Chinas E-Commerce Opportunities & Constraints in a Booming Market

Amy Cao, Deloitte Beijing June 2011

Chinese e-players offer full commercial / social solutions, mostly following their US counterparties business model
Online Shopping(C2C) Online Shopping(B2C) MicroDeal-of-the day blogging

Mobil Chat

Blogging

Wikis

Instant Messaging

Video Sharing

SNS

Q&A Message Boards

Professional SNS

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B2C and C2C models have seen substantial growth and potentials
Business-to-business (B2B)
Emerged in late 1990s Become the major platform of exporter and connection between manufacturers and wholesalers Transaction value reached around USD45 billion in 2010 Alibaba accounted for 65% of market share

Business-to-customer (B2C)

Emerged in early 2000 Rapid growth: 175% in 2009 and 150% in 2010 Transaction value reach around USD9 billion in 2010 3C, apparel, and tourism sectors received most of the PE/VC investment

Customer-to-customer (C2C)

Small shop owners

The real C2C model is very rare in China. C2C sellers are mostly entrepreneurial wholesalers, rather than individuals, but enjoy the tax free benefits Transaction value reach USD 63.5 billion in 2010 Taobao has 90% market share Large shops in C2C platform gained PE investments and started to create their own platform to reduce dependence on Taobao

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Chinas online shopping market (B2C&C2C) reached 72.5 bn USD in 2010 and is expected to grow at a CAGR of 70% for the next five years
China Online Shopping Market (bn USD, 1997-2015f)
2010 US market value

140.0 120.0 100.0

Period CAGR

2003-2006 202%

2006-2010 106%

2010-2015f 70%
Close to 2004 US market value

Strong Growth Early Development

1213

80.0 60.0 40.0 20.0 0.0 0.0 1997

Infancy

72.5

38.8
19.1 0.1 2003 0.5 2004 1.9 2005 3.5 2006 7.4 2007 2008 2009 2010 2015f

Source: www.iresearch.com.cn, Access Asia, National Bureau of Statistics (NBS) 4

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VC / PE investment: 2010 saw a boom

Online Shopping Market

1997-2002

2003-2005

2006-2009

2010

Number of Deals

13

84 (59 disclosed)

47 (30 disclosed)

Disclosed Total Investment (mn USD)

A small number of signifiant investment Majority of deals were smaller than 5mn USD

65

455

540

Average Investment (mn USD)

18

Source: www.zero2ipo.com.cn, www.chinaveture.com.cn, toocle.com

2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

VC /PE investment over 10mn USD 2009 slowed down due to financial crisis
Time 2000 2003 2004 2006 2006 2007 2007 2008 Target company Ctrip eLong DangDang DangDang SousouKe Redbaby 360Buy IntoHotel* Business sector B2C - Tourism B2C - Tourism B2C - Book B2C - Book C2C B2C - Motherhood B2C 3C B2C - Tourism PE/VC investor Soft Bank, Carlyle, IDGVC Tiger, Blue Ridge Tiger DCM, Walden Int. D&H Capital, Asian Groove KPCB Capital Today KPCB, Zero2ipo Investment value ($ mn) 12 12 10 30 17 25 10 30

2008
2008 2008 2008 2008

Udooo
Liba ByeCity Vancl 9diamond

B2CGift
B2C -Comprehensive B2C - Tourism B2C Apparel B2C - Luxury

Legend , SIG
Investor AB, Walden JAFCO, Investor AB Qiming, IDG, Legend KPCB, Rapaport, Qiming, Zero2ipo Capital Today

25
15 10 10 10

2009

360Buy

B2C 3C

21

2009

Okbuy

B2CFootwear

Sequoia Capital

17

Source: ChinaVenture database, Zero2ipo.com.cn, Deloitte analysis

2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

VC / PE investment over 10mn USD in 2010 and 2011 sector spread, large deal emerge
Time 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011 2011 2011 2011 2011 2011 Target company 360Buy Moonbasa Lashou VANCL Lightinthebox Mbaobao Vipshop Redbaby Okbuy Ayatuan Letao Yuego yesmynet Manzuo Didatuan Masa Maso 360Buy Lashou OkBuy Zbird Letao Xiu Business sector B2C 3C B2C Apparel B2C - Group buying B2C - Apparel B2C Outbound B2C Accessory B2C - Luxury B2C - Motherhood B2C Apparel B2C - Group buying B2C - Apparel B2C - Motherhood B2C Food B2C - Group buying B2C - Group buying B2C Apparel B2C 3C B2C Group buying B2C Apparel B2C - Luxury B2C Apparel B2C - Comprehensive PE/VC investor Tiger Fund Tiger Fund, GSR ventures Tenaya Venture Tiger Fund Ceyuan, Trust Bridge Partners Legend Capital, DCM Sequoia Capital, DCM Northern light, Sequoia Capital, Intel, DFJ Individual Investor Ceyuan DT Capital Partners Mandra, DCM, Zero2ipo KPCB IDG Sequoia DST, Tigar Milestone Capital, Reinet Fund, GSR Ventures Not disclosed Ceyuan, FountainVest Partners Not disclosed KPCB Investment value ($ mn) 75 80 50 49 35 30 20 20 17 17 11 10 10 10 10 10 500 110 60 50 31 20

Note: All disclosed deals above USD 10 million are included Source: ChinaVenture.com.cn, Zero2ipo database, Deloitte analysis 7
2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

More online shopping companies are expected to go public following Mexcolane and Dang Dang in the next a couple of years
IPO Company Business Sector Time Listing IPO multiples EPS when listed Current P/E Current EPS

Ctrip Mecoxlane

B2C/B2B:Online travel agency

B2C: Apparel

2003 Nasdaq 2010 Nasdaq NYSE

39 157 103

0.01 0.06 0.03

42 63 745

1.07 0.08 0.02

B2C: Dang Dang books/comprehensiv 2010 e

To-be-IPOed Company 360buy Vancl Business Sector B2C B2C Proposed IPO Time 2012-2013 2012-2013 Proposed listing HK or Nasdaq Nasdaq Estimated Market Value (mn USD) 10,000 5,000 Business Sector 3C/comprehensive Clothing

Source: www.pedaily.cn, www.chinaveture.com.cn, finance.yahoo.com, multiple media

2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

Established 8 years later, Taobao now has a comparable transaction value as ebay does today. Registered user accounts for 1/4 of China population
vs.
Year Established Enterprise Type 1995 Listed: Nasdaq C2C 9,510 2003 Private C2C(individual seller based B2C) /B2C 770

Business Model
2010 Revenue (mn USD) CAGR (2006-2010) Main Revenue Stream No. of Registered users (2010 Global) Total Transaction Value (2010, bn USD)

11.3%
Service fee and sales commission

115%
Advertising (product ranking, stand-alone ads, etc.); value-added service fee

94.5 million 62

370 million 61

Comment

ebay is Holding company of Eachnet (since 2003), Taobao is the current C2C market leader, taking currently 3rd largest C2C platform in China, with a over 80% market share total transaction value of 1.4 bn USD in 2009, no service fee and no tax paid for the seller accounting for 4% of total C2C market A supporting online payment system Eachnet lost its market leadership to Taobao in Launched Taobao mall as B2C platform 2006 and has been losing market share since

Source: company websites, www.zero.ipo.com.cn, Deloitte Analysis

9
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Fueled by several rounds of PE investment, Ctrip has shaped Chinas online tourism booking market and gained 50% share
vs.
Year Established Enterprise Type Business Model Focus Sector 2010 Revenue (mn USD) CAGR (2006-2010) Main Revenue Stream 1996 Listed: Nasdaq B2C Tourism 1999 Listed: Nasdaq B2C, B2B Tourism

3450
11% Commission

444
44% Commission

Market Cap (mn USD)

Number of Members, 2010 Global Total Transaction Value (bn USD)

6,770
50+ million 65.6 Expedia holds 56% of eLongs share eLong is 2nd largest online trabel booking agency in China, with 79 mn USD revenue in 2010, accounting for 8% of total market share eLong has been losing its market share over the past five years

6,420
50+ million 6.0 Market leader in online travel booking, with 49% market share Ctrip is expanding its business to more tour operation focused, recently acquired several local travel agencies

Comment

Source: company websites, iReseach, www.zero.ipo.com.cn, Deloitte Analysis

10

2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

Struggling in the low margin book selling sector for 10 years, Dangdang managed to go public in 2010 and substaintially expanded the product offering
vs.
Year Established Enterprise Type Business Model Focus Sector 2010 Revenue (mn USD)
CAGR (2006-2010) Main Revenue Stream Number of Registered users (2010 Global) Total Transaction Value (mn USD) 1994 Listed: Nasdaq B2C, C2C Book/comprehensive 36,930 34% 2000 Listed: NYSE B2C Book/comprehensive 346 64%

Online sales, service fee, sales commission

100+ million

online sale of books and other products

40 million

33,251
2nd Amazon.cn, formerly joyo.com, is the largest B2C company in China, with over $3200 revenue in 2009, accounting for 9.4% market share Amazon.cn is the 2nd largest online book seller in China. It has diversified its product portfolio from mainly books to 20+ categories It offers free delivery in China

342
3rd largest B2C company in China, accounting for 8.5% market share in 2009 Market leader in online book sale sector Dang Dang still focuses on book sector while expanding its product categories Dang Dang offers best price guarantee for its books and free delivery services

Comment

Source: company websites, www.zero.ipo.com.cn, Deloitte Analysis

11
2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

Group buying is an emerging hot sector with over thousand websites and received over 500 million dollars since 2010. Industry consolidation is expected
vs.
Year Established Enterprise Type Business Model Focus Sector 2010 Revenue (mn USD) CAGR (2009-2010) 2008 Private B2C Group buying 460 2009 Private B2C Group buying 150

2000+%
sales commission and advertising

6000+%
sales commission and advertising

Main Revenue Stream

Number of Registered users, (2010 Global) Total Transaction Volume (bn USD)

50 million
2

3 million
0.15

Comment

Groupon just entered China market and looking for partnership/acquisition opportunities Lashou currently ranked 2nd in group buying market in terms of number of user covered, after ju.taobao.com, the group buying platform developed by Taobao Leading online shopping companies (e.g. 360buy.com), social networks (e.g. renren.com), information portals (e.g. ganji.com) and communication portal (e.g. qq.com) all launched their group buying platform Currently there are over 2000 group buying platforms established all over China. Experts expected only 4 to 5 will survive in five years

Source: iResearch, company websites, www.zero.ipo.com.cn, b2b.toocle.com, techweb.com.cn, Deloitte Analysis

12
2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

As Chinas micro blogging, Weibo developed dramatically and became the hottest emerging media covering 140 million users
Sina Weibo Registered members reached 140 million; daily posts exceed 25 million Average time spend / day, user is over 1 hour Conquer 87% market shares by spending time per member and 57% market share by number of active user A comparison with Twitter
Weibo may have a more significant influence to the public than many of the traditional media, i.e. newspaper

Year Established Registered user Obtaining first 50 million users

2006 195 million In 3 years

2009 140 million In 1 year

Top account in Weibo has followers of over 8 million Chinas No1 newspaper issued 3.5 million everyday and only 19 newspaper has circulation over 1 million

Visit proportion in total internet 0.40% in UK, 0.18% in US visits Active user 38 million accounts with 16 or more followers

0.63% in China

100 million accounts with over 20 or more followers

Weibo has become the most important information sources for internet users; an emergency may spread to millions of user in very short time A recent example: a well known and well respected PE fund founder post his decision of elopement in Weibo. The post was forwarded by 5000 times in one hour and 2.4 million comments in 10 days

13

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Bottlenecks Less reliable third party logistics services and underdeveloped credit and payment system remain the biggest issues
Low Ratio of Online Payment Awareness of online payment is still low. Many of customers still prefer cash payment upon receiving products for following reasons The credit system in China is still at early development stage. Online payment safety is a significant concern among e-shoppers Currently online payment platform are not user friendly and often requires installations of specific software under specific systems or websites China has just set up its Third-Party Payment Association and issued licenses to 20+ online payment companies Unreliable Third-party logistics support Most of couriers companies not able to cover lower tier cities / counties Missing the delivery deadline or damaging products are quite common Short of hands in holiday seasons, especially Chinese New Year, resulting in delay on delivery Many of the significant players have invested heavily to build their own logistics system Lack of trust on products and services Many product descriptions online are different from real products, or reported fake products Most consumers are only comfortable to purchase low-value products online, e.g. books, clothes, etc. After sales servcies is usually poor, with a very difficult return / refund terms Information Security Over 20% of Chinese Internet users reported having experiences of being cheated by fraudulent websites Over 40% of Chinese internet users reported having had personal information stolen or manipulated.

14

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