Decoding China's "New Retail" + Giant Internet Ecosystems
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Decoding China’s “New Retail”
+ Giant Internet Ecosystems
LatAm Retail and Internet
Sector Note - May 2018
Fabio Monteiro Luiz Guanais
fabio.monteiro@btgpactual.com luiz.guanais@btgpactual.com btgpactual.com /BTGPactual /BTGPactual
+55 11 3383 2006 +55 11 3383 2755
Summary
03 China trip: Internet DNA as a driving force of
retail revolution
04 A few thoughts about Chinese e-commerce
…and our reading for Brazil and Mexico
07 Delving deep into Chinese ecosystem
15 China snapshot - The O2O experience
22 The main players in China’s booming e-commerce
LatAm Retail and Internet
BTG Pactual Affiliate Research - Banco BTG Pactual S.A.
Fabio Monteiro
fabio.monteiro@btgpactual.com
+55 11 3383 2006
Luiz Guanais
luiz.guanais@btgpactual.com
+55 11 3383 2755
of the BTG Pactual Equity Research team
LatAm Retail and Internet - Equity Research 2
China trip: Internet DNA as a driving force of retail revolution
Napoleon once said: “Let China sleep. When China (41% of global total by market value), such as Didi
wakes up, the world will be shaken.” Of course, (US$50bn valuation), mostly supported by at least
China woke up many years ago to become the one of the giant ecosystems.
world’s second largest economy (so far), with GDP
of US$11.2 trillion. All eyes on China and its secular growth trend…
but it isn’t a copy-paste trend!
We herein provide our feedback from our recent trip The secular growth trend in the Chinese market is
to China, where we met leading Chinese and global set to persist in the coming years, with a burgeoning
companies in the e-commerce ecosystem. Our initial presence of mobile commerce and payments,
takeaway was that, from a retail and e-commerce impressive digitalization of people’s daily lives, and
perspective, China is changing global dynamics. market consolidation by players who have created a
bona-fide ecosystem to attract consumers and sellers
Our 1-week trip focused on internet and technology to their platforms.
and the main goal was to form an initial view on
what internet players (to differing degrees of scale Meanwhile, looking specifically to Brazil and Latin
and success) are doing and the main technology America, although e-commerce in the region is still at its
trends, hopefully giving us an initial reading on early stages, there are already a few successful players,
Brazil, Mexico and the rest of Latin America. with market share ranging from 10%-25%, but that
already hold relevant organic traffic and a fulfillment
More than bringing definite answers, decoding structure to support growth in the coming years.
China’s ecosystem means diving into “New Retail”,
which will eliminate the boundary between offline Yes, companies such as B2W (BTOW3 - Buy), Magazine
and online commerce, with integrated channels, a Luiza (MGLU3 – Buy) and MercadoLibre (MELI - Buy)
seamless consumer experience and an increasingly have all invested (or have plans to invest) in logistics
cashless and card-less society. Chinese “New Retail” and payments solutions to increase buyers’ and seller’s
harnesses convenience, a personalized experience stickiness (such as the Chinese titans did), which, like a
and big data analysis, focusing on consumer déjà vu experience with China’s case, should lead to a
experience - a trend we expect to spread (to differing consolidation of the online market in the hands of a few
degrees) around the world in the coming years. potential winners in the region.
Favorable ecosystem created a competitive However, we do not expect that this consolidation
edge to succeed. will lead to the creation of complete ecosystems that
China is already a global e-commerce leader, with dominate consumers’ daily lives, such as in China,
GMV of US$1 trillion, accounting for 23% of total given these Latin American companies should face
retail sales, which compares to 9.0% in the US, competition from players in different segments (such
2.2% in India, 1.7% in Mexico and 4.3% in Brazil. The as Cielo and PAGS in the payments front), while there is
Chinese e-commerce market grew 24% in 2017, still a high dependency of Brazil Postal Service (Correios)
as per Euromonitor, and 2017-20 growth should to deliver e-commerce purchases (and private players
be 14% p.a. The drivers of China’s success are: (i) still do not have the capacity to absorb this pent-up
the country’s massive base of young consumers, demand). Thus, Latin American e-commerce should
(ii) significant investments in infrastructure, (iii) be a history of consolidation but not full integration of
open source technology, which allows for fast services under the same platform.
technological advancement and (iv) a physical retail
sector in its early stages. Meanwhile, Latin America isn’t an easy environment
Over time, China has created a favorable ecosystem for a foreign player to start operations from scratch,
dominated by Alibaba, Tencent and (to a lesser thus creating further opportunities for Brazilian (and
extent) Baidu, ranging from payments to logistics, LatAm) companies to partner up with Chinese players.
which now paves the way for innovation that However, given compelling opportunities in other
translates into growth (and what growth!). A great Asian markets, we believe China’s focus (in the case of
example
LatAm is the
Retail and number
Internet - of unicorns
Equity in the country
Research the online channel) is still a long way from Latin America.3
A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico 4 LatAm Retail and Internet - Equity Research
One of the objectives of this report is to share Based on the above-mentioned highlights for the
our main thoughts about e-commerce in China Chinese internet ecosystem, an easy conclusion is
and have a reading for Brazil, Mexico and the rest that Latin American countries are not even close
of Latin America. We present below our main to China in terms of e-commerce development,
thoughts, considering the meetings, store visits and it should take a long time to catch up in the
and overall experience we had in China (which will e-commerce, payments and logistics businesses.
be explored in details along the report): This is an opportunity for the players that are more
capable to occupy the space and gain share in a
E-commerce is a high growth market with supposedly high-growth market.
increasing penetration: China is connected, from
taxi drivers to large supermarkets, e-commerce Most of the large e-commerce players in Latam
represents 23% of retail sales, much above were originally large retailers that moved into
American and European average, and, despite the e-commerce. In Brazil, for example, B2W,
a high penetration, prospects for e-commerce Magazine Luiza, Via Varejo, Walmart, which are the
growth are still high. largest players, are all linked to large retail groups.
Only B2W has double digit market share (19% of
Huge ecosystems dominating the e-commerce’s GMV in Brazil) and launched its
e-commerce market: E-commerce is dominated payments platform (Ame Digital) a month ago,
by three groups – Alibaba, Tencent and Baidu, which still with limited number of services and products.
have morphed into huge ecosystems, comprising Magazine Luiza has much superior growth and
businesses such as e-commerce, mobile payment, above-average service levels (per Reclame Aqui),
logistics, ride sharing, games, video, search, news but still have not launched its payments platform.
and social media. These three groups have a The other players need to catch up given many
combined market cap of over US$1 trillion. internal and/or governance issues.
Mobile payment is impressively penetrated Very few players are pure online players.
in all types of business: two players – Alipay and MercadoLibre (29% of e-commerce’s GMV in Brazil)
WeChat Pay – dominate the market, with market started as a pure marketplace, with technology
share of 88%. These players are linked to Alibaba DNA. Amazon, which has less than 1% of
and Tencent, the main ecosystems in China. e-commerce’s GMV in Brazil, is still in the early stages
of its strategy in Mexico and Brazil, and should have
Strong support for startups and unicorns, difficulties to understand the specificities of taxes,
especially those focused in sharing economy, consumer finance and logistics (Inditex, Walmart
AI (artificial intelligence), and content: Tech and many other successful international retailers
environment in China with strong support from are struggling in Brazil for a long time…).
the whole ecosystem helps the creation of startups
and the development of unicorns, such as Didi (ride E-commerce penetration: In Latin America,
sharing) and Sensetime (AI / facial recognition), e-commerce penetration is increasing, but still
valued at US$50bn and US$4.5bn, respectively. representing a much smaller part of retail sales
compared to China, south Korea, the UK and the US.
Cross boarder commerce in China is growing Brazil has a 4.3% penetration as a % of retail sales, the
significantly: Cross boarder commerce jumped to largest in Latin America, and we think it can reach
US$100bn in 2017 from US$54bn in 2015, bigger high single digit penetration in 5 years. Mexico and
than the whole e-commerce in Germany and in Argentina have 1.7% and 2.7%, respectively, with
line with the UK. Alibaba (Tmall Global) and JD good potential to grow as well. This is, by the way,
(JD Worldwide) are expanding their businesses to one of the main reasons behind our secular growth
almost all the countries in the world. call for e-commerce in the region.
LatAm Retail and Internet - Equity Research 5
Winner ecosystems: We do not believe LatAm countries will have a dominant player in e-commerce with a similar scope compared to Alibaba or Tencent. Currently, e-commerce is still small and most platforms are just starting its ventures in payments, logistics, advertising. Thus, most of the money is still flowing through the main commercial banks (Banco do Brasil, Itaú, Bradesco), most of the payments are made through the main acquirers (Cielo, Rede, Getnet), and logistics for e-commerce needs to develop a lot, with private players investing in capacity and starting to gain share over the postal service (Correios). Mobile payment: As we mentioned before, B2W just launched Ame Digital, a payment platform inspired in Alipay and WeChat Pay. It should take time for the platform to gain scale, even though the downside risk is limited and the potential is huge. MercadoPago – launched by MercadoLibre in 2004 – has a strong penetration, but MELI just started to add other products and services besides factoring receivables and processing payments. The other e-commerce players have not launched their platforms yet. Overall, we think it is early to do a strong bet on possible winners, and new entrants (such as Paypal, Pagseguro), incumbent acquirers (Cielo, Stone and others), and banks are also interested in gaining importance in this business as well. Support for startups and unicorns: So far, we have not seen an ecosystem in LatAm helping entrepreneurs and startups to develop (like in the Sillicon Valley or in China). There are a few successful cases in Brazil such as Movile/iFood, VTEX, 99, but this is very little compared to the 65 unicorns in China, which account for 41% of the combined valuation for unicorns in the world (US$814bn). Cross boarder commerce: Cross boarder commerce is irrelevant in the region. Brazil buys R$9bn abroad from websites such as Aliexpress, Amazon US, Wish, JD Worldwide and eBay. However, the country is selling almost nothing through international platforms. There are a few brands such as Melissa and Havaianas selling thourgh JD, but there is potential for much more. 6 LatAm Retail and Internet - Equity Research
Delving deep into Chinese ecosystem LatAm Retail and Internet - Equity Research 7
Napoleon once said about China: “Let China sleep. Aspects that help explain China’s differentials as a
When China wakes up, the world will be shaken”. global internet player include: the role of government,
education levels, the huge amount of investments,
Of course, China woke up many years ago to become Chinese entrepreneurship, the competence and
the second largest economy (so far), with GDP of success of internet platforms that became “national
US$11.2 trillion. However, as it was our first visit, our champions”, and a booming economy.
initial impression was that China is indeed changing
global dynamics, as Napoleon anticipated. China is already an e-commerce leader, with GMV
of US$1 trillion. E-commerce represents 23% of
Our 1-week trip focused on internet and technology total retail sales, the largest penetration in the
and the main goal was to form an initial view on world, which compares to 9.0% in the US, 2.2%
what internet players (to differing degrees of scale in India, 1.7% in Mexico and 4.3% in Brazil. The
and success) are doing and the main technology Chinese e-commerce market grew 24% in 2017, as
trends, hopefully giving us an initial reading on per Euromonitor, and 2017-20 growth should be
Brazil, Mexico and the rest of Latin America. 14% per year.
We also know that China is very different to Latin We visited the following companies:
America and that our region may never be like China. Alibaba Group: largest marketplace in China,
with 52% market share. Market cap: US$500bn
JD.com: largest B2C player in China and
1. JD.com unmanned store
second largest marketplace, with 33% market
share. Market cap: US$51bn
Huawei: world’s largest telecom and IT solution
provider. Revenues: US$100bn
Didi: largest ride-sharing player in China and
world’s second most valuable unicorn (valued
at US$50bn)
Ctrip: China’s largest online travel agency.
Market cap: US$23.5bn
LianLian: third largest payments player
in China
Sensetime: world’s most valuable AI unicorn
(valued at US$4.5bn)
So Young: world’s largest beauty
service platform
We also had the opportunity to experiment JD’s
unmanned store (same concept as AmazonGo),
Hema Fresh, a “New Retail” store and an effective
example of online-to-offline (O2O) experience, and
Y-Fresh, another unmanned store owned by Yiguo.
JD.com unmanned store: In the case of JD’s
unmanned convenience store, the pilot store we
visited is being tested since last fall by the 10k
employees at its Beijing HQ.
Source: 1. BTG Pactual
8 LatAm Retail and Internet - Equity Research
2. JD.com unmanned store
The company also launched two unmanned online. An employee immediately runs around the
convenience stores in January in Tianjin, now store with mobile devices and an optimized “in-
open to the public at Joy City mall in Yantai in store route”, picking up products from shelves and
the Shandong province, and at Sunrise Shopping putting them in shopping bags with digital tags.
Center in Dalian in the Liaoning province. They After the purchase is finished, the shopping bag is put
expect to open approximately 100 unmanned on hangers that lift the bags to the ceiling and onto
stores this year alone. the overhead conveyor belts, which take the bags to
the delivery area. Delivery can be made in up to 30
The concept requires consumers to scan a QR minutes if the consumer lives within a 3km radius.
code upon entrance. Stores are using RFIDs and
ceiling cameras with facial and image recognition Products are fresh and consumers can choose
and heat mapping technologies to track each live seafood from the tanks, fresh fish or beef, take
customer’s movement and product selection. them home or get them cooked onsite and eat at
These innovations will help the company to offer the seating area inside the store.
personalized promotions and ads, and will help the
inventory management process as well. Price tags are digital and prices can be easily
changed (similar to Lojas Americanas store in Leblon
Hema Fresh: Founded by a former executive of district in Rio and Pão de Açúcar store in Iguatemi
JD Logistics, the first store was opened in January Faria Lima mall in São Paulo). Consumers can also
2016. Alibaba acquired the company shortly after scan QR codes on the tags for product information.
and the current store count is 25.
Hema Fresh stores are a hybrid of offline retailer, Payment is made via Alibaba’s Alipay. Stores are
food service and online retailer. With an average cashless and consumers must download the app.
of 3,000 sqm, it is a true (above-average) O2O Consumers’ data are gathered online and offline
shopping experience. and Hema Fresh offers personalized promotions.
Unmanned checkouts are easy to use (similar to
A few highlights on Hema Fresh: CVS in the US and Sainsbury’s in the UK).
An effective 020 (online to offline) and shipping
from store example. Consumers place their orders
Source: 2. BTG Pactual
LatAm Retail and Internet - Equity Research 9
4. Hema Fresh - select products
3. Hema Fresh - store front using an app
5. Hema Fresh - digital checkout 6. Hema Fresh - product pick up
7. Hema Fresh - delivery bag scan 8. Hema Fresh - conveyor belts
Source: 3, 4, 5, 6, 7 and 8. BTG Pactual
10 LatAm Retail and Internet - Equity Research9. Y-Fresh - store front
Y-fresh: a 10-15 sqm unmanned store that looks training. Already home to hundreds of small
like a container. Mix is similar to a convenience store. businesses, the hub invites the most famous and
professional incubators around the world to choose
Owned by Yiguo, a player originally focused on B2B projects and organizes meetings with investors for
in the fruit niche. It entered e-commerce operating startups in different stages.
the fresh fruit platform for Alibaba (Tmall), receiving
a US$300mn investment from Tmall. Finally, we visited Fosun (leading private equity
player with total investments of US$64bn) and CICC
The experience was good. To enter the store, (one of the largest investment banks in China) and
consumers need to scan a QR code via Alipay or had the opportunity to touch base with venture
WeChat Pay apps. After selecting the products, the capitalists and startups at a cocktail event held at
customer puts them in a basket for recognition. Brazil’s embassy in Beijing.
Customers pay via one of the mobile payments
platforms. If the customer forgets to pay for a With such a diversified list of meetings and
product and decides to leave the store, the door experiences, we learned a lot of things about
doesn’t open and advises the customer that there internet and e-commerce in China. The main
is an unpaid product. highlights are:
We also visited Dream Town, a startup hub China is connected, from taxi drivers to large
near Alibaba’s headquarters. It offers successful supermarkets, from mom-and-pop stores to
applicants free office space, cash subsidies and big chains, and most individuals have access to
the internet;
Source: 9. BTG Pactual
LatAm Retail and Internet - Equity Research 1110. Top 10 countries by number of internet users (mn) - 2016 14. Chinese mobile e-commerce GMV - US$bn
710 1,174
460 1,048
290
888
140
120 720
100
90 521
70
60 324
60
151
11 44
11. Smartphone penetration in China 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
58.9% 58.8%
52.7% 54.8% 15. Penetration of mobile e-commerce (as a % of online GMV)
50.4%
45.4% 47.9% 73% 74%
42.8% 68% 71%
61%
51%
34%
15%
6%
2015 2016 2017 2018E 2019E 2020E 2021E 2022E
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Growth prospects for e-commerce are
Mobile payment is impressively penetrated
still relevant;
in all types of business. Two players dominate
12. Chinese e-commerce GMV - US$bn this market: WeChat Pay (owned by TenCent)
and Alipay.
CAGR (2012-2017) =34% 1,586
1,436
CAGR (2017-2020) =14% 1,251 We here mention the example of Alibaba and its
1,059
854 payments division, Alipay.
635
444 Born in 2004, Alipay was first created as the payment
293
department of Taobao, the B2C platform of Alibaba
Group. It was right after eBay acquired Eachnet.
2013 2014 2015 2016 2017 2018E 2019E 2020E
com in China, and Taobao saw this acquisition as a
13. Penetration of e-commerce - by country (2017)
major threat to its marketplace business.
23.1%
Alibaba and Alipay spun-off in 2011. Alibaba pays
16.0%
19.1% Alipay an annual fee for payment processing and
12.6% Alipay pays Alibaba annual fees for royalty and
9.0%
7.9% software technology. After the spin-off, Jack Ma,
7.4%
4.3% Alibaba’s founder, ended up with a 46% stake in Alipay.
3.2%
2.7%
2.2%
1.7% In 2011, Yahoo (at the time with a 40% stake in
Alibaba) disclosed to its shareholders that Alibaba
Mobile commerce is strong, representing had spun off Alipay to comply with the rules,
the majority of e-commerce; causing its shares to drop 12%, and that Jack Ma
(founder and then CEO of Alibaba) only informed
Yahoo about the spinoff five weeks after the event.
Source: 10, 12, 14 and 15. BCG, BTG Pactual. 11 and 13. Statista, BTG Pactual.
12 LatAm Retail and Internet - Equity ResearchIn February this year, Alibaba Group Holding Brazil and Latin America are not priorities
said that it had agreed to buy a 33% stake in Ant for most players that we visited. They all
Financial Services Group. Alibaba’s reunion with Ant acknowledge the relevance of the region.
Financial is also seen as preparation for the affiliate’s But distance, language barriers and the huge
anticipated public listing in addition to fueling its opportunities/growth potential in Asia and other
global acquisition drive. countries mean Chinese players aren’t looking
closely at our region. There are exceptions, of
While no cash is changing hands, Ant Financial will course. This year, Didi acquired Brazil’s 99 Taxis,
end royalty payments to Alibaba that were worth while Fosun acquired the asset management firms
more than US$300mn in the last fiscal year. Rio Bravo and Guide Investimentos (subsidiary of
Banco Indusval).
E-commerce is dominated by three groups,
which have morphed into huge ecosystems: This is definitely an opportunity for us in Latin
Alibaba, Tencent and Baidu. These three groups America. There are many ideas that are being
have a combined market cap of over US$1 trillion. successfully implemented in China and that can be
The vast majority of the companies we visited replicated in Brazil, and “tropicalization” is not really
have a direct link to one of these three players. The easy for foreigners, creating the opportunity for
exceptions were Huawei and LianLian. investors to partner with Chinese groups or create
similar companies in Latin America.
Our understanding is that the Chinese government is
not a shareholder in any of these three large groups, Unicorns (startups with valuation of over
which led state-owned companies to underperform. US$1bn) are all over the place. Official data from
However, the Chinese Science Ministry recently CB Insight says that of the 197 unicorns in the
announced that the nation’s first wave of open AI world, 65 are in China and 116 are in the US.
platforms will rely heavily on Baidu for driverless cars, Didi is one of the largest unicorns, with a valuation
Tencent for AI (Artificial Intelligence) in healthcare of US$50bn. It grew by acquiring other players and
and Alibaba for smart cities. using local knowledge to achieve its dominant
position. Uber was a relevant player in China but
We’ve been seeing a few moves by these groups to decided to leave the country.
invest in and/or capitalize state-owned companies
- Unicom is a recent example - as a way to support
16. Unicorns - China vs. US
industries that the government considers strategic.
These moves can also be seen as a way to revert
bad results at some state-owned companies, with 21% 13%
the private groups helping with management ideas,
experienced managers on Boards of Directors, and
29% 41%
strategies to increase productivity and reduce
losses. So far, we haven’t seen any real moves in that
direction, but it is a possibility.
50% 46%
Meanwhile, the government and domestic
regulators have increased their scrutiny of online Quantity Valuation
platforms in response to what they consider to
be cyber-security violations in their social media/
messaging platforms.
Source: 16. BCG, BTG Pactual.
LatAm Retail and Internet - Equity Research 13Valuation One big difference between Didi and Uber is in the
Company Country Industry
(US$bn) intention to create an ecosystem. In order to reduce
Uber US 68,0 On-Demand churn, Didi is planning to provide additional services
that go far beyond its core business of ride sharing.
Didi Chuxing China 50,0 On-Demand The portfolio of Didi’s ecosystem may include
offering financing for drivers to purchase their cars
Xiaomi China 46,0 Hardware and car rentals.
Meituan
China 30,0 E-commerce
Dianping Sensetime (largest AI platform company) is another
Airbnb US 29,3 E-commerce
unicorn we visited, with a valuation of US$4.5bn,
based on a US$600mn Series C investment round
Other announced in March 2018. With 1,500 employees
SpaceX US 21,5
Transportation
(800 in R&D and 150 AI PhDs), it focuses on four
Palantir
Technologies
US 20,0 Big Data pillars; face recognition, image recognition,
autonomous driving and human-machine
WeWork US 20,0 Facilities interaction. The Chinese government says AI is the
Digital Media/ new engine for industry upgrades and wants China
Toutiao China 20,0
AI to become an AI innovation center for the world.
Lu.com China 18,5 Fintech
AI and IOT are present in the strategy of many
Pinduoduo China 15,0 E-commerce of the companies we visited, from startups to
large groups like Alibaba, JD and Huawei. Facial
Pinterest US 12,3 Social recognition was the most cited AI application and
is increasingly a reality in the country.
When Uber entered the Chinese market, it soon
learned it had to change its core product. At first,
customers had to validate credit card information
before opening an account. This presented a
major obstacle for many potential Chinese users.
Uber China recognized this disadvantage in its
business approach and, just in time for the formal
launch in February 2014, added the option of
payment via Alipay (it later partnered up with
Baidu for a map service).
But Uber had to spend a huge amount of money
to compete against the market leader, Didi, and
attract more users to its platform, which became
unsustainable.
14 LatAm Retail and Internet - Equity ResearchChina snapshot The O2O experience LatAm Retail and Internet - Equity Research 15
We provide below a detailed analysis on the 19. Chinese e-commerce sector GMV (US$bn)
Chinese e-commerce market, including the CAGR (2012-2017) =34% 1,586
1,436
variables that paved the way for the creation of a CAGR (2017-2020) =14% 1,251
favorable ecosystem. 1,059
854
635
China is already the largest e-commerce market,
444
setting the benchmark for the present and future 293
of global retailing. Its 710mn internet users account
for as many as India and the US combined, and with 2013 2014 2015 2016 2017 2018E 2019E 2020E
online spending getting closer to US levels.
20. China is the world’s 2nd most Internet-driven economy
8.0%
17. Top 10 countries by number of internet users (mn) - 2016 Share of internet-driven GDP
6.9% of total GDP (%2016)
710
460 5.6% 5.6% 5.4%
290
140
120 4.0%
3.6% 3.4%
100 2.8%
90 2.4%
70
60
60
18. Penetration of e-commerce - by country (2017)
23.1%
A major development in China e-commerce has
16.0%
19.1% been the shift from C2C to a B2C dominated model
12.6% as this market has evolved.
9.0%
7.9%
7.4% 21. Share of B2C and C2C in China’s online shopping market by GMV
4.3%
3.2%
2.7%
2.2%
1.7% 54% 54% 55% 57% 56% 60% 61%
With a forecasted double-digit CAGR in the
coming years, online retailing is expected to grow
from ~20% of retail sales in 2017 to 25% by 2020, 47% 46% 45% 44% 44% 40% 39%
according to PWC.
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Thanks to higher disposable incomes and improving B2C C2C
living standards, consumers in China’s lower-tier The drivers of Chinese success are: (i) the country’s
cities and rural areas have seen rising purchasing massive base of young consumers, (ii) significant
power, leading demand to trade-up. With further investments in infrastructure, (iii) open source
urbanization, lower-tier markets are expected to be technology, which allows for fast technological
the major driving factor over the forecasted period advancement and (iv) a physical retail sector still in
in China. its early stages.
In terms of retail stage of development, market
maturity was still low when China entered the
Internet era, with many underserved segments and
room for development in traditional industries.
Source: 17, 18 and 20. BCG, BTG Pactual. 19. Euromonitor, BTG Pactual. 21. iResearch, BTG Pactual.
16 LatAm Retail and Internet - Equity Research22. When e-commerce started in China, offline retail had low cover- 25. Penetration of devices for internet access (2015)
age and was highly fragmented
1,105 90%
83%
78% 76%
Retail floor space per
thousand ppl (m2, 2005)
51%
32%
18
23. Most markets occupied by fragmented and inefficient
independent channels Mobile Desktop/Laptop Tablet
Groceries sales channel
breakdown (2005) Mobile shopping behavior in China is more
18% frequent than store visits.
Independent
Retail 53%
26. Shopping frequency - in-store (China - 2017)
2%
4% Daily
Chained 10%
Retail
47% 82% Weekly
36% Monthly
20% A few times a year
Once a year
One of the trends of the “New Retail” era, with China
Never
at the forefront, is consumers’ mobile-first behavior.
As the lines between e-commerce, mobile and 28%
social media have blurred, China has seen a broader
convergence between online and offline retail.
27. Shopping frequency - in-store (Global - 2017)
Quoting Jack Ma, Alibaba’s executive chairman: 2%
3% Daily
“Commerce as we know it is changing in front of 11%
30% Weekly
our eyes. “E-commerce” is rapidly evolving into “New Monthly
Retail.” The boundary between offline and online A few times a year
commerce disappears as we focus on fulfilling the 24%
Once a year
personalized needs of each customer”. Never
30%
24. Retail m-commerce sales in China (US$bn) and penetration as a
% of total e-commerce
71% 73% 74%
68%
61% 28. Shopping frequency - online via PC (China - 2017)
1,174
51% 1,048 3%
888 5% Daily
34% Weekly
720 13%
35% Monthly
15% 521
A few times a year
6%
324 16% Once a year
151 Never
11 44
28%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: 22. National Bureau of Statistics, Euromonitor, BCG, BTG Pactual. 23, 24 and 25. BCG, BTG Pactual. 26, 27 and 28. PWC, BTG Pactual.
LatAm Retail and Internet - Equity Research 1729. Shopping frequency - online via PC (Global - 2017) 32. China’s digital ecosystem - building a strong competitive advantage
Independent
3% Alibaba Tencent Baidu
Companies
7% Daily
TaoBao:
7% Weekly China`s
34% Monthly biggest mobile
commerce
A few times a year JD: Direct
16% platform, with
sales
integrated
Once a year entertainment
e-commerce
platform, JD Suning,
Never Digital
and social
manages such Gome,
features. -
Commerce functions as Vipshop.
33% merchan- ~5% share
Tmail: China`s
dising and
largest
pricing.
third-party
~15% share
platform for
30. Shopping frequency - online via mobile (China - 2017) brands and
retailers.
~80% share
2%
7% Daily Alipay:
China`s WeChat Pay:
8% Weekly largest online Payments Baidu Wallet:
Monthly third-party platform Payments China UMS,
payment integrated system from 99bill,
11% 45% A few times a year Payments
system, with into popular largest search ChinaPnR.
more than messaging engine. ~25% share
Once a year 450 million app. ~20% share
users. ~20% share
Never ~50% share
27%
WeChat:
Messaging
app with
integrated
shopping fea-
tures (a much
31. Shopping frequency - online via mobile (Global - 2017) expanded
Whatsapp)
Sina Weibo:
~800 million
3% China`s
8% Daily biggest media
monthly
Social users.
Weekly platform - -
Media
11% (Twitter-like).
QQ: Popular
38% Monthly ~400 million
messaging
monthly users
A few times a year app with
greater focus
19% Once a year on integrated
games/blog-
Never ging (similar
to Whatsapp)
21% ~550 million
monthly users
IQIyi, PPS:
China`s LeTV, Sohu,
China is a must-play market, having created a favorable Vídeo Youku, Tudou. Tecent Video.
leading video Bilibili.
Streaming ~20% share ~15% share
(and multichannel) ecosystem that now paves the way platform.
~20% share
~25% share
for innovation that translates into growth of its local Baidu:
companies, such as the case of Alibaba (US$500bn Shenma:
China`s
biggest
market cap) and JD.com (US$51bn). Search
Mobile search
engine.
Sogou.
~5% share
search engine -
(similar to
~5% share
Google).
A holistic data chain covering sales, payments, logistics ~75% share
and finance, it offers insights into consumers’ demand
trends and can help optimize product planning and The ecosystem built especially by Alibaba and Tencent
supply chain, also benefiting inter-channel integration was so important that any company wanting to
and a better customer experience. succeed in China must pick one of them as its platform
for tapping into the wallet of Chinese consumers.
Source: 29, 30 and 31. PWC, BTG Pactual. 32. BCG, BTG Pactual.
18 LatAm Retail and Internet - Equity Research33. Alibaba vs. Tencent Chinese companies are playing catch-up by buying
inventions, brands and distribution globally. China’s
Alibaba Tencent
big three internet giants, Alibaba, Baidu and Tencent,
Payments Alipay WeChat Pay have spent nearly US$40bn since 2016.
E-commerce Taobao, Tmall JD.com, Vipshop 35. Selected investments since January 2016
Social Weibo WeChat, QQ Target Amount Acquisi-
Country Sector
company (US$bn) tion date
Browsers UC Browser Q Q Browser
Intime China Retail 2.6 Jan. 2017
Video Youku, Tudou Tencent Video
Retail Suning, Hema Younghui, Carrefour Didi China Transport 4.5 May. 2016
Cloud Ali Cloud Tencent Cloud
Food
Alibaba Ele.com China 1.2 Apr. 2018
delivery
Travel Fliggy LY
Bike Sharing Ofo Mobike Southeast E-com-
Lazada 1 Apr. 2016
Asia merce
Enterprise
Ding Talk WeChat Enterprise
productivity
Lyft China Transport 1 Jan. 2016
Maps Autonavi Tencent Maps
Banking MyBank WeBank Online
iQiyi China 1.5 Feb. 2017
Video
Baidu
O2O demand Koubei, ELE.ME Meituan Dianping
Uber
China Transport 2 Aug. 2016
China
E-commerce with Chinese characteristics implies
integration between online and offline (O2O) E-com-
Flipkart India 1.4 Apr. 2017
channels, with the online ecosystem deeply merce
connected into consumers’ daily life.
Automo-
Tesla US 1.8 Apr. 2017
34. The digital life of Chinese consumers (% of time spent) biles
Social Network
China
Media Consumption Online
2%1% Musica China
music
2.7 Jul. 2016
Corp
4% 2% 18%
Instant Messaging
8% Shopping
Gaming Tencent Didi China Transport 4.5 Aug. 2016
10% Browsing
17%
Search
Online
11% Banking and Supercell Finland
gaming
8.6 Jun. 2016
Financial Payments
Mapping
12% 15%
e-Book
Ticket
Meituan China 3.3 Oct. 2017
Microblogging booking
Lufax China Financial 1.2 Jan. 2016
Source: 33. Companies, BTG Pactual. 34. E-marketer, BTG Pactual. 35. WSJ, BTG Pactual.
LatAm Retail and Internet - Equity Research 19To illustrate the importance of a favorable ecosystem, 37. China third-party mobile payment - market share (2017)
in 2017 Chinese unicorns accounted for 29% of the 1%
1% Alipay (Alibaba)
world’s unicorns by quantity and 41% by valuation. 4%4% 1% WeChat Pay (Tencent)
36. Unicorns - China vs. US 1Qianbao
26% Others
Union Mobile Pay
21% 13% 62% JD Wallet
Lianlian Pay
29% 41%
As per Forrester Research, the volume transacted
50% 46% in mobile payments in China is 70x greater than
that registered in the world’s #2 market for such
Quantity Valuation
technology, the US.
38. TPV surging to 70x that of the US by 2016
Valuation 8,521
Company Country Industry 3rd-party mobile
(US$bn)
payment value
(US$bn)
Uber US 68.0 On-Demand
70x
Didi Chuxing China 50.0 On-Demand
Xiaomi China 46.0 Hardware
112
Meituan
China 30.0 E-commerce
Dianping
Airbnb US 29.3 E-commerce Mobile payments directly replaced cash payments
Other and grow strongly in China.
SpaceX US 21.5
Transportation
Palantir 39. Payment method in China
US 20.0 Big Data
Technologies
18% 17%
WeWork US 20.0 Facilities
10%
17%
Digital Media/ Cash
Toutiao China 20.0
AI 25% Credit Card
Mobile
Lu.com China 18.5 Fintech
65% Online
47% Other
Pinduoduo China 15.0 E-commerce
Pinterest US 12.3 Social 2011 2015
The pillars of the Chinese ecosystem have also
China had 540 million mobile payment users in 2017. allowed its companies to develop a strong cross-
Although Chinese consumers still mainly use cash border segment, with Chinese cross-border
as a means of payment, it has laid the foundations e-commerce transactions soaring 27% y/y to
in recent years for a more cashless society, with US$100bn in 2017.
fierce competition between Alipay and WeChat Pay
(controlled by Tencent).
Source: 36 and 39. BCG, BTG Pactual. 37. iResearch, BTG Pactual. 38. Forrester, BTG Pactual.
20 LatAm Retail and Internet - Equity ResearchWith consumers’ increasing demand for imported
products from cross border e-commerce platforms,
a growing number of internet retailers, including
Tmall, JD.com and Suning.com, have started to
expand their business to cross-border e-commerce.
For instance, Alibaba launched Tmall Global as its
cross-border e-commerce platform, attracting
many overseas manufacturers and retailers to join
its marketplace.
40. Cross-border transactions in China (US$bn) and y/y growth
47%
116
100
79
27%
15%
2016 2017 2018E
41. Market share - cross-border e-commerce (2017)
4.3% Kaola.com
5.3% Tmall.com
6.4% 21.4%
Vip.com
13.6% JD.com
Jumeiglobal.com
17.7%
Vxiaohongshu.com
15.2% Yamtou.com
16.1%
Others
Source: 40 and 41. E-marketer, BTG Pactual.
LatAm Retail and Internet - Equity Research 21The main players in China’s booming e-commerce 22 LatAm Retail and Internet - Equity Research
We provide below a snapshot of the Chinese 45. Chinese e-commerce market share (2017)
internet sector, which includes some of the
2.5%
companies we visited during our 1-week trip. 3.2% Tmall.com
9.7% JD.com
Others
Vip.com
51.7% Suning.com
32.9%
Alibaba - market cap (US$500bn)
Alibaba has China’s largest e-commerce (selling
goods online) platform, with 52% market share in 46. Alibaba’s ecosystem
terms of gross merchandise value (GMV) and 507
million monthly active users (MAUs) in 2017.
It mainly monetizes via online advertising. Its online
advertising revenue accounted for 70.0% of China’s
total e-commerce retail revenue in FY17 (ended
March), making it the largest online advertising
platform with 29.8% market share in 2016.
42. Alibaba’s sales (US$mn) 23,531
CAGR (2012-2017) =50%
15,912
12,302
47. Alibaba’s nationwide logistics network
8,583
5,489
3,131
2012 2013 2014 2015 2016 2017
43. Alibaba’s EBITDA (US$mn) and EBITDA margin
8,555
51%
38% 6,155
34% 36%
30% 4,614 39% Nationwide Fulfillment Network
4,351
is Already Established
1,886
941
48. Fulfillment network - Alibaba
2012 2013 2014 2015 2016 2017
9,334
44. Alibaba’s FCF (US$mn)
7,235
5,410
3,531
1,904
1,111
2012 2013 2014 2015 2016 2017 Source: 42, 43, 44, 46, 47 and 48. Company, BTG Pactual. 45. E-marketer, BTG Pactual.
LatAm Retail and Internet - Equity Research 2351. JD’s FCF (US$mn)
3,189
998
JD - market cap (US$51bn)
509
The #2 marketplace player in China, controlled by 144
Tencent, with 33% share and ~300 million active
(67) (180)
customers (growing at a 40% pace per year). The
company also offers online and in-person payment 2012 2013 2014 2015 2016 2017
options and customer services. It operates
approximately 210 warehouses with an aggregate 52. JD’s active customer accounts (millions)
gross floor area of ~4 million square meters in over 293
50 cities.
227
70% of JD’s GMV comes from its B2C platform, with
5k brands, while the remaining 30% comes from 155
~170k sellers, and a take rate ranging from 3%-10%.
91
47
49. JD’s sales (US$mn) 29
CAGR (2012-2017) =52% 53,678
2012 2013 2014 2015 2016 2017
38,895
53. JD’s nationwide logistics network
28,850
18,666
11,279
6,558
2012 2013 2014 2015 2016 2017
50. JD’s EBITDA (US$mn) and EBITDA margin
1,148
4%
768
2% 509
1%
0%
(47)
(280)
-4%
-4% (674)
2012 2013 2014 2015 2016 2017
Source: 49, 50, 51, 52 and 53. Company, BTG Pactual.
24 LatAm Retail and Internet - Equity Research56. China online travel vs. total market size (US$bn)
2016 2020E
1,013
CTrip - market cap (US$23bn)
674
Ctrip.com is a leading provider of accommodation
reservation, transportation ticketing, package
253
tour and corporate travel management and other 97
travel-related services in China.
Online Offline
It has experienced rapid growth since its inception
in 1999 and is now China’s largest travel company.
57. China vs. US online travel penetration (2016)
Ctrip covers approximately 500,000 hotels in China
and approximately 750,000 hotels abroad. There are 45%
just a handful of OTAs in China, with Ctrip, Qunar
and Meituan-Dianping being the main ones. Ctrip 30%
and Qunar are particularly popular with app users,
a growing segment of the market.
15%
54. CTrip’s sales (US$mn)
3,967
CAGR (2012-2017) =52%
2,896
58. CTrip ecosystem
1,734
1,193
876
659
2012 2013 2014 2015 2016 2017
55. CTrip’s EBITDA (US$mn) and EBITDA margin
18% 18% 564
14%
6%
156
119 0% 111
5
-4%
(128)
2012 2013 2014 2015 2016 2017
Source: 54, 55, 57 and 58. Company, BTG Pactual. 56. Ctrip, BTG Pactual.
LatAm Retail and Internet - Equity Research 25Other companies visited during the week in China
LianLian Pay - China’s 3rd Biggest Payment
Player: With around 150 million users, the Hong
Kong-licensed LianLian International is the fourth
Huawei - World’s Biggest Telecom Solution largest non-banking third party payment processor
Provider: Huawei is a global information and in China. The company was founded in 2003 and
technology (ICT) solution provider, ranked 83 in is known by the name Lianlian Yintong Electronic
Fortune Global 500 ranking, and with a footprint in Payment Co., Ltd.
more than 170 countries. What makes the company
unique is its broad range of offerings that include The company now processes payments in 19
wireless telecommunications infrastructure, currencies and has established firm business
enterprise networking, cloud-based solutions and relationships with all the domestic banks in China.
services, and consumer devices. Huawei has 200k It is also one of the top mobile payment companies
employees and revenues of US$100bn, despite still in China. LianLian processes billions worth of
being a non-listed company. payments between merchants and consumers of
international retail giants such as eBay, Amazon,
and Ali Express.
Didi - China’s Biggest Ride-Sharing Player: Didi
Chuxing is a mobile transportation platform, offering
a full range of commuting options to 400 cities in SenseTime - World’s Most Valuable AI Unicorn:
China, and is a dominant player in its segment (with SenseTime develops face recognition technology
~100% share). The company offers a full range of that can be applied to payment and picture
mobile tech-based mobility options for close to 300 analysis, which could be used, for instance, in bank
million users across over 400 Chinese cities, including card verification and security systems.
taxi hailing, private car hailing, Hitch (social ride-
sharing), DiDi Chauffeur, DiDi Bus, DiDi Test Drive, Ranked fifth in China Money Network’s China AI Top
DiDi Car Rental, and DiDi Enterprise Solutions. 10 Ranking in 2017, SenseTime currently provides its
face recognition technology to over 300 companies
In January 2018, Didi announced that it acquired including China Mobile Communication Co, China
control of 99 Taxis in Brazil, sending technology UnionPay, Huawei Technologies Co. Ltd., Xiaomi Inc.
engineers to Brazil and sharing its expertise. and JD.com Inc. Founded in 2014, it announced in
March this year a US$600mn Series C investment
Didi has a valuation of more than US$50bn, making round (which, with series A and B, totals a US$1bn
it one of Asia’s largest startups. investment in the company), valuing it at over
US$4.5bn
26 LatAm Retail and Internet - Equity ResearchSoYoung - World’s Biggest Beauty Service China International Capital Corporation Platform: The Beijing-based company, which Limited: Founded in 1995, it is one of China’s has 25mn active users in its SoYoung app, has leading investment banking firms that engages 25k clinics and thousands of plastic surgeons in in investment banking, securities, investment its platform. It’s trying to tap an aesthetic medical management, and other financial services primarily services market forecast to double to US$11.3bn with institutional clients. In 2017, Chinese tech over the next five years, according to a prospectus giant Tencent Holdings agreed to buy a 5% stake from Union Medical Healthcare Ltd. SoYoung has a in CICC, creating a partnership between two of the valuation of US$500mn-US$1bn country’s tech and finance majors. Fosun - China’s Biggest Private Investment Group: Fosun International Limited is a Chinese international conglomerate and investment company, with market cap of US$20bn and US$2.1bn net income in 2017. Founded in 1992, the company is headquartered in Shanghai and was incorporated in Hong Kong in 2004. It owns five listed companies in the Chinese mainland and has stakes in 20 others. In 2013, Fosun teamed up with Alibaba and other parties in a logistics project valued at about 5 billion yuan (US$816mm). LatAm Retail and Internet - Equity Research 27
Appendix 60. Organic traffic (% Direct + mail)
Amazon’s unsuccessful history in China 74%
63% 64% 65%
59%
Despite being in China for over ten years, after
acquiring Joyo.com in 2004 (biggest bookseller
38% 39%
in China), Amazon has struggled due to a lack of
local knowledge and privacy issues in the country. 25%
Indeed, most tech giants made the classic mistake
of replicating their successful business model at
home in China. Gome Tmail.com Dangdang Amazon Vip.com JD.com Suning.com Taobao
Amazon brought the same design and mindset 61. Organic traffic (% Direct + mail + unpaid search)
it used for American customers, with very few
adjustments for the local market. The model of 88%
84% 85%
working with major distributors and manufacturers, 77% 80% 82%
which was a success in Amazon’s operations in
the US, Germany and UK, wasn’t enough in China, 56%
quickly earning it the undesirable reputation of 44%
being more expensive in a market where consumers
are ultra price-sensitive.
In addition to having its own Chinese store at Tmail.com Gome Suning.com Amazon JD.com Dangdang Taobao Vip.com
Amazon.cn, at the start of 2015 Amazon opened a
store on rival Alibaba’s Tmall platform, where it pays
62. Amazon’s distribution network in China (fulfillment centers)
a commission to the Chinese e-commerce giant.
59. B2C e-commerce market share – China (2017)
Tmall.com 51.7%
JD.com 32.9%
Vip.com 3.2%
Suning.com 2.5%
Gome 1.0%
Yihaodian 1.0%
Dangdang 1.0%
Amazon 0.9%
Others 5.8%
In 2016, it started offering its Prime free-shipping
service in China, ratcheting up attempts to
compete with Alibaba Group. However, Prime’s
fast, free delivery and its discounts don’t stand out
in China because local companies can match or
surpass Amazon’s offerings. In addition, Prime is also
without Prime Video in China due to government
censorship, further weakening the program’s value.
Source: 59. E-marketer, BTG Pactual. 60 and 61. Similar Web, BTG Pactual, as of 05/16/2018. 62. Company, BTG Pactual.
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