Alibaba, Baidu Leveraging China’s Online Momentum

Of the 384 million current internet users in China, reports estimate that a mere 9% of people shop online. However, the numbers are growing fast. Analysts project China’s online population to reach 650 million in five years and the percentage shopping online to grow to 19% in 2012. Recent research conducted by BCG on 1,700 Chinese has shown that almost 99% of university students and professionals aged between twenty-two and thirty-five spend almost four hours online per day. Given such positive trends, Chinese Internet players are delivering strong results.

Alibaba’s Q2 revenues grew 49% over the year to RMB1.37 billion (US$200.9 million) as its number of paid members continued to grow. Registered users grew by 10.7 million subscribers to 53.4 million at the end of the quarter. China Gold Supplier members grew 50.2% to 105,810 and China TrustPass members grew 34% over the year to 593,498. EPS grew 47% over the year to RMB 8.18 (~$1.21).

Alibaba plans to expand its operations internationally and has already budgeted $100 million toward inorganic growth to achieve this goal. During the quarter, it made its first international acquisition. It purchased U.S.-based Vendio and Auctiva, multichannel e-commerce companies that provide one-stop solutions for small businesses to help them sell online across multiple channels. Through these acquisitions, Alibaba will be able to connect over 250,000 small businesses in the United States to the over 1.5 million supplier storefronts of Alibaba.com and Aliexpress.com, the wholesale site. Alibaba is looking to build a first global e-commerce supply chain by connecting manufacturers and wholesalers to e-tailers and consumers and enabling small business owners to source from and supply to the world through channels like eBay, Amazon, and its own online storefronts.

Besides the U.S., Alibaba is also focusing on India and Japan. It already has over 2 million users in the U.S and 1.5 million users in India. To grow in India, it recently opened a customer service center in the country to serve the over 5,000 paying Gold supplier members. The center is expected to grow to over a hundred employees in the near future.

Within China, Alibaba continued to focus on its value-added services revenues, revamped the Chinese site, and changed to a new domain, 1688.com. It launched China TrustPass Basic in April this year, which is positioned as an entry-level product for users.

The stock is trading at HK$15.40 (~$1.98), taking its market capitalization to HK$77.7(~$10.0) billion. It touched a 52-week high of HK$21.45 (~$2.76) in September of last year.

Baidu reported Q2 revenue growth of 74% to RMB 1.914 billion (~$282.3 million). EPS for the quarter stood at RMB 2.46 (~$0.36). The market was looking for revenues of $276.7 million with EPS of $0.31. The company ended the quarter with 254,000 active online marketing customers, recording growth of 25% over the year.

Baidu has benefited from Google’s Chinese stance. According to iResearch, in the second quarter, Google’s market share in China fell from 29.5% in the previous quarter to 27.3%, while Baidu managed to grow to 70.8% from 67.8% a quarter ago. Google had been forced to exit China due to regulatory issues. However, the Chinese government recently renewed Google’s license, making Google rethink its plans of complete withdrawal from the market.

After the successful deployment of its marketing platform, Phoenix Nest, Baidu is now looking to expand within the mobile search area. In the second quarter, Baidu led mobile searches in China with 34.3% market share, compared with 29% share a quarter ago. Google’s mobile searches in China fell during the quarter by about five percentage points to 12.3%. Baidu is working with multiple handset makers on embedding a Baidu search box on its smartphones in China that use the Android, Symbian, and other operating systems. Motorola recently announced its plans to embed Baidu as its mobile search engine for its Android-based smartphones for China.

Analysts expect 3G phones to reach 110 million users by 2014, making it a big market for Baidu. During the last quarter of 2009, Android-based phones accounted for a mere 0.4% and Symbian phones accounted for 72.1% of the smartphones sold in China. In June this year, Symbian and Baidu announced plans to set up a joint lab to integrate Baidu’s search functions onto Symbian. There is speculation that Baidu is building its own mobile operating system as well taking the help of some former Google employees. Google does have significant advantage over Baidu in the mobile arena through its Android operating system. But as of now, Baidu seems to be willing to wage a full war to ensure that it emerges leader even in the mobile search space.

The company projects Q3 revenues of RMB2.200 billion ($324.4 million) to RMB2.260 billion ($333.3 million). The market was expecting revenues of $321.6 million.

The stock was trading at $84.33 with a market capitalization of $29.4 billion. It touched a 52-week high of $88.32 earlier last month.