Alibaba, Tencent and China’s fast growing ecommerce economy

Alibaba is now up 89% on the year and valued at $424 billion. Tencent is up 74% and valued at $469 billion.

Alibaba’s “China commerce retail” revenue, which covers its giant Taobao and Tmall marketplaces and still accounts for 73% of its revenue, grew 57% to RMB36.7 billion ($5.4 billion), a big improvement from the March quarter’s 41% growth.

This growth was fueled by a 65% increase in revenue for “customer management” services for merchants (ads account for much of this business), and to a lesser extent a 28% increase in commission revenue (mostly from Tmall). While the annual active customer base for Taobao/Tmall only grew 7% annually to 466 million, annual revenue per active customer grew 35% to RMB273 ($41), thanks both to higher per-customer spend and Alibaba’s very successful efforts to monetize its mobile apps and sites.

Alibaba also noted Tmall saw a 49% increase in physical goods gross merchandise volume (GMV), with GMV growth accelerating for categories such as consumer electronics, fashion/apparel and “fast-moving consumer goods.”

Alibaba’s AliCloud unit continues cementing its place as the top player in China’s cloud infrastructure market: The company’s “cloud computing” revenue grew 96% to RMB2.4 billion ($359 million). Digital media and entertainment revenue — driven by Youku and services tied to the popular UCWeb mobile browser — grew 30% to RMB4.1 billion ($602 million).

Such top-line growth is allowing Alibaba’s margins to expand even as it makes Amazon-like retail, content and cloud investments. Costs and expenses fell to 65% of revenue from 73% a year ago, and to 57% from 62% if one backs out stock compensation spend. Free cash flow grew 74% to RMB22.1 billion ($3.3 billion).

Tencent’s revenue growth, meanwhile, accelerated to 59% from Q1’s 55%. Online gaming revenue, driven by the runaway hit Honour of Kings and several other titles, grew 39% to RMB23.9 billion, an improvement from Q1’s 34%. Social networks revenue, driven by content services and in-app purchases for smartphone games, grew 51% to RMB12.9 billion, slightly less than Q1’s 57%.

Online ad revenue grew 55% to RMB10.1 billion, faster than Q1’s 47%. Ad sales on Tencent’s ubiquitous WeChat app were a factor, as were the growth of video and news products. And importantly, “Other” revenue, which is driven by the widely-used WeChat Pay payments services and Tencent’s cloud offerings, soared 177% to RMB9.7 billion.

WeChat monthly active users (MAUs) grew 3% sequentially and 20% annually to 963 million. That’s taking precedence over the gradual decline of Tencent’s older QQ and Qzone social platforms, which respectively saw MAUs drop 5% and 7% annually to 850 million and 606 million.

The total spending power of its burgeoning middle class is growing faster than its 7% per year economy. Last year, McKinsey estimated 63% of urban Chinese households will earn $16,000 or more by 2022, up from just 17% in 2012.

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