Article / 27 February 2015 at 6:32 GMT

Earnings Preview: to target market share over profit

China Watcher / Shanghai
  • is announcing its fourth-quarter results on March 3
  • Investors will be seeking similar trends to that of its biggest rival – Alibaba
  • Two key focuses will be mobile monetisation and the growth of its product range

By Neil Flynn

Chinese online retail giant will report its fourth-quarter earnings on Tuesday March 3, before the opening of the markets. As Alibaba has already announced its results, investors will be looking for similar trends from its biggest rival. Here are the four key points to focus on in the earnings reports and subsequent conference call.

Return to net loss posted positive non-GAAP net income in the third quarter, but management was quick to state that the firm doesn’t target profit at this stage, because it is focusing on growing market share throughout China. Therefore investors shouldn’t expect continued profit in the coming quarters. 

In addition, the fourth quarter tends to see lower gross margins because of the higher marketing expenses related to heavy promotional activities, such as the Single’s Day and 12.12 shopping events. While this is in contrast to great rival Alibaba, investors shouldn’t be disappointed by negative profit margins. Management has stated that by building market share and developing its business model during 2014 and 2015, the firm will be in a strong position to target profit within a few years. 

bnb's gross margins are likely to be lower in the fourth quarter because of the higher marketing expenses related to events such as Single's Day. Photo: iStock

Has Alibaba and Baidu mitigated the monetisation effect from mobile?

The key theme from the earnings of China’s tech giants is that as mobile becomes a growing component of total revenues, the overall monetisation rate has been decreasing. The reason for this is because PC is an established platform, and effective monetisation strategies have been developed over several years. 

However, the migration of mobile essentially began in 2013, and firms focused heavily on mobile during 2014. Therefore monetisation strategies have yet to be optimised, meaning that the monetisation rate for mobile is lower than that of PC. Hence as the proportion of revenues from mobile increases, the overall monetisation rate decreases.

In the third quarter, 29.6% of orders fulfilled came from mobile, and during the Single’s Day festival on November 11, mobile contributed to 40% of orders. In addition, is becoming more integrated into the Tencent social media network, and the direct links from QQ and WeChat should continue to drive mobile user growth. 

CEO Richard Liu commented that the firm is seeing growing conversion rates from these Tencent social media platforms, and this should continue in 2015. I expect to see overall mobile contribution for the fourth quarter reach 36%, but this will likely contribute to lower profit margins. However, I don’t think that the market’s reaction will be as great as we saw from Alibaba and Baidu, because these two firms have eliminated the surprise factor. 

Investors will be expecting higher mobile contribution to revenues and lower profit margins, and they understand that this is a necessary stage of China’s transition from PC-centric to mobile-centric strategy.

Growth of marketplace to complement merchandise in 2015

While is known as China’s biggest online direct retailer, it has been expanding its third-party business, known as Marketplace. This is where acts as a retail platform for third-party suppliers to sell their products to consumers. As has been expanding the marketplace business, investors should expect to see much stronger growth than from its established direct selling merchandise business.

It should be noted that the marketplace business has a higher risk of counterfeit products than the merchandise business, because the products come from third-party suppliers. Therefore while has built its reputation on the back of product quality, emphasising the contrast to Alibaba, the growth of GMV from third-party suppliers will likely see the risk of counterfeit products increase. is notorious for taking every opportunity to criticise Alibaba, and the fourth-quarter conference call should see many references to product quality, particularly after the SAIC report that targeted Alibaba's lapses on anti-counterfeit controls. I expect that management will discuss its warehousing and logistics services for third-party merchants, which allows suppliers to use’s infrastructure in order to improve delivery times. 

Not only does this generate revenue for, but it allows the firm to test product quality from third-party suppliers. By the end of the third quarter,’s proprietary logistics network delivered about 30% of parcels for third-party sellers, and this is expected to increase throughout 2015. has been developing high-quality warehousing infrastructure, and the first of which was opened in Shanghai prior to the Single’s Day festival in November. Three more are under construction, and should be online in 2015. Asian No. 1 Warehouse

’s state-of-the-art warehousing infrastructure. Photo:

Could VIPshop finally see genuine competition? has always been known as a consumer electronics retail platform, but it has been growing its product line-up. Non-electronic merchandise has seen strong growth over the past few quarters, and Richard Liu stated that GMV from non-electronic merchandise will exceed that of electronic merchandise in 2015.

The firm sees the apparel and shoes product category as very promising. While a substantial part of this revenue comes from the third-party marketplace business, is looking at expanding the direct selling merchandise business through flash sales, putting it in direct competition with flash sales leader VIPshop. 

This is a very interesting strategy by, because VIPshop has consistently shown that the flash sales model is a very profitable business. VIPshop’s management recently discussed how its position in the market allows it to essentially have first refusal on inventory from many brands, which should help it to stave off competition from the likes of

Nevertheless, should be able to provide strong competition for VIPshop, because it is a much bigger firm. In the third quarter, VIPshop had 9.5 million active customer accounts, while had 46 million, and even despite VIPshop’s fourth-quarter active customer accounts growing 28.4% to 12.2 million, should see strong growth from the fourth quarter, due to the seasonal promotions. 

While I wouldn’t expect significant revenues from its flash sales model over the coming quarters, continued growth in flash sales would put serious pressure on VIPshop in 2015.

– Edited by Gayle Bryant

Neil Flynn is portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.


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