LinkedIn China Opportunities & Challenges

  • LinkedIn has a huge opportunity in China to expand users and revenue.
  • LinkedIn’s censorship could hurt user sentiment and engagement.
  • LinkedIn remains a risky bet at its current stock valuation.

LinkedIns China Push Opportunities And Challenges

On 16 June 2014, LinkedIn (NYSE:LNKD) announced the launch of its second Chinese language site in Traditional Chinese after it launched a Simplified Chinese website earlier this year. The professional networking site is evidently very keen to tap into the world’s largest pool of professionals. That said, censorship issues could become a concern for members outside China too. We look at the potential, the challenges and how unbundling of services could impact LinkedIn’s Chinese foray.

How Big Is LinkedIn's Chinese Market?

LinkedIn’s target is to reach a tally of 140 million members in China. As per the company’s recent update in May 2014, it currently has about 5 million members. LinkedIn had about 4 million members at the beginning of the year. LinkedIn China also released its first set of user statistics since the launch of its Chinese site.

LinkedIn’s Simplified Chinese site, also known as Ling Ying, its first Chinese website was launched in Feb 2014. Following the launch, the beta version of the site was accessible by invitation only. The site is expected to contribute materially to LinkedIn’s member base only in the second half of 2014. Further, revenue addition will be minimal in 2014 and pick up in the years thereafter.

LinkedIn China Impact on Member Base and Revenue Growth

In our first article covering LinkedIn’s prospects in China, we had discussed a number of factors impacting user growth. Based on the combination of factors, LinkedIn’s user base could grow as follows:

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
User Base million 145 202 277 350 425 497 560
Y/Y growth 39% 37% 26% 22% 17% 13%
China addition million 21 42 42 31
China cumulative million 4 25 67 109 140
Total User Base million 145 202 277 375 492 606 700
Y/Y growth 39% 37% 35% 31% 23% 15%

Based on LinkedIn’s Average Revenue Per Member (ARPM) in the APAC region, the addition to LinkedIn’s member base could contribute to LinkedIn’s revenue as follows:

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
LinkedIn Global Revenue excluding China 522.1 972.3 1519.3 2045.1 2638.9 3188.0 3775.1
Y/Y 86.2% 56.3% 34.6% 29.0% 20.8% 18.4%
LinkedIn Revenue from China 12.0 46.2 94.3 115.1
Y/Y 285.7% 104.0% 22.0%
TOTAL 522.1 972.3 1519.3 2057.1 2685.1 3282.3 3890.2
Y/Y 86.2% 56.3% 35.4% 30.5% 22.2% 18.5%

One should note that LinkedIn’s plans do seem somewhat ambitious given the current size and stature of its competitors in China which are still growing. Sites like Dajie, Wealink and Tianji are way ahead of LinkedIn with 27, 20 and 14 million members respectively. Sites like 51Job and Zhaopin are also currently bigger than LinkedIn as per Reuters. Dajie recently saw its member base grow twice as fast as that of LinkedIn in China. However, if LinkedIn’s local language sites take off, the equation might look far more balanced than it does currently.

Challenges for LinkedIn China

Clearly China is a big opportunity for LinkedIn, but the question is, at what cost? Recently, as public attention was focused on the Tianmen Massacre, LinkedIn faced a lot of criticism for its censorship of content originating even from outside the Chinese mainland. For instance, Honk Kong is supposed to be outside the reach of Chinese censorship norms. There have been instances where content has been blocked on the English-language versions of the site. This could hurt LinkedIn, not just because other regions don’t subscribe to such censorship policies, but also because it could take away some interesting content.

After all, China is the world’s second largest economy, and has admirers and critics, and a lot of people want to see both sides of the debate.

LinkedIn has been working hard to improve user engagement which consists of content to a large extent. User engagement is critical to a site like LinkedIn because it might not draw as much of a day to day interest from members as Facebook might for instance. Further, moves like these could be counter-productive to LinkedIn’s other initiatives, like long form publishing, which it is rolling out to all its members in the coming months.

That apart, there’s a cost involved in sieving through tons of content and filtering it. Then there’s competition which understand the local user more than LinkedIn does right now. Most importantly, LinkedIn might want to find a way to keep its established member base happy by not blocking content which was available all along.

LinkedIn’s Unbundling Of Services Will Add Value & Reduce Risk

As we mentioned in our latest article, unbundling of services will add value to LinkedIn’s members. The company recently launched a mobile app specifically for job searches following its launch of a Slideshare app earlier this year. With the focus of internet companies shifting from websites to mobile apps, unbundling makes for improved accessibility on an otherwise cluttered app. Further, it also improves the ability to serve more relevant ads and improve monetization.

The good part for LinkedIn is that even if things don’t go very well with its Chinese expedition, it might not run the risk of being blocked out of China completely. A job search app is not very likely to be filled with censor-worthy content in any case.

LinkedIn Stock Valuation

LinkedIn has a huge opportunity in China and its tie up with Tencent’s fast growing WeChat could help it gain a day to day user recall. Unbundling of services into different mobile apps will help LinkedIn in the long run.

That said, there are multiple challenges and it’s uncertain how far LinkedIn will go eventually. The company might want to deal with its censorship requirements in ways that won’t upset the rest of its members.

LinkedIn’s stock price of $168 a share implies a Price/Sales valuation of 12.17. Given that LinkedIn isn’t too very profitable, the stock is expensive at its current valuations. Further, with the company investing in growth and expansion, profit margins are not expected to get any better. The company’s guidance indicates no net profits in 2014 and a slowdown in absolute revenue growth (incremental) in Q2 2014. At its current valuations, we rate the stock 1.6/5, making LinkedIn stock a risky bet.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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