To say that Alibaba’s pending initial public offering is eagerly awaited is an understatement.
As far as new listings go, it looks set to be one of the largest ever with an expected deal size of as much as $15 billion and a valuation approaching or possibly even exceeding the $100 billion mark.
As a result, global chief executives of most major investment banks have been travelling to Hong Kong and Alibaba’s headquarters in Hangzhou in a steady stream this year to meet the management and pitch for a role on the deal.
The IPO is also creating a lot of buzz among investors as it will give them their first chance to get direct exposure to online shopping in China via a large and liquid stock.
And when the company decided at the end of September to pursue a listing in the US rather than in Hong Kong, it sparked a flurry of stories and comments noting what a big loss this is for the Hong Kong exchange.
Not only will it miss out on the largest internet IPO since Facebook, but there had been talk that some Chinese companies that are already listed in the US, including search engine provider Baidu, were interested in moving to Hong Kong if Alibaba’s listing was successful. That will not happen now.
Irrespective of where it eventually lists, though, every equity fund manager with either an Asian or global portfolio, or a technology or consumer focus will need to at least take a look at the deal and that means the Alibaba IPO will draw renewed attention to China’s e-commerce sector as a whole.
In fact, this seems to be happening already based on the share price gains among Chinese online shopping-focused companies in the US in recent months.
In a 395-page report published in September, CLSA’s Paul Mckenzie argues that the China e-commerce story “eclipses all other investment themes” within the global consumer sector and notes that the total value of business-to-consumer (B2C) online sales in the mainland has multiplied from just $3 billion in 2009 to $64 billion in 2012. By 2017 the bank projects it will hit $330 billion.
With a market share of more than 50%, Alibaba’s Tmall B2C platform, is at the centre of this rapid growth, which CLSA believes will be driven primarily by the increasing penetration of mobile internet.
However, Alibaba is involved in so much more. From its beginnings 14 years ago as an online platform where international businesses could connect with Chinese suppliers, it has grown into an e-commerce giant that is involved in most areas related to online shopping, including three major online market places, search engines, payment systems and micro-loans, delivery logistics, and the collection and management of business data.
The company has even developed its own cloud-based mobile operating system and recently started selling smart TV set-top boxes to bring online shopping right into the living room. Earlier this year it also bought an 18% stake in Weibo, a highly popular Chinese micro-blogging service that is owned by Sina Corp and has more than 500 million users.
Tmall isn’t even Alibaba’s largest market platform. That honour goes to Taobao, which focuses on consumer-to-consumer (C2C) business and had a market share of about 90% in 2012. According to the CLSA report, C2C, accounted for about 65% of online sales in China last year, but similar to the online shopping evolution in other developed markets such as the US and South Korea, B2C is growing much faster.
By the end of 2016 the two business areas are projected to be largely even in terms of sales revenues. Taobao is a sales platform both for individuals and small-scale entrepreneurs, while Tmall is a place where established brands get to sell their products directly to consumers.
Jack Ma, the charismatic former English-teacher who co-founded Alibaba together with 17 other visionaries in 1999 and is now the company’s executive chairman, has predicted that online retail sales will account for 30% of total retail sales in China in five years versus about 8% today.
“Traditional businesses still think e-commerce is a business model. It is not, it is a lifestyle,” he told investors at a Credit Suisse conference in Hong Kong in March this year, adding that in 10 years nobody will talk about e-commerce as it will be a natural part of everyone’s lives, just like nobody is talking about electricity today.
Underpinned by that vision, Alibaba will continue to focus across the entire spectrum of e-commerce-related services with the aim of building what it refers to as an e-commerce eco-system. In the real world there is a rich diversity of business activities, and hence Alibaba feels it needs to build multiple formats of market places to facilitate all kinds of business activities as they move online.
In an interview with FinanceAsia, Alibaba’s Brian Li who works directly with chief executive officer Jonathan Lu on the company’s strategic development, said that a key focus within that broader aim is to “lower the entry barriers further so that more people can participate but also to make the whole eco-system more efficient for people to connect with each other.” But, said Li: “We are just getting started so we have a long way to go.”