Alibaba: Here Are The Key Growth Drivers In The Chinese E-Commerce Market

Even while Alibaba (NYSE:BABA) has its eyes set on global markets to expand its business, a large part of its growth over the next five years will be driven by increased demand in the Chinese e-commerce market. The country’s e-retail market is estimated to grow to over $1 trillion by 2018; by then, it could become even bigger than the combined e-commerce markets of the U.S., Britain, Japan, Germany, and France. ^[1] The share of online sales in the Chinese retail market is set to increase from 10% in Q2 2014 to over-15% by 2017. ^[2] In this article, we list out the key growth drivers for this explosive growth in this market.

The rapid increase in China’s Internet penetration rate, driven by the rising adoption of smartphones, is one of the main growth drivers in the Chinese e-commerce market. There were more than 360 million online shoppers in China in 2014; this figure, which is even larger than the entire population of the U.S., could grow to over 750 million by 2020, in our view. Further, the trend towards cashless transactions, which is facilitated by more than 4 billion bank cards in China and by the exchange of millions of virtual red envelopes, has further pushed demand in the Chinese market. (Red Envelopes are an app offered by Tencent for transferring money.)  The rural areas represent a source for significant long-term growth, on account of the unique online shopping habits of rural users coupled with tremendous scope for expansion in penetration rates in these areas. The reduction in delivery time and expansion in product categories are other factors that will propel demand in the Chinese e-commerce market.

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Here Are The Key Drivers In The Chinese E-Commerce Market

1. China’s Internet Penetration Rate: The total number of Internet users in China crossed 649 million at the end of 2014. This represented 47.9% of the country’s population. The increasing penetration of the mobile Internet, which crossed 85.8% last year, is expected to fuel Internet usage in the country. On the other hand, desktop penetration was lower in China at around 70.8% in 2014. ^[3]
2. Popularity of Online Shopping: At the same time that Internet penetration rate is rising in China, online shopping is also gaining increased popularity in the country. The percentage of Internet users shopping online rose from 48.9% in 2013 to 55.7% in 2014. ^[3] We expect online shopping to become even more common in China in the coming future.  Hence, we have estimated that online shoppers in China will surpass 750 million by 2020.
3. Smartphone Penetration Rate: The number of monthly active smartphone users in China was seen at 519.7 million in 2014, according to data by eMarketer (a market research firm). ^[4] In comparison, the number of mobile communication subscribers in China was recorded at 1.286 billion at the end of 2014. ^[5] Out of this, 485.26 million were 3G users. The number of monthly active smartphones users in China is forecast to expand to 704.1 million by 2018, according to eMarketer.
4. GDP Per Capita: China’s growing economy has resulted in increased income levels for its citizens. GDP per capita in China rose from $4,433 in 2010 to $6,807 in 2014, according to World Bank. According to certain estimates, the figure could expand by over 6% annually from 2014 to 2020. Hence, an increase in spending power will further fuel demand in the Chinese e-commerce market.
5. Ease of Paying Online: Fueled by rapid urbanization and government policies, cashless transactions are fast gaining popularity in China. China has more than 4 billion bank cards in circulation ^[6]; in addition, tens of millions of Chinese people have exchanged virtual red envelopes through mobile apps. Hence, we expect online payment mechanisms to become even more common in the country in the coming future.
6. Rural Customers: China’s rural areas represent a source of significant growth for the country’s e-commerce market. We note that the Internet penetration rate in China decreases from over 75% in tier-1 and tier-2 cities, to 47% in tier-3 and tier-4 cities and 19% in rural areas.  ((Over 60% of China’s Rural Internet Users are Online Shoppers, China Internet Watch, March 6, 2015)) Yet China’s rural Internet users are even more active on e-commerce sites than their counterparts in urban areas, given the lack of alternative retailing. Hence, the rapid growth of online shopping in rural areas has further augmented demand in the Chinese e-commerce sector.
7. Reduction in Delivery Time: Finally, with increasing investments in logistics and warehousing capabilities, this is directly resulting in improved delivery times for online orders in China. Alibaba is reportedly even testing drones to quickly deliver goods within Beijing, Shanghai and Guangzhou. ^[7] All this is contributing to increased demand in the Chinese e-commerce market.

Our $97.11 price estimate for Alibaba’s stock, is marginally above the current market price.

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1. Retail Sales Worldwide Will Top $22 Trillion This Year, eMarketer, December 23, 2014 [↩]
2. China Online Shopping GMV Soars 47.1%, iResearch, August 11, 2014 [↩]
3. China Internet: 649 Million Users, 86% On Mobile; Advertising Trends, Barron’s Asia, February 3, 2015 [↩] [↩]
4. China now has 520M smartphone users, will top 700M by 2018, TechInAsia, December 22, 2014 [↩]
5. China December mobile phone user base grows to 1.286 billion, says MIIT, DigiTimes, January 23, 2015 [↩]
6. China falls out of love with cash, The Financial Times, Feb 28, 2014 [↩]
7. Alibaba begins drone delivery trials in China, BBC, Feb 4 2015 [↩]