Alibaba, Baidu Riding The China Boom

According to a recent report published by China Internet Network Information Center (CNNIC) on Internet development in China, that country added 40 million users to the Web community within the first half of this year. China is home to the largest number of broadband subscribers and Internet users in the world. The June 2009 count of 338 million Internet users reveals a penetration rate of over 25%, and usage has grown 13% over the year. Of this population, nearly 133 million users access the net via cell phones and 320 million users have access to broadband. While entertainment, information and social networking command the biggest share of online time spent by the users, online shopping is also gaining popularity. In the first half of the year, the number of shoppers grew by 14 million to 87.9 million by June. With a market growing this fast, it comes as no surprise that China-focused players such as Alibaba and Baidu are reporting good results.

Alibaba, the Hong Kong-based B2B e-commerce company, recently turned ten years old and reported Q2 results. Revenues of RMB908.3 million ($133 million) grew 24% over the year and 13% over the previous quarter. There were 42.8 million registered users as of the end of June compared with 32.5 million a year ago, representing growth of 32% over the year and 6% over the quarter. The Chinese B2B e-commerce market is valued at $205 million, and Alibaba is said to have 62% of this market share.

EPS of HK$5.83 fell 33% over the year but grew 3% over the quarter on account of higher advertising and technology spending. It does not appear as though Alibaba will curtail this spending in the coming quarters, and the company has already launched a $30 million global advertising campaign that they claim will be used to help drive interest in SMBs.

Revenues from the international marketplace stood at RMB574.8 million ($84.2 million) for the quarter, growing 23% over the year and 14% over the quarter. The number of international users grew 69% over the year and 10% over the quarter to 9.5 million.

Alibaba is looking to expand their operations outside Chinaand to promote this goal, they introduced the ‘Gold Supplier membership’ to SMBs outside Greater China. They also launched the ‘Gold Supplier international edition’ to replace the existing International TrustPass membership. These membership plans aim to expand the level of service for the international members by increasing access and exposure to the global marketplace.

The company’s efforts are yielding results as the number of registered users and paying members grow in Indiaand Japan. In the quarter, registered users in India exceeded 1 million, making Alibaba one of the top B2B e-commerce marketplaces in that country. Alibaba.com Japan introduced a Japan Link in Chinese to help Chinese suppliers gain access to the Japanese buyers through the Japanese-language Web site.

To globalize their reach, Alibaba plans to launch a B2B platform in the United States by the end of the year; this platform is currently in the testing phase. They are also setting up a joint venture in India to manage their B2B platform there.

But growth is not restricted to the international segment. Revenues from the China marketplace stood at RMB333.5 million ($48.8 million), growing 26% over the year and 11% over the quarter. The number of China marketplace users grew 24% over the year and 5% over the quarter to 33.3 million. Paying members within the user base also grew by a significant 44% over the year and 10% over the quarter to 531,471.

Within the China market segment, Alibaba launched a Business Network Service to help members manage business relationships by identifying and capturing potential opportunities and take advantage of the networking effect on their marketplace. They also launched services such as Mobile China TrustPass and Traffic Analyzer.

The company ended the quarter with RMB 7.1 billion ($1 billion) in cash. They are looking to use some of this cash for mergers and acquisitions planned in the near future. While the company has been very quiet on the nature of acquisitions, they did indicate that they aren’t looking at global companies.

Alibaba’s stock took a deep dive recently as Yahoo! sold off its 1.14% stake for nearly $150 million. Earlier this year, founder Jack Ma sold nearly 13 million of his shares for $35 million. The stock had fallen 12% on the news of the Yahoo sale! but has since managed to rebound and is trading at HK$18.40, taking its market capitalization to HK$93 billion (US$ 12 billion).

A recently released comScore report says that there were 113 billion online searches in July, which represents an increase of 41% over the year. Google remained the world leader in searches with 76.7 billion, or a 67.5% market share, followed by Yahoo! at 8.9 billion searches or a 7.8% share. Baidu(NASDAQ: BIDU) came in a close third with 8 billion searches or 7% worldwide market share. But Baidu remained the leading Internet search engine in China with over 70% of the market share in the region.

Baidu recently published their Q2 results. Revenues grew from $117 million to $161 million with online marketing revenues increasing 36% over the year. EPS of $1.61 grew 45% over the year. Analysts were expecting revenues of $158 million with EPS of $1.43.

During the quarter, the company had 203,000 active online marketing customers, a 12% increase over the year and a 10% increase over the previous quarter. Revenue per online marketing customer grew 23% over the year and the quarter to RMB5,400.

To retain their leadership position in the market, Baidu is introducing new products, adopting new marketing techniques and improving the user experience. The marketing strategy includes solutions to meet the needs of Chinese businesses, SMBs in particular. Earlier this year, Baidu also launched Phoenix’s Nest, the online marketing professional edition with enhanced bidding platform for online marketing customers. To improve the user experience they launched Project Aladdin, which is an open platform for producing richer search results such as localized results. The company is working with webmasters to create growth for content inclusion and display formats to expand the utility of the platform.

They are also partnering with big content brands and recently announced a tie-up with Discovery Communications to create a standalone site that will serve as an Asian platform for the Discovery network’s nonfiction programming. Baidu will manage the website, and Discovery will be the exclusive content provider. Content will be customized and translated for the Chinese marketplace and will generate revenues through third-party ad sales.

Baidu projects Q3 revenue of $184 million to $189 million, representing a 15% to 18% increase over the quarter.

Baidu has a period of strong growth ahead. In China, their biggest competitor, Google, is far behind with an estimated 20-25% market share compared with Baidu’s 70%. Google’s China chief also quit recently, causing quite a stir in the region.

The stock was trading at nearly $100 levels in December last year and has since quadrupled to its current levels in less than a year, taking its market capitalization to $13.8 billion.