If there are any left who doubt the strength of the Chinese e-commerce sector, they must be very few indeed. Report after report has shown staggering growth for online retailers in the Middle Kingdom, as the country's burgeoning middle class has an increased amount of money to spend. The most recent piece of news appeared with a blowout report from online discount retailer Vipshop (NYSE: VIPS ) which competes with the US-based Amazon (NASDAQ: AMZN ) and local rival Alibaba, in which Yahoo! (NASDAQ: YHOO ) holds a stake. What propelled this massive growth?
Distinctive business model
Vipshop differs slightly from most online retailers in the way it does business. Employing a flash-sale format in which it limits inventory on discounted items in order to drive sales from deal-hungry consumers, Vipshop was recently forced to defend its business model and methods of counting customers after a bearish article from Greenwich Research Group. In any case, the company seems profitable enough after looking at the figures.
Vipshop's fourth-quarter earnings more than tripled to reach $0.49 per share excluding items to surpass the consensus estimate of $0.41. Quarterly revenue showed equally impressive growth of around 117% year-over-year to $651 million, which smashed the $560 million consensus estimate. Moreover, margins expanded and all of this good news sent the stock up more than 20% in after-hours trading following the report.
The company's flash-sale model sets it apart from other, more traditional business-to-consumer models such as that of Alibaba. Partly owned by Yahoo!, Alibaba has also been delivering some strong growth recently, although its numbers are not as impressive as Vipshop's results. Valued at some $153 billion earlier this year, the e-commerce giant reported a sequential rise of 12% in earnings with its most recent report, with revenue surging 51%. The owner of websites such as Tmall.com and Taobao may be looking for a US IPO fairly soon, and it could become the biggest tech IPO since Facebook went public.
Comparing US growth
Although comparing Vipshop to Amazon may be difficult because Amazon has a different geographic distribution and a more traditional business model, Amazon's growth figures may shine some light on the break-neck growth that is currently taking place in China. In Amazon's most recent report, the US clearly drove its revenue growth as its domestic business was up 26% year-over-year while international sales increased by 'only' 13%. In any case, the report was a bit of a flop as Amazon missed on both the top and the bottom line.
While Amazon does do business in China, it does not have anywhere near the footprints of Alibaba and Vipshop. In 2012, two of Alibaba's e-commerce websites had turnover of $170 billion, more than eBay and Amazon combined. Operating in over 45 countries, Amazon will have to expand its global footprint if it is to come anywhere near the growth figures posted by Chinese online retailers.
One way in which Amazon is looking to expand its Chinese business is a recent deal with China Net Center that will allow it to provide Amazon Web Service through the Chinese company's extensive network. China Net Center currently serves some 3,000 clients across a range of industries, and together with Amazon it will be able to provide a comprehensive set of cloud services to corporations and small businesses.
The bottom line
So far, it seems that the Chinese e-commerce market isn't slowing down. In fact, the growth figures coming out of some Chinese online retailers are simply staggering. Vipshop's most recent report showed triple-digit earnings and revenue growth which easily beat the analyst consensus. While the company faces stiff competition from rivals such as Amazon and Alibaba, it still seems to be growing faster than the overall industry and as such it may be a solid bet to capitalize on the Chinese consumer market.
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