometimes be an overhang Typically, e-commerce companies have grown with several rounds of funding from multiple private equity, venture capital and institutional equity funds and these firms have had significant ownership in individual companies at the time of IPO in many cases. A public listing of the investee company offers an exit opportunity for these investors. In general, lock-up expiry is a major liquidity event as it can create significant supply of shares in the market and the stock price tends to react negatively. An analysis of Chinese e-commerce companies indicates that there was some negative impact on the stock price around the period when the lock-in expired in some cases. In the Indian context, Justdial saw a correction around the expiry of lock-up. After a 2x increase in the stock price post the IPO in Jun-13 till the lock-up expiry in Jun-14, the stock has corrected 16% till date. There will be several other factors that impact stock price performance: stock performance between the IPO and lock-up expiry, fundamental momentum, the market sentiment at that point, and liquidity conditions among others. However, this would be something for investors in Indian e-commerce names, whenever they become public, to consider as well.
Figure 97: Lock-up expiry impacted the share price performance of China's internet companies in some cases Company Third-party investment Share price performance (non strategic From listing to One month prior Day of lock-up A month after 6 months after investment) one month before to lock-up expiry expiry lock-up expiry lock-up expiry lock-up expiry 500.com Small -5% 25% 6% 54% 318% 58.com Small 7% -19% 2% -6% 12% Alibaba 85% 84% -11% -4% -5% -23% Autohome Over 70% (Majority was 61% -4% 2% 4% -2% held by Telstra, which was reduced after lockup expiry) Bitauto Moderate 56% -3% -3% -4% -23% Boyaa Interactive 26% -2% 18% -1% -3% 10% Dangdang Moderate 5% -10% -2% 5% -32% JD.com 82% 63% 4% 1% -32% -4% Jiayuan Moderate -1% 1% -6% -44% 8% Jumei 43% 14% -8% 1% -3% 53% Qihoo Moderate -5% -5% -7% -4% -3% Qunar >50% (Majority of this 11% -21% 0% 38% 8% was held by Baidu, no major selling) RenRen Small -9% -34% -8% -9% -37% Soufun >50% (majorilty held by -24% -28% -4% -13% -72% Telstra, which was sold in the IPO and to PE investors) Tuniu Moderate 76% -37% -7% 1% -46% Vipshop Small -24% -23% -10% 10% 44% Weibo Over 90% (held by Sina -72% 38% -1% -40% -12% and Alibaba) Youku Moderate -23% 33% 0% -31% -50% Note: Shaded companies are those with >25% institutional holding pre-IPO. Source: Company data, Thomson Reuters, Credit Suisse research
India Internet Primer #2 77 05 August 2015
India vs the US as the listing destination Chinese e-commerce companies have preferred the US of late Most of the larger Chinese companies are listed in Hong Kong given the large institutional base in that market. However, several Chinese e-commerce companies have preferred the US as the listing destination over Hong Kong. Alibaba, Baidu and JD.com, together have a market cap of over US$300 bn. Several other companies such as Vipshop, Soufun, Bitauto, Dandang, Youko, Qihoo, Renren and 58.com are also listed in the US. Several more companies such as Vipshop, Weibo, Tuniu and Jumei had US IPOs in 2014. The primary reasons for listing in the US are the flexibility offered by the US exchanges over the Hong Kong exchange. Most internet companies have a multiple-tier stock structure that allows a small number of people to control the company's operations. The US stock exchanges allow such arrangements. But the Hong Kong stock exchange does not allow share classes with different voting rights. The Hong Kong stock exchange is reasonably flexible regarding the pre-requisites for listing with qualification based on profitability, revenue, market cap and cash flow. It also requires a minimum three years trading track-record. The Hong Kong stock exchange recently allowed the secondary listing of Alibaba, relieving the differential voting right restriction. But this exemption has been allowed only on a selective basis. A larger investor base in the US that invests in internet companies is also another key reason for a US listing. Similar could be the case in India India's general listing norms are more rigid for an e-commerce company that is typically in a growth phase and making losses. Similar to China, differential voting rights are not allowed. Minimum founder holding, lock-in requirements and other disclosure requirements are also not accomodative for start-ups. SEBI (Securities and Exchange Board of India) has been discussing relaxing some of the listing requirements to address a few of these issues. However, the US markets may provide more depth for large internet stocks and provide e- commerce companies with access to larger pools of money from investors with extensive investments in the technology sector, which could possibly support, or further boost, their valuations. Also, some of these companies may have been structured in a particular way to accommodate their foreign private investors with a view to provide them with an exit in the US.
India Internet Primer #2 78 05 August 2015 Indian e-tailing can conservatively be a US$60-90 bn market by 2020 India's e-commerce market size is US$14.6 bn Indian e-commerce has grown into a US$14.6 bn market (excluding B2B) in 2014, but is 60% of this is travel and less than 1% of GDP. Travel is the largest segment with over 60% share, followed by e- 27% is e-tailing tailing (27% share). Categories such as real estate, local classifieds and online ticketing continue to grow, while several new categories such as online payments, taxi hailing, food delivery and grocery delivery have been getting a lot of investor attention. Individually, these segments are still small with revenue/GMV in the range of US$100-200 mn but have large growth potential.
Figure 98: Indian ecommerce landscape (2014)
Notes: (a) The above estimates are for B2C and C2C transactions. Hence e-tailing does not include the B2B GMV. (b) We have used the gross transaction value for all the segments except classifieds. (c) Payment and finance includes online bill payment and recharge and online financial services Source: IAMAI, Company data, Credit Suisse research Acceleration in e-tailing growth E-tailing has grown into nearly a US$4 bn market, from about US$1.7 bn in 2013. Growth 2010-13 CAGR of 50%, in the e-tailing segment in 2014 was significantly higher than its 2010-13 CAGR of ~50%, 2014 growth of 135%, 2015 and, based on press reports of some of the leading players' targeted 2015 GMV, the could be higher growth should accelerate further this year. This was led by an increase in discounting and marketing activities on the back of healthy funding activity. Flipkart has raised close to US$2 bn, while Snapdeal has raised close to US$0.9 bn in funding. Amazon has also increased its investments in India during the course of the year and has been talking about further significant investments. Paytm also ventured into the e-tailing market during the year with the backing of Alibaba. Besides these larger horizontal firms, vertical players such as Myntra (part of Flipkart), Jabong, Yepme and Shopclues in fashion, FabFurnish and Pepperfry in furniture, and Caratlane and Bluestone in jewellery also witnessed better access to funding.
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While electronics and mobile have been older categories in online shopping, 2014 saw rapid growth and scaling-up of the fashion category. This includes apparel, accessories, personal care and footware. Some niche categories such as furniture and jewellery also witnessed traction during the year but these still remain reasonably small.
Figure 99: E-tailing has been growing rapidly, yet the Figure 100: Mobile remains the largest category; fashion penetration is still low and personal care are growing faster (2014) 4,500 0.8% Camera and 4,000 0.7% accessories Mobile phones 3,500 2% Others 0.6% and Home Books 2% Jewellery accessories 3,000 furnishing 3% 0.5% 4% 2% 41% 2,500 Laptops/Netboo 0.4% ks/Tablets 2,000 12% 0.3% 1,500 0.2% 1,000 Consumer 500 0.1% durables 14% Fashion and 0 0.0% personal care 2010 2011 2012 2013 2014 20%
E-tailing (US$ mn) % penetration in retail [RHS]
Source: IAMAI, Credit Suisse research Source: IAMAI
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Flipkart Flipkart is the largest Indian e-tailing firm with a monthly annualised GMV run-rate of ~US$4 bn (in Feb 2014, as per press reports). It is a horizontal marketplace with a product portfolio ranging from books, electronics, fashion, home furnishing and household goods to car and bike accessories. Flipkart acquired Myntra in 2014 and these companies, in aggregate, have the largest online fashion offering. Business model Flipkart started with an inventory-based model but later transitioned into a marketplace. WS Retail, the only vendor selling on Flipkart before it turned into marketplace, still accounts for ~70-75% of Flipkart's GMV. However, management is looking to reduce this percentage and increase the percentage share of third-party sellers on the platform. Logistics Flipkart manages logistics on its own and also uses third-party logistics providers. According to the company, ~85% of the logistics is done in-house. This may reduce going forward. Rapid growth in smaller cities Tier 1 and metro cities account for ~65-70% of GMV but smaller cities are growing faster. Returns rates are the same, but payment is more COD for smaller cities. COD is the most common mode of payment The COD component for Flipkart is 50% and this has helped in the evolution of the market. COD takes up more time and reduces efficiency. It is less expensive than the prepaid model though but will likely have higher returns. Differential pricing may help in lowering the COD percentage but that may have a negative impact as well. Closed-loop wallet does not have any material impact. Profitability According to the company, the discount rates have been coming down and will reduce further as the market matures. There is inherent operating leverage in the business which should also help. Flipkart-Myntra acquisition Though Myntra continues to operate an independent platform, back-office, supply chain, brand negotiation could be the key synergies. Travel remains the largest category, but is growing slower than the overall e-commerce market Travel is one of the first categories to attain significant size in the e-commerce sector Within travel, hotel bookings because of the following characteristics: (1) standardised product offering, (2) the price is are growing faster than lower as the internet adds efficiency, (3) low requirement of 'after-sales' service, and (4) travel bookings delivery is online, avoiding issues related to India's poor logistics infrastructure. These features have led to wide adoption of online airline and railway ticket bookings. According to PhoCusWright (a global research firm), the Indian online travel market already had ~50% penetration in airline booking and over 40% penetration in the railway booking segments. On the other hand, hotel booking is a relatively new segment for online travel firms. A large part of the market is unorganised as the basic advantage of 'standardised product' is not available here. Nonetheless, this is a fast growing segment with low online penetration (~17% according to PhoCusWright). This segment (also including tour packages) has been growing at close to 50% CAGR for MakeMyTrip vs. 16% CAGR in the air ticket booking segment in US$ terms.
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Figure 101: Airline and railway bookings account for Figure 102: Hotel and packages are the fastest growing ~88% of the online travel segment (2014) categories as reflected in MakeMyTrip's financials
Online travel - market break-up 70.0% MakeMyTrip gross booking growth trend
Bus bookings 60.0% 2% Domestic air Hotel bookings ticket 50.0% International 10% 50% air tickets 8% 40.0%
30.0%
20.0%
10.0% Rail booking 30% 0.0% 2012 2013 2014 2015
Airticket booking Hotel and packages
Source: IAMAI, Credit Suisse research Note: Year ending March. Source: Company data Structural trends are positive There has been positive movement in several key e-commerce enablers in India. Internet Internet penetration and penetration (% of population that uses internet) has increased from ~19% as at July 2014 smartphone penetration (last surveyed number by Internetlivestats) vs. ~17% a year ago. This was driven rising, data costs declining significantly by the increasing penetration in rural India (according to IMRB and IAMAI estimates, there were ~69 mn active internet users in rural India, an increase of 50% YoY). There is significant scope for this to increase further. India's internet penetration is still on the lower side compared to other developing countries. China, Russia and Brazil, for example, had internet penetration of 46%, 59% and 53%, respectively as at July 2014. As discussed earlier in the report, India is evolving into largely a mobile-first economy with many new internet users accessing it over their smartphones. Smartphone penetration was ~14-15% as on December 2014 and according to estimates by e-Marketer, this may increase to ~26% levels by 2018 (~280 mn smartphone users). Some of the market estimates are even more optimistic: IDC expects smartphone penetration to increase to over 40% by 2018. Declining smartphone costs are the primary driver of increasing adoption. Smartphone costs are declining and are likely to decline even further: IDC expects the average cost of smartphones in India to decline from US$135 in 2014 to US$102 in 2018. Several Chinese as well as local Indian handset brands have a significant presence in the market, particularly at the lower end of the pyramid. As a large chunk of incremental internet user addition in India is through smartphones, the quality of the internet network and cost of using data becomes very important, besides the cost of smartphones. While the data cost has trended down over the last few years (based on the per MB data revenue of the largest telecom operator Bharti Airtel and Idea), India's internet speed continues to remain relatively weak and slightly lower in comparison to other large developing countries. According to Akamai's state of the internet report for 1Q 2015, India's average connection speed was 2.2 Mbps vs the global average of 5 Mbps and 3.7 and 3.2 Mbps for China and Brazil, respectively. There has been some improvement in India's connection speed though—from 1.7 Mbps in 1Q 2014 and 0.8 Mbps in 1Q 2013.
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Figure 103: India has the third largest internet population, Figure 104: …however, penetration has been increasingly though the penetration is still significantly low… rapidly 700 100% 300 25.0% 90% 600 250 80% 20.0% 500 70% 200 60% 15.0% 400 50% 150 300 40% 10.0% 100 200 30% 20% 5.0% 100 50 10% 0 0% 0 0.0% China US India Japan Brazil Russia 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Internet users (mn) Internet penetration [RHS] Internet users (mn) Internet penetration [RHS]
Source: Internetlivestats Source: Internetlivestats
Figure 105: Mobile is a significant driver of internet Figure 106: …supported by the low average selling price adoption, smartphone penetration is increasing… of handsets, that is expected to further decline
300 30% 160 Average selling price of smartphone in India (US$ mn)
250 25% 140
120 200 20% 100 150 15% 80 100 10% 60
50 5% 40
0 0% 20 FY13 FY14 FY15 FY16 FY17 FY18 0 Smartphone Penetration [RHS] 2014 2018E
Source: eMarketer Source: IDC
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Figure 107: Internet speed has been improving backed by Figure 108: …however, India still has among the slowest increasing 3G penetration… internet speed
2.5 Average connection speed in India (Mbps) 25.0
20.0 2.0
15.0
1.5 10.0
1.0 5.0
0.0 0.5 S. HK Japan SG US UK Russia Global China Brazil India Korea
S. Korea HK Japan SG US UK - Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Russia Global China Brazil India
Source: Akamai Source: Akamai
Gaadi.com and Cardekho Gaadi.com is an auto portal that provides the users new car research, a used-car buying and selling platform, exclusive car content and an interactive platform for car enthusiasts. Gaadi was acquired by another auto portal, Cardekho.com in 2014. The competitors are Carwale, Zigwheels and horizontal platforms such as Olx. Business model The company has four businesses: (1) new car sales, (2) old cars, (3) auto finance and (4) other new businesses such as car insurance. Gaadi.com is more popular for used cars and Cardekho is positioned as a portal for new cars. For the new car business, there is standard advertising for OEMs, auto services/solutions for OEMs, and lead sales (this has the highest growth prospects). The structure can be a flat fee one for lead sales or commission based. The old car business has dealer classifieds and individual classifieds. It provides dealer services. Dealers pay listing fees while individual listings are mostly free but there are some premium listings too. Profitability Globally the businesses have been profitable. Currently, marketing costs are high for Indian auto portals. The monetisation rate could also increase. International comparables The business model is similar to those of BitAuto in China, Edmunds and Truecar in the US.
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India e-tailing can conservatively be a US$60-90 bn opportunity by 2020 We believe that with growing internet penetration, the greater adoption of online buying by consumers and an increasing proportion of personal budget allocation to online shopping, the e-tailing market GMV can conservatively be US$60-90 bn by CY20. This would imply a CAGR of 60-70% from the current CY14 GMV estimate of US$4 bn. As discussed earlier, India is 4-10 years behind China on several key parameters relevant to the e-commerce market. India's current e-tailing penetration, both as % GDP and overall retail sales, is very similar to where China was in 2007. From 2007 to 2014, China's e-tailing market (B2C + C2C) has leapfrogged from US$7 bn to US$458 bn, close to 80% CAGR. We believe, China's e-commerce market evolution can be a reasonable case in point to analyse India's e-commerce market's growth potential. We have taken significant haircuts in some cases to China's 2014 metrics while applying it to 2020 for India, as shown below.
Figure 109: Indian e-tailing market can conservatively be US$60-90 bn in size by 2020 India China 2014 2020 (low case) 2020 (high case) 2007 2014 Total population (mn) 1,267 1,363 1,363 1,318 1,364 No of internet users (mn) 253 545 613 211 660 Internet penetration (US$) 20% 40% 45% 16% 47% Per capita GDP 1,631 2,889 2,889 2,651 7,330 Number of online shoppers (mn) 38 191 245 55 372 As % of internet users 15% 35% 40% 26% 56% Per capita spend on online retail (US$) 104 318 362 135 1,233 As % of per capital GDP 6% 11% 13% 5% 17% E-tailing market size (US$ bn) 4 61 89 7 458 % of retail sales 0.7% 7.1% 8.9% 0.6% 11.0% As % of GDP 0.2% 1.5% 2.3% 0.2% 4.6% Source: iResearch, IAMAI, Credit Suisse estimates
Figure 110: Indian e-tailing market may emulate China's evolution to some extent China CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 Population 1,318 1,325 1,331 1,338 1,344 1,351 1,357 1,364 Internet users 211 299 385 459 515 571 622 660 Internet penetration 16.0% 22.6% 28.9% 34.3% 38.3% 42.3% 45.8% 47.4% Per capita GDP 2,651 3,414 3,749 4,433 5,447 6,093 6,807 7,330 Number of online shoppers (mn) 55.0 80.0 109.0 148.0 187.0 242.0 302.0 371.5 As % of internet users 26% 27% 28% 32% 36% 42% 49% 56% Per capita spend on online retail (US$) 135.3 232.3 354.9 464.9 660.7 778.6 1011.4 1233.0 As % of per capita GDP 5% 7% 9% 10% 12% 13% 15% 17% Online shopping market size (US$ bn) 7.4 18.6 38.7 68.8 123.6 188.4 305.4 458.0 As % of GDP 0.2% 0.4% 0.8% 1.2% 1.7% 2.3% 3.3% 4.6% As % of retail sales 0.6% 1.1% 2.0% 2.9% 4.3% 5.7% 8.3% 11.0% Source: Company data, Credit Suisse estimates Most investment activity largely in the private space India's e-commerce market is still evolving. Though investment activity has significantly picked up in the sector over the last couple of years, it has been mainly in the private space, with Justdial being the lone public listing in the sector during this period (listed in 2013). Besides Justdial, there are a couple of more listed e-commerce players: InfoEdge (an online classifieds company with a portfolio of online classifieds businesses, listed in 2006) and MakeMyTrip (an online travel portal, listed on the NASDAQ in 2010). We cover Justdial (OUTPERFORM) and Infoedge (NEUTRAL).
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Justdial (JUST.BO, Rs.1,028, OUTPERFORM, TP: Rs.1,400)
■ Justdial is India’s largest local search engine with over 15 mn business listings and close to 350 thousand paid campaigns.
■ The core local search business is highly cash generative, with ~30% EBITDA margins and negative working capital. Revenue growth momentum has slowed down from 40%+ couple of years back to 25-30% and management is exploring complementary services termed as "Search Plus" (such as local marketplace, online table reservation, cab booking, doctor's appointment—most of which can be classified as O2O).
■ While we are constructive on the core business, we are cautious on the "Search Plus" offerings given significant competition in most of the "Search Plus" categories. Many of the competitors have access to relatively easy funding and are not afraid to burn money to gain traffic share. Justdial, being a conservative company, may struggle to compete with these players.
■ While we remain sceptical on the execution of "Search Plus", we think of the stock as having limited downside and the core business remains good. Infoedge (INED.BO, Rs816, NEUTRAL, TP: Rs870)
■ Infoedge is the market leader in online job search (through its recruitment portal, Naukri.com) and is a dominant player in real estate, education and matrimonial classifieds.
■ It also has investments in companies such as Zomato (restaurant listing), Policybazaar (policy comparison) and a couple of more e-commerce start-ups.
■ While the core recruitment business is highly profitable and cash generative, Infoedge's 99 acres and Zomato businesses are burning significant cash at the moment. Given the huge interest in the online food ordering/restaurant classified portals, Zomato has attracted a lot of investor attention—the business is already valued at US$660 mn and there are rumours of a possible US$1 bn valuation. Infoedge has 50% stake in this business. 99 acres, on the other hand, is witnessing intense competition in a slowing real estate market in India.
■ While Infoedge's core recruitment continues to generate healthy cash flows and Zomato has been attracting investor attention, we find valuations rich. Also, 99 acres is likely to remain an overhang in the medium term. Alibaba and Vipshop are top picks in China e- commerce universe Alibaba and Vipshop are the top-picks of our China e-commerce analyst, Dick Wei.
■ Alibaba (OUTPERFORM, TP US$114): We are positive on Alibaba as the leading e- commerce ecosystem in China. Share drivers include: PC ad monetisation improvements, ad load increase in mobile, mobile Tmall GMV growth, and contents investments to drive user engagement on platform. Our DCF-based TP implies 34.2x CY16E and 26.7x CY 17E dil. adj. P/E on the back of 29% earnings CAGR (15–17E).
■ Vipshop (OUTPERFORM, TP US$30): We expect Vipshop to benefit from solid e- commerce growth in China. With company exiting the group buy segment in June last year, Vipshop will likely see easy YoY comparisons in 2H15. Our TP is based on 30x 2016E P/E on the back of a 70% EPS CAGR for the next two years.
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Companies Mentioned (Price as of 05-Aug-2015) 500.Com (WBAI.N, $21.8) 51job Inc. (JOBS.OQ, $30.24) 58.com Inc. (WUBA.N, $57.01) Alibaba Group Holding Limited (BABA.N, $78.87, OUTPERFORM[V], TP $114.0) Amazon com Inc. (AMZN.OQ, $531.9) Apple Inc (AAPL.OQ, $114.64) Arvind (ARVN.NS, Rs309.9) Autohome Inc. (ATHM.N, $39.23) Baidu Inc (BIDU.OQ, $170.32) Barnes & Noble, Inc. (BKS.N, $17.89) Best Buy (BBY.N, $31.96) Bharti Airtel Ltd (BRTI.BO, Rs416.9) Bitauto Holdings Limited (BITA.N, $39.03) BlackRock (BLK.N, $332.44) Blue Dart Ex (BLDT.NS, Rs7433.45) Boyaa Interactive International Limited (0434.HK, HK$3.66) Colgate-Palmolive (CL.N, $68.45) Costco Wholesale Corporation (COST.OQ, $144.84) Ctrip.com International, Ltd. (CTRP.OQ, $78.57) Dominos Pizza (DPZ.N, $115.23) E-House China Holdings Ltd (EJ.N, $6.43) E-commerce China Dangdang Inc. (DANG.N, $6.77) Facebook Inc. (FB.OQ, $94.06) FedEx Corporation (FDX.N, $170.09) Future Retail (FURE.NS, Rs131.35) GCP Invest (GCPI.L, 117.6p) GOME Electrical Appliances Holding Limited (0493.HK, HK$1.34) Gati (GATI.NS, Rs183.35) Godrej Consumer (GOCP.NS, Rs1408.4) Google, Inc. (GOOGL.OQ, $661.28) Groupon Inc. (GRPN.OQ, $4.73) HC Intl (2280.HK, HK$4.73) Haier Electronics Group Co., Ltd. (1169.HK, HK$18.14) Hero MotoCorp (HROM.NS, Rs2666.0) Hewlett Packard (HPQ.N, $29.76) Hind Unilever (HLL.NS, Rs908.6) Home Depot (HD.N, $117.53) Honda Motor (7267.T, ¥4,357) Hyundai Motor Company (005380.KS, W145,500) Idea Cellular Ltd (IDEA.BO, Rs166.0) Info Edge (INED.BO, Rs867.3) JC Penney (JCP.N, $8.16) JD.com, Inc. (JD.OQ, $33.99) Jiayuan (DATE.OQ, $6.56) John Lewis (JLH.L, 1.275p) Jumei International Holding Limited (JMEI.N, $17.82) Just Dial Limited (JUST.BO, Rs1085.75, OUTPERFORM[V], TP Rs1400.0) LG Electronics Inc (066570.KS, W41,500) Liberty Inter (QVCA.OQ, $28.9) Macy's Inc. (M.N, $68.57) MakeMyTrip (MMYT.OQ, $13.8) MasterCard Inc. (MA.N, $97.3) Momo Inc. (MOMO.OQ, $16.46) Monster Beverage Corporation (MNST.OQ, $151.72) Morgan Stanley (MS.N, $38.92) Naspers (NPNJn.J, R1802.0) Nestle (NESN.VX, SFr73.75) Nestle India (NEST.NS, Rs6838.35) NetEase.com (NTES.OQ, $143.42) Office Depot (ODP.OQ, $7.785) PILL (PATL.NS, Rs100.3) People.cn (603000.SS, Rmb21.74) Qihoo 360 Technology Co. Ltd. (QIHU.N, $63.0) Qunar Cayman Islands Limited (QUNR.OQ, $42.33) Renren Inc. (RENN.N, $3.51) Rocket Internet (RKET.DE, €31.62) SOHU.COM INC. (SOHU.OQ, $49.68) Samsung Electronics (005930.KS, W1,159,000) Sears Holdings Corp. (SHLD.OQ, $20.81) Shanda Games Limited (GAME.OQ, $6.76) Shoppers Stop (SHOP.NS, Rs412.35) Sina Corporation (SINA.OQ, $40.07) SoftBank Group Corp. (9984.T, ¥7,007) Sony (6758.T, ¥3,355) Sony Financial Holdings (8729.T, ¥2,352) SouFun (SFUN.N, $6.83) State Bank India (SBI.NS, Rs285.4) Suning Commerce Group Co., Ltd. (002024.SZ, Rmb13.79) TNT Express (TNTE.AS, €7.619) Target Corporation (TGT.N, $80.05) Tencent Holdings (0700.HK, HK$142.4) Tesco (TSCO.L, 210.7p)
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The Gap, Inc. (GPS.N, $35.16) The Priceline Group Inc (PCLN.OQ, $1283.99) Tuniu Corporation (TOUR.OQ, $15.95) United Parcel Service Inc. (UPS.N, $102.64) Vipshop Holdings Limited (VIPS.N, $20.57, OUTPERFORM[V], TP $30.0) Visa Inc. (V.N, $75.27) Wal-Mart Stores, Inc. (WMT.N, $72.25) Wanda Cinema Line Co Ltd (002739.SZ, Rmb176.68) Weibo Corporation (WB.OQ, $14.12) Williams-Sonoma (WSM.N, $85.28) Woolworths (WOW.AX, A$28.52) YY INC. (YY.OQ, $59.46) Yahoo Inc. (YHOO.OQ, $37.12) Yamato Holding Co Ltd (9064.T, ¥2,849) Youku Tudou Inc. (YOKU.N, $19.29) Yum! Brands, Inc. (YUM.N, $88.19) eBay Inc. (EBAY.OQ, $28.41) eLong (LONG.OQ, $17.03)
Disclosure Appendix
Important Global Disclosures Anantha Narayan and Dick Wei, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Alibaba Group Holding Limited (BABA.N)
BABA.N Closing Price Target Price Date (US$) (US$) Rating 29-Oct-14 98.31 114.00 O * 05-Nov-14 108.67 118.00 29-Jan-15 89.81 113.00 09-Mar-15 82.53 112.00 08-May-15 87.06 114.00 * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
3-Year Price and Rating History for Just Dial Limited (JUST.BO)
JUST.BO Closing Price Target Price Date (Rs) (Rs) Rating 19-Sep-14 1725.15 1650.00 N * 22-Oct-14 1636.00 1575.00 29-Jan-15 1554.20 1625.00 11-May-15 1086.35 1400.00 O * Asterisk signifies initiation or assumption of coverage.
NEUTRAL OUTPERFORM
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3-Year Price and Rating History for Vipshop Holdings Limited (VIPS.N)
VIPS.N Closing Price Target Price Date (US$) (US$) Rating 26-Sep-13 5.80 6.00 N * 13-Nov-13 8.70 7.50 16-Jan-14 10.38 8.00 05-Mar-14 17.15 14.50 08-Apr-14 14.26 17.80 O 15-May-14 16.45 20.30 23-Jun-14 18.01 20.80 14-Aug-14 21.73 26.70 20-Nov-14 22.64 25.90 06-Jan-15 21.75 24.50 NEUTRAL OUTPERFORM 17-Feb-15 25.11 31.00 15-May-15 26.22 30.00 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
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Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 50% (28% banking clients) Neutral/Hold* 34% (41% banking clients) Underperform/Sell* 13% (38% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are det ermined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Alibaba Group Holding Limited (BABA.N) Method: We use DCF valuation as the key valuation methodology, as we see DCF captures the longer-term growth opportunities of Alibaba. We assume mid-teens growth rate from 2020-25, WACC of 11% and 3% terminal growth rate. Our base-case DCF valuation yields a target price of US$107 of its core business. By considering the potential upside from Ant Financial Services Company (US$17.5 bn), we arrive at our final target price of US$114 for the whole Alibaba business. Risk: Risks that could impede achievement of our US$114 target price for Alibaba Group Holding Limited include: (1) macro slowdown; (2) slower-than-expected category expansion (medical, O2O local services) due to execution or competition; (3) slower mobile traffic growth and monetisation; and (4) higher-than-expected investments in business initiatives. Price Target: (12 months) for Just Dial Limited (JUST.BO)
Method: We calculate our Rs1,400 target price for JustDial using a DCF (discounted cash flow) model. We use a cost of capital of 13% and terminal growth rate of 6%. Risk: Key downside risks to our Rs1,400 target price for Just Dial include irrational investment by the company in 'Search Plus' and any further selling pressure from the pre-IPO institutional holders. Price Target: (12 months) for Vipshop Holdings Limited (VIPS.N) Method: Our new US$30 TP is based on 30x 2016E P/E on the back of 70% EPS CAGR in the next two years and at a premium to other eCommerce and China internet names. Risk: The risks that may impede achievement of our US$30 target price for Vipshop Holdings Limited are: (1) active customer growth slowdown, (2) increasing competition on suppliers and customers, and (3) further inventory improvement from suppliers.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (BABA.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (BABA.N) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (BABA.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (BABA.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (VIPS.N, JUST.BO, BABA.N) within the next 3 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014
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Credit Suisse may have interest in (SBI.NS, HROM.NS, GATI.NS, PATL.NS, INED.BO, MMYT.OQ, SHOP.NS, ARVN.NS, HLL.NS, GOCP.NS, NEST.NS, BLDT.NS, FURE.NS, IDEA.BO, BRTI.BO, JUST.BO) Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (VIPS.N, JUST.BO, BABA.N) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BABA.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Dick Wei Credit Suisse Securities (India) Private Limited ...... Anantha Narayan ; Nitin Jain
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
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