Yahoo Japan, Alibaba, Naver

114 Pages·2017·4.45 MB·English

Global Markets Research

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Asia Pacific internet: Top picks – Yahoo Japan, Alibaba, Naver

Invest in leading e-commerce platforms
14 February 2017
amid strong market growth
Research analysts
South Korea Internet & New
We recommend investing in leading e-commerce platforms which control Media
traffic and provide end-to-end ecosystems. Internet tends to be a winner-
Angela Hong - NFIK
takes-all industry, and we believe that e-commerce is similar given the
[email protected]
networking effect. Leading platforms will have the most buyers and sellers, [phone]
and the platforms will continue to enjoy the virtuous cycle.
Japan internet & media
We expect market leaders to see an improving blended take-rate through
Yoshitaka Nagao - NSC
targeted ads. With resilient GMV growth and advertising efficiency such as [email protected]
rising click-through rates and conversion ratios helped by big data, we [phone]
expect the blended take-rates of leading platforms such as Alibaba, Yahoo
China Internet & New Media
Japan and Naver to gradually improve.
Jialong Shi - NIHK
Key analysis in this Anchor Report includes: [email protected]
[phone]
 Who will be the winners in the e-commerce market? We provide our
Japan telecommunications
outlook on the competitive environment and market share.
Daisaku Masuno, CFA - NSC
 An in-depth analysis of the different e-commerce business models, [email protected]
including 1P, 3P and search engines. [phone]
 Financial analysis: we compare the profitability of Asian e-commerce
companies and share opportunities for improving blended take-rates.
Production Complete: 2017-02-14 23:30 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Asia Pacific internet

EQUITY: INTERNET & NEW MEDIA
Top picks: Yahoo Japan, Alibaba, Naver
Global Markets Research

14 February 2017
Invest in leading e-commerce platforms amid strong

market growth
Anchor themes
We recommend investing in leading platforms which control traffic and We recommend investing in
provide end-to-end ecosystem: Yahoo Japan, Alibaba and Naver leading e-commerce platforms
Internet tends to be a winner-takes-all industry and we believe that e-commerce which control traffic gateways
is similar given the networking effect. Leading platforms will have the most and provide an end-to-end
buyers and sellers, and the platforms will continue to enjoy the virtuous cycle. ecosystem.
Yahoo Japan, Alibaba and Naver provide superior customer experience from
search to a comprehensive ecosystem which provides online payment, delivery Nomura vs consensus
and customer rewards programmes. Given that the three companies have Our 2017F EPS for Yahoo
strong traffic and ecosystem, we believe they will continue to be long-term Japan/Naver is 5%/9% above
winners in their respective markets. consensus, while that for Alibaba
Market leaders to see improving blended take-rate through targeted ads is largely in line with consensus.
We note that blended take-rates (commissions and advertising revenue over
total GMV) of Chinese e-commerce companies vary from 3% (Alibaba) to 8% Research analysts
(JD), while those of Japanese and Korean open market platforms are 7-8% (for
Rakuten, eBay Korea and Coupang). For search engines, this take-rate tends to South Korea Internet & New Media
be 3.5% (for Yahoo Japan and Naver). With resilient GMV growth and
Angela Hong - NFIK
advertising efficiency such as rising click-through rates and conversion ratio [email protected]
helped by big data, we expect the blended take-rate of leading platforms such [phone]

as Alibaba, Yahoo Japan and Naver to gradually improve.
Japan internet & media
Financial analysis: Margins to contract for major e-commerce players in
China and Korea, while Japanese players to turn profitable Yoshitaka Nagao - NSC
[email protected]
On the margin front, Japanese players are likely to turn profitable driven by
[phone]
stabilising competition as well as Yahoo Japan’s initiative to focus on profitability
by pursuing more efficient promotions, through collaboration with Softbank
China Internet & New Media
Group. For major China e-commerce players, we expect to witness further
margin expansion for the core e-commerce business, but consolidated margin Jialong Shi - NIHK
[email protected]
will likely contract owing to new business investment. In Korea, losses of the
[phone]
big-3 social commerce players and 11st are likely to continue owing to a fierce
market share battle. In this environment, we think the winner will continue to be Japan telecommunications
Naver whose position as a traffic gateway will further strengthen if consumers
Daisaku Masuno, CFA - NSC
prefer to shop on price comparison platforms.
[email protected]
Where we are different from the Street in this report [phone]
 China: We are more bullish than the Street about Alibaba’s potential in
marketing services, backed by the improving ROI for its existing ad products
and many under-monetised inventories on Ali’s properties.

 Japan: We expect e-commerce industry competition to stabilise in 2017,

compared to the Street view of potential escalation in competition.

 Korea: We analyse the competitive environment and financial performance of
not only the listed companies but also unlisted ones, including eBay Korea,
Coupang, TicketMonster and WeMakePrice.
Fig. 1: Stocks for action
M/Caps Avg. TO Closing Upside
Company Code Rating (USDmn) (USDmn) Target Price 10-Feb (%)
Yahoo Japan 4689 JP Buy 26,999 16 6 40 5 39 19%
Alibaba Group Holding BABA US Buy 253,231 1,327 1 33 1 02 30%
Naver Corporation 035420 KS Buy 22,799 19 950,000↓ 7 95,000 19%
Source: Bloomberg, Nomura estimates. Prices and TP in trading currency.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Asia Pacific internet 14 February 2017

Contents

Executive summary ................................................................................. 3
Valuation and stock recommendations .................................................... 6
Competitive analysis: Who will be the winners? ...................................... 7
E-commerce business models .............................................................. 24
Market growth outlook and history ......................................................... 35
Financial analysis .................................................................................. 48
Yahoo Japan ......................................................................................... 61
Alibaba Group Holding .......................................................................... 74
Naver Corporation ................................................................................. 76
Softbank Group ..................................................................................... 80
Rakuten ................................................................................................. 84
JD.com .................................................................................................. 93
VIPSHOP ............................................................................................... 95
SK Telecom ........................................................................................... 97
Kakao Corp. ......................................................................................... 102
Appendix A-1 ....................................................................................... 108

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Nomura | Asia Pacific internet 14 February 2017

Executive summary
Our top picks are Yahoo Japan, Alibaba and Naver

We recommend that investors invest in e-commerce companies which control user traffic Fig. 2: China e-commerce
and provide end-to-end e-commerce ecosystem. Our top picks in the region are Yahoo market share
Japan, Alibaba and Naver.
• Yahoo Japan (4689 JP, Buy, TP JPY640): We forecast margin improvement at Yahoo Vipshop
2%
Shopping as gross merchandise sales rise on expansion of the product range and the Others
12%
partnership with Softbank Group ensures efficient promotions.
• Alibaba (BABA US, Buy, TP USD133): We expect Alibaba to continue its dominance
JD
with over 70% market share in terms of GMV, given its leading position in the e- 13%
commerce market, profound ecosystem and monetisation capability.
Alibaba
• Naver (035420 KS, Buy, TP KRW950,000): We forecast Naver Shopping to continue 73%
its dominance as a traffic gateway and Naver could also leverage Naver Pay to gain
market share in Korea’s ecommerce market.

Competitive analysis: Who will be the winners?
Note: as of 2016F

Leading platforms which control traffic gateway and provide end-to-end Source: Nomura estimates

ecosystem are long-term winners
Fig. 3: Japan e-commerce
Internet tends to be a winner-takes-all industry, and we believe that e-commerce is similar
market share
given the networking effect. Leading platforms will have the most buyers and sellers, and the
platforms will continue to enjoy the virtuous cycle. In China, Alibaba has dominated the e-
commerce market and, therefore, people go to Taobao directly, rather than going through
other search engines. In Japan and Korea, people initiate online shopping on search
platforms such as Yahoo Japan and Naver, as the search platforms dominate search query Other
Rakuten
market share, while there is no dominant e-commerce player. These leading platforms 33% 37%
provide superior customer experience from search to a comprehensive ecosystem which
provides online payment, delivery and customer rewards programmes. Given Alibaba, Yahoo
Japan and Naver have strong traffic and ecosystems, we believe they will continue to be
Yahoo!
long-term winners in their respective markets. Shopping Amazon
6% Japan
C ompetitive landscape in each region: 24%
• China: China’s e-commerce market has been dominated by Alibaba, with more than

70% market share, and we expect this dominance to continue given its: 1) leading
position in the e-commerce market, where it has accumulated a large number of loyal Note: as of 2016F
Source: Nomura estimates
shoppers and merchant base; 2) profound ecosystem, including: Ant Financial, Cainiao

and AliCloud; 3) monetisation capability: leveraging accurate customer profiles backed
Fig. 4: Korea e-commerce
by big data. Alibaba, in our view, has ample potential to monetise its customers further market share
(such as increased click volume and better click-through rates) through more targeted
Interpark
feed ads. 1% Tmon
6%
WeMakePrice
• Japan: We believe the main competitive field for e-commerce in Japan is shifting to 5%
Coupang
value-added services, from the previous focus on price competition. From this
6%
standpoint, we look for improvement in profitability at Yahoo Japan, which is working to
Auction
provide its own value-added services more efficiently by strengthening collaborative Others 7%
54%
efforts with Softbank Group. We also have high expectations for Rakuten, given the 11st
10%
weighting of new users has been rising since Rakuten adopted its Super Point Up
(SPU) programme, which offers larger point discounts the more a customer uses Gmarket
11%
Rakuten's services.
• Korea: The e-commerce market in Korea is fragmented, with a number of players. We
expect heated competition to continue into 2017-18F, driven by social commerce Note: as of 2016F
players’ market share competition as well as 11st’s vision to become the largest e- Source: Nomura estimates
commerce player. Furthermore, 3P companies are expanding into 1P model, and vice
versa. As such, we think the boundaries between open market and social commerce
will fade into 2017-18F. In this environment, we expect consumers to prefer to shop on
Naver where they can search for products, compare prices and make payments – all in
one place.
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Nomura | Asia Pacific internet 14 February 2017

E-commerce business models: Market share leaders should
see improving blended take-rate through targeted advertising
There are three major types of e-commerce business models: 1) online direct sales (1P);
2) online marketplace (3P); 3) search platform. In 1P model, the company takes control
of the inventory and sells the products to buyers. As such, the 1P model derives revenue
from product sales and cost of products sold is booked as COGS. 3P model purely
connects merchants and buyers, and the key revenues are commissions, value-added
services and advertising fees charged to merchants. Meanwhile, a search platform
model is a vertical search engine that allows users products search, price comparison
and sharing of customer reviews. They charge commissions to different retailers,
including 1P and 3P companies, for transferring GMV traffic as well as advertising fees
for displaying products on their platform.
Blended take-rate of leading platforms to improve gradually
We note that blended take-rates (commissions and advertising revenue over total GMV)
of Chinese e-commerce companies vary from 3%(Alibaba) to 8% (JD), while those of
Japanese and Korean open market/social commerce models are 7-8% (for Rakuten,
eBay Korea and Coupang). For search engines, this take-rate tends to be 3.5% (for
Yahoo Japan and Naver). With resilient GMV growth and improving advertising efficiency
helped by big data, we expect blended take rate of leading platforms such as Alibaba,
Yahoo Japan and Naver to improve gradually.
• In 3P model, there has been downward pressure on commission revenue. This is
because the number of merchants on an e-commerce platform is a key competitive
advantage and we have seen that companies that intend to gain market share will often
offer lower commissions. We note that Alibaba offered 0% commission on Taobao and
did not start monetising from advertising until Taobao attracted enough number of
merchants. Yahoo Japan has been the #3 e-commerce platform for many years. In an
attempt to gain market share, it started a zero commission strategy several years ago.
In Korea, 11st and WeMakePrice charge low commission from merchants in an effort to
recruit more merchants.
• Instead, e-commerce platforms will make more money from advertising. We
expect online marketing services including advertising to outgrow commission revenue,
given a large number of un-monetised merchants and better marketing tools offering so
as to incentivise increasing ad spending.

Fig. 5: Take rate comparison
3P
Search engine
eBay
* JD * Rakuten Korea
* Coupang
8.0% 8.0% *WeMake 7.6%
7.1%
Yahoo Price
Japan Naver 5.0%
Alibaba
3.5% 3.6%
2.9%
China Japan Korea

Note 1: * Take rates of the companies’ 3P business
Note 2: as of 2016; WeMakePrice, Coupang and eBay Korea as of 2015
Source: Company data, Nomura estimates
Market growth outlook and history
E-commerce market remains a secular trend in Asia; China’s e-commerce market
to grow at 16% CAGR in 2017-20F, followed by Korea at 12% and Japan at 9%.
In 2017-20F, we estimate China’s e-commerce to grow the fastest at 16% CAGR,
followed by Korea’s 12% and Japan’s 9%. Overall, we expect the growth of e-commerce
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Nomura | Asia Pacific internet 14 February 2017

will be driven by increasing mobile usage, competitive prices and convenience of mobile
payment.
• In China, e-commerce growth has mostly been driven by first-tier cities on internet
availability, whereas we believe consumption upgrades and ongoing rising penetration
rates in rural areas and the fast-moving consumer goods (FMCG) category will serve
as major growth drivers going forward.
• Japan: Given e-commerce accounts for a small percentage of total retail market in
Japan compared with Korea, we expect e-commerce penetration rates to continue
growing strongly, driven by the removal of tenant fees and royalty fees from Yahoo!
Shopping, announced in October 2013. We think this encourages both SMEs and large
companies to get into e-commerce in Japan at the same time.
• For Korea, we expect attractive prices offered by e-commerce platforms, as well as the
convenience factor of shopping and payment, to lead e-commerce to grow faster than
other retail channels.
History of e-commerce market: amid fading boundaries between 3P and 1P
models, companies are engaged in price and delivery wars
We have observed that third-party e-commerce platforms tend to be the first business
model in most markets due to low capital intensity. Those that took the first-mover
advantage are Alibaba, Rakuten and Interpark and Gmarket. As consumers become
more sophisticated and demanding, this gives an opportunity to a new business model,
which is the direct sales model (1P): In the mid-to-late 2000s, online retailers such as
JD.com, Amazon Japan, TicketMonster and Coupang challenged the market leaders,
with competitive pricing and guaranteed product quality. Since then, there have been
price wars initiated by smaller companies trying to gain share against the market leaders.
What added to the price competition was the concept of ‘fast delivery’. Most recently,
companies like JD.com, Amazon Japan, Askul and Coupang have invested heavily in
logistics networks and offer same-day delivery services to consumers, in an effort to gain
market share.
Financials analysis: margins to contract for major e-
commerce players in China and Korea, while Japanese
players to turn profitable
We expect the revenue growth of e-commerce companies in China, Japan and Korea to
continue to post double-digit CAGR. On the margin front, we note that e-commerce
players’ margin is contracting overall due to heavy investments and/or heated market
competition. In this competitive market environment, dominant players, such as Alibaba
and Ebay Korea, are enjoying the highest profitability of double-digit operating margins
by leveraging their market-dominant position. However, the rest of the players are
struggling and either seeing only single-digit operating margin or even making operating
losses. We expect this trend to continue into 2017-18F.
• China: For major China e-commerce players (Alibaba, JD and VIPSHOP), we expect to
witness further margin expansion for core e-commerce business, pointing to operating
leverage and improving procurement pricing , but consolidated margin will likely
contract owing to new business investment (Internet Finance, Cloud business, O2O for
example), in our view.
• Japanese players’ margins are likely to turn around and start to be profitable as they
focus more on profitability. This is driven by a stabilising competitive environment in
Japan, as well as Yahoo Japan’s initiative to focus on profitability by pursuing more
efficient promotions, through collaboration with Softbank Group.
• In Korea, losses of pure e-commerce players are likely to expand owing to a fierce
market share battle. In particular, companies which look to gain market share will need
to sacrifice profitability for GMV growth. These companies include the big three social
commerce players and 11st. In this environment, we think the winner will continue to be
Naver whose position as a traffic gateway will further strengthen if other e-commerce
players continue to fight for market share and consumers prefer to shop on price
comparison platforms. We estimate Naver Shopping’s revenue to post 50% CAGR until
2018F, driven by advertising and Naver Pay commissions.
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Nomura | Asia Pacific internet 14 February 2017

Valuation and stock recommendations

Fig. 6: Global internet companies – valuation comparison
Company Code M/Caps Rating Target Closing Upside YTD perf PER (x) EPS growth (%) PEG (x) PBR (x) ROE (%) OP margin (%) NP margin (%)
(USD mn) Price 10-Feb (%) (%) FY17FFY18F FY17F FY18FFY17FFY18FFY17FFY18FFY17FFY18F FY17F FY18F FY17F FY18F
Alibaba BABA US 253,231 Buy 133 102 30% 16.6 29.7 26.2 38.9 16.9 0.8 1.6 6.4 5.3 16.3 17.1 30.5 32.5 25.3 24.9
JD.com JD US 42,790 Buy 32 29 9% 15.5 188.7 51.4 (5,446) 266.9 n.a. 0.2 8.2 7.3 -4.8 7.5 -0.3 0.5 -0.4 0.6
VIP shop VIPS US 7,318 Buy 16.4 12 31% 13.4 16.0 13.7 15.9 18.9 1.0 0.7 5.0 3.6 27.9 23.2 3.9 3.9 3.3 3.4
China average 78.1 30.4 27.4 17.9 0.9 0.8 6.6 5.4 13.1 15.9 11.4 12.3 9.4 9.6
Softbank Group 9984 JP 85,110 Buy 11,790.0 8,792.0 34% 13.2 16.6 13.8 21.2 20.4 0.8 0.7 3.1 2.5 21.7 20.7 13.5 14.2 7.3 8.7
Yahoo Japan 4689 JP 26,999 Buy 640.0 539.0 19% 20.0 19.5 17.2 14.9 13.0 1.3 1.3 3.0 2.6 16.0 16.1 24.9 26.4 17.5 18.5
Rakuten 4755 JP 14,232 Buy 1,400.0 * 1128.5 24% (3.2) 20.2 18.1 30.3 11.4 0.7 1.6 2.2 2.0 9.7 10.1 14.6 14.8 8.8 8.9
Askul 2678 JP 1,740 Buy 4,700.0 3,580.0 31% 17.5 23.4 19.0 35.8 23.1 0.7 0.8 3.0 2.7 13.5 14.9 3.3 3.6 2.4 2.8
Japan average 19.9 17.0 25.6 17.0 0.9 1.1 2.8 2.4 15.2 15.5 14.1 14.7 9.0 9.7
Naver 035420 KS 22,799 Buy 950,000 795,000 19% 2.6 27.4 22.7 38.9 21.4 0.7 1.1 5.1 4.1 26.6 26.1 31.1 33.1 23.6 25.2
SKT 017670 KS 15,982 Neutral 240,000 227,500 5% 1.6 7.9 9.9 37.9 -19.9 0.2 -0.5 1.0 1.0 13.7 10.1 9.3 9.3 13.6 10.7
Kakao 035720 KS 5,010 Neutral 80,000 85,100 -6% 10.5 55.3 38.0 49.8 45.6 1.1 0.8 1.6 1.5 3.1 4.3 9.4 11.8 6.2 8.3
Interpark 108790 KS 241 Not Rated n.a. 8,980 n.a. ( 12.0) 16.8 13.4 181.2 24.7 0.1 0.5 1.6 1.5 10.0 11.7 4.4 5.1 3.6 4.3
Korea average 26.8 21.0 76.9 18.0 0.5 0.5 2.3 2.0 13.4 13.1 13.6 14.8 11.7 12.1
Amazon AMZN US 393,182 Buy 925 827 12% 10.3 43.4 30.4 44.2 42.7 1.0 0.7 12.0 8.9 27.9 34.3 5.2 6.8 4.7 5.0
Ebay EBAY US 36,557 Not Rated n.a. 34 n.a. 13.3 15.1 14.0 10.2 7.8 1.5 1.8 2.1 1.9 18.8 16.5 30.8 31.3 24.2 24.8
US average 29.3 22.2 27.2 25.3 1.2 1.3 7.1 5.4 23.3 25.4 18.0 19.1 14.4 14.9
Global internet companies average 38.5 22.7 39.3 19.5 0.9 0.9 4.7 3.8 16.3 17.5 14.2 15.2 11.1 11.6
Source: Company data, Bloomberg, Nomura estimates; Bloomberg consensus for not-rated stocks.
* Note: Share price for Rakuten (4755 JP) is as of 13 February 2017; Chinese stocks’ TP and closing prices are in trading currency

Asia e-commerce stocks trade in the range of 17-25x 2017F P/E. While these multiples
might seem high, we note that EPS growth for these companies is strong. Another way
to look at the valuation could be PEG multiple valuation, as it takes into account the
earnings growth. These companies trade in the range of 1-1.5x, which is broadly in line
with the multiples for US e-commerce stocks Amazon and Ebay. We note that market-
dominant players in their respective country/business, including Alibaba, Yahoo Japan,
Rakuten and Naver, tend to trade at the upper end of the PEG range compared to their
competitors, as we think the market gives a premium to their high profitability and
earnings sustainability. Internet, and e-commerce, tends to be a winner-takes-all industry
and, therefore, leading platforms continue to enjoy the virtuous cycle. For Softbank
Group and SK Telecom, which have multiple businesses such as telecom, e-commerce
and other non-core businesses, the stocks trade at lower P/E and PEG multiples
compared to other pure e-commerce stocks.
Our top picks are Yahoo Japan, Alibaba and Naver
We recommend that investors invest in e-commerce companies which control user traffic
and provide end-to-end e-commerce ecosystem. Our top picks in the region are Yahoo
Japan, Alibaba and Naver.
• Yahoo Japan (4689 JP, Buy, TP JPY640): We forecast margin improvement at Yahoo
Shopping as gross merchandise sales rise on expansion of the product range and the
partnership with Softbank Group ensures efficient promotions.
• Alibaba (BABA US, Buy, TP USD133): We expect Alibaba to continue its dominance
with over 70% market share in terms of GMV, given its leading position in the e-
commerce market, profound ecosystem and monetisation capability.
• Naver (035420 KS, Buy, TP KRW950,000): We forecast Naver Shopping to continue
its dominance as a traffic gateway and Naver could also leverage Naver Pay to gain
market share in Korea’s e-commerce market.
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Nomura | Asia Pacific internet 14 February 2017

Competitive analysis: Who will be the
winners?
Leading platforms which control traffic gateway and provide end-to-end
ecosystem are long term winners
Internet tends to be a winner-takes-all industry and we believe that e-commerce is
similar given the networking effect. Leading platforms will have the most buyers and
sellers, and the platforms will continue to enjoy the virtuous cycle. In China, Alibaba has
dominated the e-commerce market and, therefore, people go to Taobao directly, rather
than going through other search engines. In Japan and Korea, people initiate online
shopping on search platforms such as Yahoo Japan and Naver, as the search platforms
dominate search query market share while there is no dominant e-commerce player.
These leading platforms provide superior customer experience from search to a
comprehensive ecosystem which provides online payment, delivery and customer
rewards programmes. Given Alibaba, Yahoo Japan and Naver have strong traffic and
ecosystem, we believe that they will continue to be long-term winners in their respective
markets.
Competitive landscape in each region:
• China: China’s e-commerce market has been dominated by Alibaba, currently with
more than 70% market share, and we expect this dominance to continue, given its: 1)
leading position in the e-commerce market, where it has accumulated a large number
of loyal shoppers and merchant base; 2) profound ecosystem, including: Ant Financial,
Cainiao and AliCloud; 3) monetisation capability: leveraging accurate customer profiles
backed by big data, Alibaba, in our view, has ample potential to further monetise its
customers (such as increased click volume and better click-through rates) through
more targeted feed ads.
• Japan: We believe the main competitive field for e-commerce in Japan is shifting to
value-added services, from the previous focus on price competition. From this
standpoint, we look for improvement in profitability at Yahoo Japan, which is working to
provide its own value-added services more efficiently by strengthening collaborative
efforts with Softbank Group. We also have high expectations for Rakuten, given the
weighting of new users has been rising since Rakuten adopted its Super Point Up
(SPU) programme, which offers larger points discounts the more a customer uses
Rakuten's services.
• Korea: The e-commerce market in Korea is fragmented with a number of players. We
expect heated competition to continue into 2017-18, driven by social commerce
players’ market share competition as well as 11st’s vision to become the largest e-
commerce player. Furthermore, 3P companies are expanding into 1P model, and vice
versa. As such, we think the boundaries between open market and social commerce
will fade into 2017-18F. In this environment, we expect consumers to prefer to shop on
Naver where they can search for products, compare prices and make payments – all in
one place.
China: Alibaba’s dominance to continue
China’s e-commerce market has been dominated by Alibaba, currently with more than
70% market share, and our analyst Jialong Shi expects this dominance to continue,
given its: 1) leading position in the e-commerce market, where it has accumulated a
large number of loyal shoppers and merchant base; 2) profound ecosystem: Alibaba has
established a comprehensive ecosystem to support its e-commerce business, including:
Ant Financial, its internet finance arm; Cainiao, its smart logistics subsidiary; and
AliCloud, a leading public cloud service provider; to name a few; 3) monetisation
capability: leveraging accurate customer profiles backed by big data, Alibaba, in our
view, has ample potential to monetise its customers further – for example, through more
targeted feed ads, Alibaba achieved increased click volume and better click-through
rates without adding ad loads during the December-end quarter 2016.
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Nomura | Asia Pacific internet 14 February 2017

Alibaba – China’s undisputed e-commerce leader
The China e-commerce market is heavily dominated by Alibaba through Taobao (C2C)
and Tmall (B2C), with around RMB3.6tn GMV for 2016, more than the combination of
Amazon and eBay. We estimate that Alibaba has ~73% market share of China’s total e-
commerce market in terms of GMV, far exceeding JD’s 13% and VIPSHOP’s 2% (Fig.
7). In the B2C e-commerce market, Tmall continues to top the list with around 56%
market share, followed by JD at 25% and Suning (002024CH, NR) at 4%. Overall, we
believe Alibaba and JD have absolute advantages in the e-commerce market, but we
have witnessed some smaller vertical e-commerce players emerge, such as
Xiaohongshu and Ymatou, to meet the different tastes of shoppers.

Fig. 7: China e-commerce market share in 2016F Fig. 8: China B2C e-commerce market share in 3Q16

Others YiHaodian
Vipshop 12% Gome 1% Others
1% 9%
2%
Vipshop
3%
JD
Suning
13%
5%
Tmall
JD 56%
25%
Alibaba
73%

Source: Nomura estimates Source: iResearch, Nomura research

Catalysts for China e-commerce
Despite the economic slowdown, we expect Chinese domestic consumption will record a
resilient 7% CAGR through 2020F (Fig. 9), underpinned by growing disposable income
of China’s middle class and internet-savvy, consumption-driven, post-90s population.
Furthermore, we believe online consumption will continue to outpace offline consumption
due to the continuing offline-to-online migration. In particular, increasing mobile device
adoption should facilitate online shopping, leading both to more frequent purchases and
higher spending per shopper.

Fig. 9: China: Domestic retail consumption and growth
(CNYtrn) Total retail sales (LHS) YoY% (RHS)
50 18% 20%
17% 44.3
45 18%
15%
40 14% 16%
35 12% 14%
30 11% 10% 12%
10%
25 10%
20 7% 7% 6% 8%
15 6%
10 4%
5 2%
0 0%
2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
Source: iResearch, Nomura estimates

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Nomura | Asia Pacific internet 14 February 2017

Rural e-commerce
We believe there is still much untapped potential in lower-tier cities and rural areas and,
thus, penetrating those areas could help to greatly broaden the customer base for e-
commerce services. According to the World Bank, China’s rural population was 609mn
as of 2015, accounting for 44% of the country’s entire population; of this, rural internet
users reached 195mn, accounting for only 28.4% of the Chinese internet population
based on CNNIC data (Fig. 10). As per a McKinsey estimate, there are some 160mn
people in low-tier cities who use online services but have yet to be exposed to e-
commerce; the number is nearly as many people as the number of online shoppers in
high-tier cities today. In high-tier cities, by contrast, McKinsey 2016 iConsumer shows
limited potential for user penetration to drive e-commerce growth: 89% of digital
consumers in Tier-1 and Tier-2 cities are already shopping online. Consequently, we
expect rural e-commerce in China to see a 32% CAGR over 2017-20F, reaching
RMB2.3tn in 2020F (Fig. 11).

Fig. 10: China: Number of rural internet users Fig. 11: China: Rural e-commerce market size and growth
(Million) (CNYbn) Rural e-commerce GMV
250 2,500 YoY growth (RHS) 120%
96%
200 100%
2,000
83%
150 80%
1,500
55%
100 60%
45%
1,000
50 32% 40%
21%
500
0 20%
6 2 6 2 6 2 6 2 6 2 6 2
0 1 0 1 0 1 0 1 0 1 0 1
-11 -11 -21 -21 -31 -31 -41 -41 -51 -51 -61 -61 0 0%
0 0 0 0 0 0 0 0 0 0 0 0
2 2 2 2 2 2 2 2 2 2 2 2 2014 2015 2016E 2017F 2018F 2019F 2020F
Source: CNNIC, Nomura research Source: iResearch, Nomura estimates

Chinese rural areas still lag behind cities in overall economic development. But the gap
has been narrowing over the past couple of years, thanks to favourable government
policies. As shown in Fig. 12, overall rural consumption spending has climbed
impressively since 2012 and reached 36% of that for urban dwellers by 2015.
The vast population and increasing incomes have laid solid groundwork for rural e-
commerce. Alibaba, JD and other e-commerce players have begun to explore the rural
market. Alibaba’s rural e-commerce solution is a two-way model, ie, selling to and selling
by farmers. On the one hand, farmers are also selling local produce or handmade craft
via Taobao to customers nationwide. Taobao-based entrepreneurship is thriving in some
rural areas. The number of so-called “Taobao Villages” or clusters of rural online
entrepreneurs who have opened shops on the Taobao marketplace, increased from
three in 2009 to 1,311 by the end of 2016, according to Ali Research (Fig. 13).
In addition, Alibaba has unveiled a slew of incentive policies to encourage farmers to
become Taobao merchants. Ant Financial, Alibaba’s Internet Finance affiliate, has
provided financial support for Taobao Village merchants. Meanwhile, Taobao University,
Taobao’s educational arm, will start a programme of seminars in rural areas to train
village merchants as well.

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