Alibaba Could Pay Top Dollar for One-Touch

Alibaba Could Pay Top Dollar for One-Touch: Source: 21 Century News Group

November 29, Alibaba.com Ltd. (1688.HK), China’s leading e-commerce platform for small and medium-sized enterprises, acquired Shenzhen based One-Touch Enterprise Service Ltd. for a high price-to-earnings (P/E) ratio earlier this month, the 21st Century Business Herald has learned.

Alibaba pushed ahead with the deal in the hope of diversifying its revenue amid slowing subscriber growth, and hopes to further its goal of transforming its platforms from 'Meet at Alibaba' to 'Work at Alibaba.'

One-Touch, a provider of one-stop services for exporters in China, will allow Alibaba’s China Gold Supplier members to conduct export business more effectively, the e-commerce site said in a statement on Nov. 15.

The move is the first by a large-scale Chinese online business-to-business enterprise to turn an information platform into an online transaction platform.

Under an agreement between both companies, Alibaba valued One-Touch at 20 times 2011 profits. The e-commerce site also agreed to buy 65% of One-Touch.

One-Touch president Wei Qiang predicted net profit of RMB 40 million next year, meaning the deal could cost Alibaba up to RMB 500 million.

The 21st Century Business Herald has also learned that the company expects to record RMB 5 million in profits this year, giving it a sale price of almost 100 times earnings.

Such a high premium is not common even on Shenzhen’s Growth Enterprise Market, where companies collectively trade at very high average P/E ratios.

The high premium could destroy value for Alibaba’s shareholders, but over the long-term the deal fits into the company’s development from a traditional service platform into a transaction chain provider.

Alibaba also expects One-Touch to bring synergies to its existing business and enhance its members’ user experience by reducing the time and money they spend managing their export processes and procedures.

'Against the backdrop of slower growth of exports and narrowing profit margins for exporters in China, we felt the obligation to help our customers stay competitive and enhance margins,' David Wei, chief executive officer of Alibaba.com, said in the statement.

The acquisition will help solve Alibaba’s customs clearance, logistic and finance problems.

Bringing One-Touch into the fold will also diversify Alibaba’s revenue stream, which is currently based on a model of charging a fee for information, as the Shenzhen-based firm offers supplementary services to Alibaba’s offerings.

A One-Touch source told the 21st Century Business Herald that the company charges each client a minimum of RMB 1,000 for basic import and export agency fees and on average another RMB 600 for value-added services per transaction.

Alibaba is also interested in One-Touch’s credit service. The service provider has a RMB 500 million credit line with a domestic commercial bank, which it uses to provide credit to smaller businesses.

In 2009, One-Touch recorded a profit after posting a loss the year-prior. It has around 1,500 small business clients.

Alibaba’s profit growth has mainly come from paid memberships, but numbers have been falling in recent months. According to the company’s third-quarter report, new members of its international business fell 45% quarter-on-quarter to 2,800, while new domestic users fell to 38,000 from 52,000 in the previous quarter.

JP Morgan Chase & Co. said Alibaba’s decision to raise its annual membership fee for businesses to RMB 30,000 from 2011 may have caused the decline in new members. The bank lowered its forecast of earnings per share for Alibaba by 8% and the target price from HK$ 18.00 to HK$16.00.

Credit Suisse Group also lowered its target price for Alibaba by 4% to HK$17.00, saying the company’s stock price has limited upside in the coming year.

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