Baidu, Alibaba and Tencent set to reap returns from stakes in O2O platforms, analysts say

PUBLISHED : Wednesday, 01 June, 2016, 6:53pm
UPDATED : Thursday, 02 June, 2016, 3:28pm

From ordering takeout delivery online to booking movie tickets on a mobile app, major Chinese online-to-offline platforms are starting to pay off as they begin to drive overall revenue growth in their parent companies.

Online-to-offline (O2O) platforms link consumers with brick-and-mortar merchants and service providers. Goods and services are bought and booked online, then later fulfilled in the physical world.

“Investments that Alibaba, Tencent and Baidu have made in O2O platforms have begun to contribute to the companies’ overall revenue growth, mainly by increasing consumer engagement and raising monetisation potential,” said a Moody’s Investors Service report.

Since 2013, China’s internet giants Baidu, Alibaba and Tencent have spent an estimated US$47 billion to invest in strategic retailers and US$797 million in logistics services providers, according to HSBC research.

Many of these O2O platforms run by the trio remain loss-making, as companies shoulder high operating costs such as offering steep discounts in order to attract customers.

Even as the services are yet to reach break even, analysts say that the platforms are driving more user traffic, in turn boosting overall revenues.

Tencent’s popular messaging app WeChat, which has an in-built function called WeChat Wallet, allows users to transfer money, or make payments at offline stores.

Online advertising revenue from WeChat totalled 17.5 billion yuan (HK$20.6 billion) in 2015, double from a year earlier, according to figures cited by Moody’s.

Online advertising now accounts for 17 per cent of Tencent’s total revenue, up from the 11 per cent in 2014.

The report also said that Alibaba generated higher mobile revenue in the past six months due to rising monetisation rates.

“This increase indicates merchants are willing to pay more than they did previously to reach the growing number of consumers accessing Ailbaba’s integrated e-commerce platform through their mobile devices,” said Lina Choi, vice president and senior credit officer at Moody’s.

Alibaba’s O2O platforms include Taobao Marketplace, China’s equivalent to online shopping site Amazon, travel booking app AliTrip and food-ordering portal Koubei.

As O2O platform revenues start to gain traction, the overall revenue growth rates of the three companies are expected to slow from a 25 per cent to 35 per cent range in 2015 to 15 per cent to 30 per cent year-on-year growth in the coming 12 months, the report said.

“The slight decrease reflects the expected slowdown that occurs following rapid growth and the establishment of a large revenue base, but this growth rate remains strong,” Choi said.

Looking ahead, the investments by the three companies in O2O-related services will continue to rise, the report added.

Investment by Baidu, Alibaba and Tencent will remain high for the next 18 months as companies further expand with more acquisitions in payment solutions and logistics services.

Choi points out that the ability to process and deliver goods within 48 hours of order placement is a “significant barrier” for competitors, and that it is especially important to serve a growing base of consumers in rural areas.

“Despite significant investment requirements, the three companies maintain solid cash holdings and strong cash flows from operations,” said Choi. “We therefore believe the companies’ financial and credit profiles can support these strategic investments.”

Alibaba is the owner of the South China Morning Post.