Alibaba’s Alipay Payment Services To Dictate Future

  • Alibaba revenue growth at 40%.
  • China’s e-commerce industry to account for 18% of retail sales in 2018.
  • Gains From Alipay IPO.

Recent earnings release by Alibaba (NYSE:BABA) shows comparable period revenue growth for Alibaba of 40% for the 3Q end. The company saw strength in its mobile servicing business along with top line growth. Final numbers showed strong revenue from operations at $4.22 billion. (See: Alibaba detailed earnings analysis)

The company could also be a beneficiary of the expected move by the Chinese government to focus on economic rebalancing as the industrial sectors begin to stabilize and consumer consumption comes into focus. As the citizens of the country acquire more personal wealth, the company expects that to translate into an increased demand for services. This means that consumer spending will increase.

Over the years Capital has been one of the main drivers for growth in China. This change in government policy with regard to moving from Capital driven growth to consumption driven growth has been beneficial for Chinese companies leading to the high profile Alibaba IPO last year, and going ahead this growth is only expected to continue. (Also See: Best Chinese Stocks Of 2014)

china's source of economic growth

From the above chart it can be clearly seen that Capital has been the driving force when it comes to China’s growth rather than Total Factor Productivity (TFP) or Labor.

china e-commerce

According to iResearch Global Inc the e-commerce industry in China accounted for 10% of total 2014 retail sales of consumer goods. When you consider that Alibaba holds an estimated 80% Gross Merchandising Value (GMV) market share in this market, the growth potential becomes apparent.

According to iResearch, mobile shopping will continue to grow at rapid pace and is expected to contribute 48% of compound growth rate over next few years. It would also be one of the key catalysts for rapid development of online shopping market.

The Payment Services Business And Alipay

Let's take a look at the potential growth of the company's multi payment services businesses. Morgan Stanley estimates that by 2018, the average online user will spend up to 81% more or $1,880 per head. Alibaba is positioned to cash in with the launch by Alipay of the Bill-Me-Later program on Taobao and Tmall to offer a line of revolving credit. This program is aimed at attracting consumers’ interest in buying high-value durables such as consumer electronics and home appliances. The growth potential is illustrated by the one-day off-line promotion on December 12, 2014 offering substantial discounts on the use of mobile Alipay at stores and restaurants, which recorded more than 4 million transactions on that single day.

Alipay was founded by Alibaba in 2004 as a payment facility to build online confidence between buyers and sellers along the lines of success of PayPal, with its partnership, with eBay. In 2011, Alibaba gave up its interest and control following new rules from the People's Bank of China, which threw a shadow over the relationship between Alibaba and the Government. However, Alibaba continues to have a strong relationship with the company, and Jack Ma holds a 46% stake in Alipay's parent Zhejiang Ant Small and Micro Financial Services Company (SMFSC). Alibaba took in $390 million in revenue from Alipay in 2014 as per terms of the profit-sharing arrangement between the two companies.

Under the terms of an agreement between Alibaba and Alipay, struck in August 2014, Alibaba will be entitled to receive 37.5% of the value of SMFSC and Alipay, should the company decide to go public. According to sources, SMFSC is reported to have an estimated value of around $50 billion. If an IPO is done in 2016, Ant Financial is controlled by Jack Ma and Alibaba will benefit by virtue of its deal to get 37.5% of SMFSC and Alipay value.

Recent Policy Changes In China

Recently, China's State Council announced that the domestic payments system would be opened to foreign payment processors like Visa (NYSE:V) and MasterCard (NYSE:MA), unlike the past when their cards had to be issued by using the local UnionPay network. This should benefit Alipay, which has had its share of issues with the monopoly of UnionPay, including its total exit from off-line payments and point of sales services. There also might be something to a rumored partnership between Apple Pay and Alipay. This would have to get past Chinese regulators scrutiny, which might be unlikely.

Expansion Into India

Ant Financial Services Group announced that it signed a deal to acquire a 25% interest in Paytm, the Indian mobile payments and e-commerce platform (owned by One97 Communications). No financial terms were revealed by either company, but the deal is expected to close in the second quarter of 2015. In 2014, the Indian e-commerce industry boomed and fresh investment flowed into domestic companies from important overseas institutional investors.

India, with a population of 1.2 billion, is benefiting from the encouraging demographic situation, as well as the investment friendly policies of the new government. Alibaba is entering the market to go head to head with Amazon (NASDAQ:AMZN), which put in $2 billion into its local subsidiary in 2014. Forrester Research believes that this is an opportune time to enter the market and build the brand because of the relatively low cost of customer acquisition and the opportunity to capitalize on existing business models.

Satish Meena of Forrester opines that the Paytm transaction is critical to Alibaba's expansion outside China because it offers an excellent opportunity to capture the fast growing population of mobile users in India. More than 40% of the total transactions of Paytm at the moment are generated by smartphone users. Also, the pace at which the mobile internet usage is rising is quite promising and the growth looks eminent.

mobile internet users

The deal also provides a convenient way to avoid the current restrictions in the Indian e-commerce market due to the limited penetration of credit cards. There is also opportunity to create a synergistic blend between Alipay and its Alipay Wallet along the Paytm mobile wallet.

The Bottom Line

It is evident that the growth in payment services could do wonders for the growth of Alibaba, and a huge bonanza could be in store if there is an IPO for Alipay or SMFSC in 2016. Such an IPO could potentially value the company at approximately $50 billion. All things aside, the company has some issues to work out before it can fully capitalize on any future developments, and until it does, the Alibaba stock should be viewed cautiously.

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