Foreign trade B2C e-commerce Lightinthebox research report – IPO version

By Li Yan

Lightinthebox founder Guo Quji, an MBA from Stanford University, worked at Microsoft, Google, and Amazon. In 2007, Guo Quji, then Chief Strategy Officer of Google China, reached a consensus with Wen Xin, who founded BlogChina, Liu Jun, former vice president of Joyo, and Zhang Liang, a supplier of Dangdang and Joyo, in the field of e-commerce and decided to establish a multinational B2C company. Thus, "lightinthebox" was born.

At the end of 2008, Guo Quji officially became the chairman and CEO of LightInTheBox. Among the four founders, he was responsible for strategy and financing, while President Wen Xin was responsible for marketing, Liu Jun was responsible for operations, and Zhang Liang was responsible for procurement. Thanks to the background of the founding team, the company is particularly good at marketing through the Internet and is keen to pursue a higher return on investment.

In the early days of its business, LightInTheBox received angel investment from New Oriental co-founder Xu Xiaoping and Google's early American employee Zhou Zhe; in 2008, it received a first round of investment of US$5 million from Ceyuan Ventures; in 2009, it received a second round of investment of US$11.27 million from Ceyuan Ventures and GSR Ventures; in 2010, it received a third round of investment of US$35 million from Ceyuan Ventures, GSR Ventures and Trust Bridge Partners.

98% of LightInTheBox's revenue comes from overseas users, with its main markets in Europe and North America. On May 24, 2010, LightInTheBox acquired Oku Mall, a B2C website targeting Chinese consumers, for a total purchase price of US$2.167 million. The acquisition was mainly to expand the company's brand into the Chinese market and to create synergies with its existing foreign trade business. In addition to operating its own website, LightInTheBox also sells on high-traffic e-commerce platforms such as Amazon, eBay, and Taobao. In 2012, revenue from external websites accounted for 8.6% of its net income.

Today, LightInTheBox has grown into a well-known foreign trade B2C website that offers 220,000 products and serves global customers in 17 major languages. The company's user base has grown from 36,000 in 2008 to 2.48 million in 2012; net revenue has grown from $6.3 million in 2008 to $200 million in 2012; and it began to turn a profit in the fourth quarter of 2012 and will be listed on the New York Stock Exchange on June 6, 2013.

iUS stock investment research report will interpret Lazada from the aspects of business model, financial data, industry, risks, company structure and equity structure, valuation, etc. to enhance investors' understanding.

1. Business Model

Foreign trade B2C websites, as the name implies, sell goods produced in China to overseas individual users. However, LightInTheBox has its own unique supply chain management and marketing methods. The following will analyze it from these two perspectives:

1. Unique supply chain management model

LightInTheBox's gross profit margin was 22.12% in 2010, and rose to 41.77% in 2012. As shown in the figure below, its gross profit margin is much higher than the overall level of e-commerce. In 2012, Amazon's gross profit margin was 24.8%, Vipshop's was 22.3%, and Dangdang's was 13.9%. Behind the high gross profit margin is the advantage of a shorter supply chain and cheap production costs.

When LightInTheBox was first launched, its main foreign trade category was electronic products. After gradually opening up the foreign trade market, LightInTheBox began to expand into categories with higher gross margins, such as clothing, electronic product accessories, home gardening, etc. Currently, electronic accessories have become LightInTheBox's largest category, accounting for 39.1%, and clothing accounts for 30.7%.

Lightinthebox has opened up a corner of the overseas e-commerce market by offering a variety of knockoff electronic products and cheap wedding dresses made in China. In 2012, the number of users of Lightinthebox exceeded 2.47 million, contributing a total revenue of $200 million, with each user spending an average of $81 on Lightinthebox. Low prices are the main factor driving overseas users to spend on Lightinthebox. For example, according to a survey conducted by The Wedding Report, Inc., in 2011, the average price of a wedding dress in the United States was $1,166, while the average price of a Lightinthebox wedding dress was only $209 during the same period.

The reason why LightInTheBox can achieve such a high gross profit level at such a low pricing level is that it has a strong cost advantage and has greatly shortened the supply chain. Everyone should be quite familiar with the pricing of domestic knockoff mobile phones or unbranded clothing. Even if the price unit of a "Made in China" product of 100 yuan is directly converted into US dollars, the price is still very attractive to some overseas "diaosi" groups. This is the power of Made in China. You can even say it is "huge profits". Of course, this is also the advantage of most Chinese foreign trade companies. What is more unique is that LightInTheBox has greatly shortened the supply chain of foreign trade B2C. Upward, LightInTheBox bypasses the layers of intermediate trade links. Currently, 70% of the goods are directly purchased from factories, achieving the purpose of saving purchase costs; downward, LightInTheBox directly sells these low-priced Made in China products to C-end customers at the pricing standards of the overseas market, gaining the advantage of high gross profit.

LightInTheBox currently has 6 procurement offices across the country. Due to the need to expand product categories and LightInTheBox's increasingly broad foreign trade channels, LightInTheBox is constantly looking for more supplier partners across the country. The number of suppliers has increased from 600 in 2010 to 2,000 in 2012. As the products are mainly sold to overseas markets, LightInTheBox also has relatively high requirements for the production capacity of suppliers. For example, they must be able to meet a certain procurement volume, be sensitive to overseas market demand, and even know how to avoid stepping on the red line of overseas intellectual property rights while designing and producing many "copycat products"... In addition to these unbranded products, some local brands, including Newman, Patriot, Founder Technology, Yadu, Shenzhou Computer, etc., have also joined the LightInTheBox.com sales platform and become the company's supplier composition. You can refer to the investment standards of LightInTheBox's official website. In addition, LightInTheBox has also established a design team to create its own brand and enrich product diversity. Its own clothing brands include Three Seasons / TS brand.

In addition to its high gross profit margin, LightInTheBox's inventory turnover rate is also quite amazing. Its inventory turnover rate of 21.7 is also much higher than the average level of e-commerce. Amazon's inventory turnover rate is about 9.3, and Vipshop's inventory turnover rate is about 5. LightInTheBox's inventory turnover rate is faster than that of ordinary e-commerce companies, which is determined by its special supply chain management model.

1) Customized production of personalized products, but with extremely high efficiency

The customized products of LightInTheBox are mainly wedding dresses, which customers can customize according to their body shape and favorite colors. Tiger Hill in Suzhou is the main source of wedding dresses, and it is said to occupy 70% of the national market share of wedding dress production. However, most of the production here is in a scattered small workshop mode, and the production and management level is mostly low. To meet the foreign trade standards, they must first find a way to standardize their product quality and improve production efficiency. To this end, LightInTheBox has specially established an internal team of experts to directly enter the production line, responsible for guiding suppliers to improve production efficiency and improve product quality, so that they can meet the standards of personalized goods and mass production of standard products in the shortest possible time. In order to ensure sustainable production and supply capabilities, LightInTheBox usually signs a one-year supply agreement with suppliers, which includes product types, unit prices, quantities, delivery time, etc.

For customized clothing products, LightInTheBox usually updates the orders to suppliers on a daily basis after receiving the orders, and the suppliers customize the products on demand. Since they have reached a process-based production coordination capability with the expert team, suppliers can usually complete production and deliver the goods to LightInTheBox's warehouse within 10 to 14 days after receiving the order. For standard products, suppliers can usually deliver the goods to LightInTheBox's warehouse within 48 hours.

LightInTheBox has established a relatively efficient supply chain management mechanism that not only ensures timely processing of orders, but also helps suppliers reduce waste through customized production processes, which in turn increases suppliers’ willingness to cooperate with LightInTheBox. This procurement system allows LightInTheBox to maintain a low inventory level, and by updating order information to suppliers on a daily basis, LightInTheBox can also maintain a high order fulfillment rate.

2) Standard products are stocked in advance, but there is no inventory risk

The relationship between Lightinthebox and its suppliers underwent a unique change in the fourth quarter of 2011. Since then, Lightinthebox has begun to require some suppliers to prepare inventory in advance. The inventory must be stored in Lightinthebox's own warehouse, and this part of the inventory is not included in Lightinthebox's inventory. Only when the user places an order, the ownership of this part of the asset is transferred to Lightinthebox and included in Lightinthebox's revenue and costs. Obviously, Lightinthebox has improved the efficiency of order processing and effectively avoided inventory risks through suppliers' "pre-stocking". Not only that, Lightinthebox can also require suppliers to increase the inventory of specific products according to the popularity of the products, or require suppliers to remove the inventory of products with poor sales at any time, and remove the remaining inventory of products within 90 days. During the entire stocking process, Lightinthebox is only responsible for providing warehouse space and paying the logistics expenses when suppliers transport the remaining inventory.

The prospectus disclosed that as of December 31, 2011 and 2012, the value of "pre-stocking" in Lightinthebox warehouses reached US$1.5 million and US$3.9 million respectively, while the total value of Lightinthebox's inventory was US$4.96 million and US$5.75 million respectively during the same period, and the proportion of "pre-stocking" increased significantly. At the same time, due to the increase in the proportion of "pre-stocking", the proportion of the purchase amount paid by Lightinthebox to suppliers to the cost of sales gradually decreased, reaching 71.4%, 68.1% and 65.1% in 2010, 2011 and 2012 respectively; the proportion of the purchase amount paid to the largest supplier to the cost of sales decreased more significantly, accounting for 6.3%, 5.6% and 3.0% respectively during the same period.

In summary, LightInTheBox's supply chain management model is very different from other e-commerce websites. On the one hand, it can purchase directly from manufacturers to shorten the supply chain and achieve a higher gross profit margin. On the other hand, for customized products and non-customized products, LightInTheBox and suppliers have established unique cooperation models respectively, which can effectively reduce inventory risks and achieve ultra-high inventory turnover rates while ensuring production efficiency.

The uniqueness of its supply chain management model has enabled this website to open up a distinctive business channel in the vast foreign trade B2C market; the next question is how to expand and broaden this channel, and Lazada's unique marketing methods play a key role.

2. The company that understands Internet marketing best

How does this company bring traffic to its website and promote its products to overseas consumers? And is Lanting, as a foreign trade B2C, capable of achieving the high repeat purchase rate that e-commerce companies strive for?

First, let's look at a set of data. In 2010, 2011, and 2012, Lightinthebox's sales and market expenses (or marketing expenses) were 22.6 million, 38.46 million, and 53.41 million US dollars, respectively, accounting for 38.5%, 33.1%, and 26.7% of net revenue in the same period. Compared with websites that mainly engage in local e-commerce, Amazon's marketing expenses accounted for 3.9% in 2012, and Vipshop's was 4.7%. Lightinthebox's marketing expenses are a bit scary. In this way, no matter how high Lightin's gross profit margin is, it is not "high" overall! This is also the reason why Lightin's revenue scale has exploded in recent years and its gross profit margin has increased significantly, but it has not achieved profitability. In 2012, Lightinthebox's net loss attributable to shareholders was 4.2 million US dollars. In the fourth quarter, it turned a profit and made a net profit of 1.11 million US dollars.

The logic of e-commerce is to achieve scaled operation through new users and repeated purchases, thereby reducing variable costs on the basis of scale, generating continuous cash flow, supporting reinvestment, and forming an ecological cycle. Taking Amazon as an example, the reason why marketing expenses account for only 3.9% is that Amazon has gained a large number of loyal user groups through continuous improvement of user experience. Amazon has achieved a repeat purchase rate of 73% in 1999. At present, the domestic e-commerce website Vipshop has also achieved a repeat purchase rate of more than 70%. Because they have formed a good reputation among consumers and have strong user stickiness, they no longer need to match the same proportion of marketing expenses to obtain new traffic or order volume.

Compared with these companies that focus on local e-commerce, LightInTheBox is indeed different in terms of marketing. On the one hand, it spends money on marketing "without hesitation", but on the other hand, user stickiness "has not improved". Where exactly does LightInTheBox spend its marketing expenses?

LightInTheBox mainly promotes its products through search engines, display ads, affiliate ads, email marketing, and social marketing. It can be said that LightInTheBox's explosive growth in recent years is mainly due to the team's expertise in Internet marketing. Interestingly, LightInTheBox's marketing approach is very different from that of another domestic e-commerce website that "focuses on marketing," Vancl. Vancl focuses more on brand marketing and improving the brand awareness and influence of the channel itself, while LightInTheBox is keen on marketing methods that can directly drive sales, such as search marketing, which can directly bring in traffic and orders, but is not enthusiastic about building channel brands. Specifically:

Search—CPC payment

Taking the overall situation of e-commerce websites in the United States as an example, the traffic from search engines is as high as 40%, of which about half comes from SEO, that is, natural search, and the other half comes from paid marketing. Similarly, search engines are the largest traffic entrance for Linghtinthebox. According to Hitwise data statistics, in March 2013, among the visits to www.linghtinthebox.com in North America, more than 45% of the traffic came from Google, followed by the social networking site Facebook, which brought about 3% of the traffic, and other websites including eBay, Yahoo! Search, Bing, Ask, Yahoo! Mail, Amazon, etc., which brought about 2% of the traffic.

For search engine placement, Lanting pays on a CPC basis, that is, on a cost-per-click basis. When a user searches with a specific keyword and clicks on a Lantingjieshi ad in the search results, or when a user clicks on a contextual ad matched by a search engine while browsing a web page, Lanting will pay a fixed fee to the search engine or affiliate website for each click. According to the prospectus, Lanting has currently placed at least millions of keywords in 17 languages ​​on search engines such as Google.

Affiliate Distribution—Pay per Sales

LightInTheBox has established an affiliate marketing program and provides partners with content and tools to attract users to visit. When users visit and purchase LightInTheBox products through LightInTheBox's affiliate website, LightInTheBox pays a certain percentage of sales commission to the affiliate website.

Social Marketing--

At the same time, LightInTheBox has a dedicated marketing team that conducts social marketing on social networking platforms such as Facebook to improve branding and exposure. Facebook has successfully brought a lot of traffic to LightInTheBox, and about 3% of traffic in the United States comes from Facebook.

Lightinthebox.com has 230,000 "likes" on Facebook, and 35,000 people participate in discussions on the page; MinInthebox has 138,000 "likes"; but these are only a fraction of Amazon. Amazon.com has 18 million "likes" on Facebook, and 145,000 people participate in discussions.

In addition, display advertising and email marketing are also LightInTheBox's main revenue sources. LightInTheBox has placed display advertising on more than 100,000 media websites.

In 2010, 2011 and 2012, Lazada's marketing expenses were US$22.6 million, US$38.46 million and US$53.41 million respectively; the main expenditure was on marketing plans, accounting for 31.9%, 24.6% and 22% of net revenue in the same period respectively; the expenditure on marketing personnel accounted for no more than 10%, which dropped to 4.7% in 2012.

In fact, it is not just LightInTheBox that has high marketing expenses. Most of the Chinese foreign trade B2C websites have relatively high marketing expenses. Take DealExtreme.com, a foreign trade B2C website launched in 2006, for example. This company was acquired and listed by Yeebao (Hong Kong Stock 08086) and is currently the main source of revenue for Yeebao. Yeebao's revenue for the fiscal year ended June 30, 2012 was HK$1.416 billion (of which the e-commerce business DealExtreme contributed HK$1.284 billion), gross profit was HK$613 million, and gross profit margin was 43.3%; marketing expenses were HK$379 million, accounting for 26.7% of revenue; in 2012, the company made a profit of HK$131 million, with a net profit margin of 9.3%.

What is the reason why the marketing costs of foreign trade e-commerce websites are "high"? Why is it difficult to form user stickiness and achieve a high proportion of repeat purchases?

With the development of Internet technology, there are more and more Internet marketing methods, including search engines and social networks, logistics are becoming more convenient and fast, and online payment is becoming more secure and reliable. The chain of selling low-cost Chinese-made products to overseas C-end consumers is gradually shortened. When LightInTheBox, DX, Dalong.com, Milan and others first opened up this market, a large number of small foreign trade companies emerged and followed their marketing model, selling China's "counterfeit goods" to foreigners through purchasing keywords on Google, search engine optimization, social marketing, email marketing and other means. However, these 3C, clothing, accessories and other products with great price advantages are mostly "imitations" and "counterfeit goods". They are cheap, lack real brands, and product quality and service are difficult to guarantee. Most of the target users of foreign trade B2C such as LightInTheBox and DX are not mainstream e-commerce user groups, but relatively "diaosi". They are extremely sensitive to prices and do not have much requirements for brands, quality and service. They buy wherever there are cheap goods. Moreover, with more and more foreign trade B2C participants, there will always be someone who can offer lower prices than you, making it difficult for this user group to develop a strong dependence on a certain website.

Therefore, the first reason why Lanting and other foreign trade websites have high marketing costs and low repeat consumption rates is that the market they choose determines that their user groups are generally very price sensitive and often switch because of "low prices". Second, there are more participants, and the search engine marketing is generally used to promote products to overseas markets. With more participants in the bidding, the price of keywords will naturally increase. Third, the main categories of wedding dresses, 3C, and accessories are not consumed frequently.

Due to the lack of its own users, Lanting's growth is heavily dependent on traffic purchases. Lantingjieshi's prospectus did not disclose its repeat purchase rate and order volume, but only provided the total number of users, revenue contributed by repeat purchase users, and revenue purchased by new users. From these data, we can see that the proportion of repeat purchase revenue in total revenue is gradually increasing, 14.91%, 17.97%, 24.69%, and 29.57% in 2010, 2011, 2012, and Q1 2013, respectively. However, overall, the proportion of repeat purchases is still relatively low. Secondly, we conservatively assume that repeat purchase users only consume twice a year, and we can roughly infer that Lantingjieshi's average customer price was approximately US$117.8, US$111.6, US$70.7, and US$55.4 in 2010, 2011, and 2012, respectively, and the average customer price has dropped significantly.

The good sign is that the proportion of repeat purchase revenue of Lanting is increasing, and the growth rate of marketing expenditure is obviously lower than the growth rate of revenue. As shown in the figure below, from Q1 2011 to Q4 2012, the proportion of marketing expenses to revenue of Lanting Jieshi has been declining overall, and in Q4 2012 it has dropped to 24%.

The reason why LightInTheBox stands out among many foreign trade B2C websites is that it discovered and explored this market relatively early, and it is also closely related to the founders’ proficiency in search engine marketing. The LightInTheBox team attaches great importance to using the Internet to explore commercial value. They are willing to spend money on keywords and have developed their own algorithms to discover and adjust keyword combinations to bring the highest possible return on investment (ROI). Their advantages in SEO search engine optimization are unparalleled.

The recent downward trend in the proportion of marketing expenses of LightInTheBox is quite obvious, which is the dual effect of the increase in the proportion of repeat purchase revenue and the improvement of marketing efficiency. However, whether this trend can continue and how much room for decline there is still a question. After all, the current market positioning and growth mode of this foreign trade e-commerce company constitute the difficulty of cultivating user stickiness. Its performance growth is heavily dependent on traffic purchases, and it is difficult to significantly reduce the proportion of marketing expenses.

2. Financial Analysis

Looking through the financial statements of LightInTheBox, we can generally draw the following conclusions: the company has a high revenue growth rate, high gross profit, and optimistic cash flow. The management also expects to achieve a 10% non-Gaap net profit margin in the future. Faced with such a statement, some people even believe that if the financial level continues to improve, LightInTheBox does not need to go public for financing. So, let's reverse the deduction and see how this foreign trade e-commerce company achieves profitability and how much room for growth it has in the future.

1. High revenue growth requires marketing

From 2010 to 2012, the compound growth rate of LightInTheBox's net revenue was as high as 85%, with net revenue of US$200 million in 2012 and net revenue of US$73.3 million in the first quarter of 2013, a year-on-year growth rate of 99%.

The rapid growth of LightInTheBox's revenue is mainly driven by marketing. It can be clearly seen from the above figure that the overall trend of LightInTheBox's revenue growth rate is almost completely matched with the growth rate of marketing expenses. In the quarters with slow growth in marketing expenses, the net revenue growth rate is relatively slow. On the contrary, in the quarters with high growth in marketing expenses, the corresponding net revenue growth rate is also high.

Judging from the proportion, LightInTheBox is more willing to spend money on marketing than other e-commerce companies, with marketing expenses accounting for as much as 25-30% of net revenue; a good sign is that this proportion has been declining in recent quarters, falling to 25% in Q1 2013. However, since LightInTheBox's business model relies too much on traffic purchases, it will be difficult for the proportion of marketing expenses to drop significantly.

2. Low repeat purchases and poor user stickiness

Domestic websites that do foreign trade e-commerce generally have a problem: weak brand influence, few active and repeated visits from users, and poor word-of-mouth communication, so the repeat purchase rate is much lower than that of other types of e-commerce. Lantingjiesi did not disclose the repeat purchase rate, but listed the revenue scale contributed by repeat purchase users separately. In Q1 2013, the repeat purchase revenue accounted for 29% of the total revenue, which was the most ideal quarter.

The reason for the low repeat purchase rate is, on the one hand, related to Lazada's market positioning. Lazada mainly serves people with relatively weak overseas consumption power, because this group of people is extremely sensitive to prices, and the unit price often determines their purchasing channels. However, there are many cross-border e-commerce options with price advantages.

On the other hand, although LightInTheBox spends a lot of money on marketing, they pay more attention to marketing efficiency. Compared with brand marketing, they are more willing to invest money in marketing methods that can directly drive sales, such as keyword purchases and SEO optimization. In order to achieve better results, LightInTheBox has established multiple sub-sites and achieved higher conversion rates through vertical and professional operations.

According to rough statistics, LightInTheBox's sub-sites include:

//www.miniinthebox.com Electronics

//www.hikaribox.com Wedding dresses

//www.dropintheboxe.com Small wholesale

//www.rcinthebox.com Remote Control Models

//www.onlyts.cn Clothing brand

//www.ouku.com Mobile Digital

//tuan.ouku.com Group Buying

//www.kuailebox.com Idol Products

//lightinthebox.tmall.com Taobao Wedding Flagship Store

3. Product category adjustment to increase gross profit margin

LightInTheBox's gross profit margins were 29.1%, 33.3% and 41.7% in 2010, 2011 and 2012 respectively, and continued to increase to 45.4% in Q1 2013. The increase in gross profit margin is mainly related to LightInTheBox's product category adjustment strategy, and judging from the financial statements, this strategy has achieved significant results.

Lanting consciously increased the proportion of high-gross-profit categories and reduced investment in low-gross-profit categories. As the gross profit level of clothing products is relatively high, Lanting has largely retained the operation of this category, which currently accounts for 30.7%; the proportion of electronic and communication equipment products with lower gross profit has dropped from 44.4% in 2010 to 14.1% at present; the proportion of electronic product accessories with higher gross profit has increased significantly from 2.6% in 2010 to 39.1% at present, becoming the largest category operated by Lanting; in addition, the proportion of home and garden products has also increased to 10.5%.

In addition to increasing gross profit margin, the category adjustment also promoted the increase in the proportion of repeat purchase revenue of Lightinthebox. Lightin originally mainly operated wedding dresses and communication equipment, but these products belong to the low-frequency category. On the contrary, the consumption frequency of electronic product accessories and home gardening products, which have increased rapidly, is high. The increase in the proportion of these products has objectively promoted the increase in users' repeat purchase rate. But on the other hand, the unit price of accessories and home products is relatively low, which has led to a significant decline in the unit price of customers of Lightinthebox recently.

4. Improved operational efficiency

In addition to marketing, LightInTheBox's main operating expenses also include warehousing, logistics and administrative expenses. Judging from recent data, with the growth of website orders and revenue, the scale effect has gradually begun to emerge, and the proportion of various expenses to revenue has shown a downward trend to varying degrees. In the most recent quarter, marketing expenses accounted for 25%, logistics expenses remained stable at 5%, and administrative expenses remained stable at 11%.

Thanks to the combined effects of revenue growth, improved gross profit margin and reduced operating expenses, Lazada turned a profit in the fourth quarter of 2012, with a net profit of US$1.115 million and a net profit margin of 1.72%; the net profit in the first quarter of 2013 was US$2.610 million, the net profit margin increased to 3.6%, and the NonGaap net profit margin was 4.1%.

In 2010 and 2011, the company's operating cash was negative due to its continued market development and business expansion. In 2012, the company generated positive cash flow of $7.4 million from operations.

5. Financial expectations

We believe that the IPO will greatly help Lanting enhance its brand influence. In addition, the funds raised from the IPO will also lay a good financial foundation for Lanting's future expansion.

During its IPO roadshow, LightInTheBox made the following forecasts for the company’s performance:

Gross profit margin remained at 45%;

Non-Gaap marketing expenses dropped to 20%;

Non-Gaap management fees were reduced to 6%;

NonGaap logistics costs remain at 5%;

NonGaap operating profit margin increased to 14%;

NonGaap net profit margin increased to 10%.

3. Industry and Competition

While domestic e-commerce is raising funds, expanding, and thriving, cross-border e-commerce channels are also gradually being opened up, but have not received enough attention and attention from the industry so far. Now that LightInTheBox is about to go public, it has once again sparked public enthusiasm for research in the field of foreign trade e-commerce. How big is this market, which companies are the best at playing it, and what problems are they facing?

The market is vast but quite fragmented

Due to its strong low-cost manufacturing capabilities, China has always been a major exporter of consumer goods. According to iResearch data, the size of China's consumer goods export market reached US$12.7 billion in 2012 and is expected to reach US$19.83 billion by 2015, with a compound growth rate of 16%.

However, there are many participants in the foreign trade B2C field, and the market is quite fragmented. Most of them are small in scale. The big ones are mainly Lightinthebox, DX, Dalong.com, and Milan.com. Liu Yanting, president of DX's shell company, Yibao, once said, "There are tens of thousands of B2Cs in the foreign trade field. As long as you find the price difference between domestic products and foreign markets, you can do it. Currently, most of them can make tens of thousands to hundreds of thousands of US dollars, and usually they are very profitable with hundreds of thousands of US dollars."

These companies play the same game, with almost the same market positioning and marketing methods. According to statistics, most of the participants are engaged in electronic and communication products and clothing, while small accessories and home products are emerging areas in recent years. In terms of marketing methods, keyword purchase and SEO optimization are basic skills for foreign trade B2C, and the growth of website traffic and orders is mostly brought by Google. In terms of market selection, the market penetration rate in North America is already quite high. Since there is not much differentiation in products and services, price wars are almost inevitable, and market expansion is also indispensable.

If we talk about the differences, the biggest difference between LightInTheBox and other participants is that LightInTheBox understands marketing better and is better at leveraging the expertise of Internet technology to improve delivery efficiency.

DX and LightInTheBox

Currently, only DX is a B2C foreign trade company that has grown and gone public. Let’s compare the financial data of LightInTheBox and Yibao (DX shell company):

Revenue: In the quarter ended March 31, 2013, YeePao achieved revenue of HK$374 million, up 15% year-on-year; Lanting's net revenue was US$73.3 million, up 98.7% year-on-year;

Gross profit margin: During the same period, Yibao's gross profit margin was 40.25%, a slight decrease from 43.43% in the same period last year; LightInTheBox's gross profit margin was 45.4%, up from 40.1% in the same period last year;

Net profit: During the same period, Yeepo's profit after tax was HK$24.79 million, lower than HK$28.67 million in the same period last year, and its net profit margin was 6.62%, lower than 8.8% in the same period last year. The company said that the decline in profits was mainly due to the increase in marketing, promotion and employee costs caused by users' increased competition in e-commerce business; after deducting interest and tax, Lazada's net profit was US$2.61 million, with a net profit margin of 3.6%. In the same period last year, it suffered a net loss of US$2.97 million. As mentioned above, the improvement in Lazada's profitability is the result of the combined effect of improved gross profit margin and operating efficiency. The management expects that it should not be difficult to achieve a net profit margin of 10% under NonGaap in the future, but whether it can be maintained for a long time will be a big test.

DX and LightInTheBox can be considered the two largest foreign trade B2C teams. DX was listed in Hong Kong through a backdoor listing a few years earlier than LightInTheBox, but its growth after listing seems to have hit a bottleneck, with revenue and profit even declining year-on-year in several quarters. In recent quarters, with the decline in gross profit margin and the increase in operating costs, the company's net profit and net profit margin have also continued to decline. In contrast, LightInTheBox's revenue momentum is very strong. Although it was a step later than DX to achieve profitability, from the situation in recent quarters, LightInTheBox's operating efficiency has gradually improved, and its losses have gradually narrowed. It finally turned losses into profits in the fourth quarter of 2012.

As of June 5, 2013, Yeebao's market capitalization was HK$1.63 billion, with net revenue of HK$1.383 billion and net profit after tax of HK$99.52 million in the last 12 months; its price-to-sales ratio was 1.18 and its price-to-earnings ratio was 16.4.

4. Risk: The gray area of ​​foreign trade B2C

High growth, easy-to-replicate model, profitability... Is foreign trade B2C really as good as it seems?

In fact, the development of foreign trade e-commerce has always been subject to many constraints, and is even in a gray area in terms of customs clearance, foreign exchange settlement, and tax refund.

First, domestic labor and material costs have risen, price advantages have been challenged, the renminbi has appreciated, and the profits of foreign trade companies have been squeezed. The overall living environment of China's foreign trade companies is no longer as optimistic as before, and further development has encountered bottlenecks.

Secondly, intellectual property risk is also a frequent problem. Imitation and knockoff products are the characteristics of China's foreign trade B2C. Once involved in a lawsuit, the subsequent disputes and compensation will be a hassle. At present, foreign trade websites including Lightinthebox attach great importance to avoiding intellectual property risks.

Pricing is low to begin with, and it seems impossible to expect users to spend too much money on shipping. How to deliver goods to overseas C-end users at the lowest cost is a thorny issue. Currently, there is a lack of a convenient, safe, and low-cost transportation channel suitable for small-value foreign trade exports. In order to save costs, most foreign trade B2C companies use international parcels to send goods to users. The price of Hong Kong Post parcels is even 30-50 yuan/kg, but the logistics cannot be tracked. It is said that there is a loss rate of up to 5%. Moreover, small parcels are mostly mailed in the form of gifts and samples, without formal customs clearance procedures, and cannot be normally declared and refunded.

If the export procedures are not formal and there is no export exchange verification form, it is impossible to collect and settle foreign exchange through formal channels. According to the Yibang investigation report, a foreign trade industry insider said, "Many companies convert foreign exchange into RMB by paying service fees to domestic subsidiaries or through underground banks, personal accounts, overseas exchanges, etc., and then launder it to China to pay for purchases."

The demand and space for the foreign trade market are still quite vast, but there has not yet been a giant like Alibaba or Amazon in this field. This is due to both the companies themselves and the external environment. The lack of perfect policy support has shrouded China's foreign trade B2C companies in many uncertain environments, and has even become an obstacle to the development of this field.

V. Corporate Structure and Equity Structure

LightInTheBox was founded in 2007 and its holding company is registered in the Cayman Islands. It conducts global online retail business through its subsidiaries in Hong Kong and the Mainland and its affiliated companies.

In March 2008, LightInTheBox (Cayman Islands) Holding Company was established; in June 2008, Shenzhen LightInTheBox Huitong Technology Co., Ltd. was established as a variable interest entity (VIE); in October 2008, LightInTheBox (Shenzhen) Trading Co., Ltd. was established; in December 2011, Beijing LightInTheBox Gaochuang Technology Co., Ltd. was established as a new VIE.

The Hong Kong subsidiary directly controls the mainland LightInTheBox (Shenzhen) Trading, which in turn controls the operating entities Beijing LightInTheBox Hi-Tech and Shenzhen LightInTheBox through VIE agreements. The shareholders of Shenzhen LightInTheBox are the company's founding team members Guo Quji, Wen Xin, Zhang Liang and Liu Jun.

Shenzhen Lanting Huitong holds 49% of Beijing Lanting Gaochuang Technology Co., Ltd., and the remaining 51% is held by Guo Quji. The company's operations are mainly handled by Lanting Jieshi (Hong Kong) and Lanting Jieshi (Shenzhen). Shenzhen Lanting Huitong operates domestic websites through its subsidiary Shanghai Oku Network Technology Co., Ltd., and Beijing Lanting Gaochuang is responsible for some research and development work. Lanting Jieshi controls Lanting Huitong and Lanting Gaochuang through a series of agreements.

Lanting Jishi founder and CEO Guo Quji holds 10555555555 shares of common shares through Wincore Holdings Limited, with a shareholding ratio of 13.5%. Co-President Wen Xin and Zhang Liang hold 7,038,889 common shares of the company through Vitz Holdings Limited and Clinet Investments Limited, respectively, with a shareholding ratio of 9%; the three founders hold a total of 31.5%. In addition, according to the agreement, the three founders hold three voting rights for each share, and other holders only enjoy one voting rights for each share.

Senior Vice President of Operations Liu Jun holds 5,222,221 common shares of the company through FulltrendHoldings Group Limited, with a shareholding ratio of 6.7%;

In terms of institutional shareholders, CeyuanEntities holds 20686277 common shares, with a shareholding ratio of 26.4%; GSR Ventures III, LP holds 16094261 common shares, with a shareholding ratio of 20.6%; Li Shujun holds 5,356,111 common shares of the company through Trustbridge Partners III, LP, with a shareholding ratio of 6.8% (he has stated that he will resign from the position of director of the company); FocusChina Holdings Limited, controlled by Xu Xiaoping, a co-founder of New Oriental, holds 5,333,334 common shares of the company, with a shareholding ratio of 6.8%.

In this IPO, the company and the donor shareholders granted the underwriter the option of purchasing up to 1,245,000 American depositary shares, with 1ADS=2 common shares. The holding entities of the company, including the company's directors and executives Guo Quji, Wen Xin, Zhang Liang and Liu Jun, as the donor shareholders, granted the underwriter the right to purchase up to 10 million American depositary shares. Based on the median issue price of US$9.5/ADS, this part is equivalent to a total of 1,052,632 American depositary shares.

In its prospectus, Lanting stated that the company's original shareholders Lianchuang Ceyuan, Jinshajiang Venture Capital and Trustbridge Partners III are willing to subscribe to the company's shares worth US$25 million at the IPO issue price.

VI. Valuation

The valuation of Lanting Jishi is of some reference significance for Yibao, which is listed on the Hong Kong stock market.

Foreign trade B2C website DX was listed on the shell of Yibao in 2011, and its stocks were speculated in the Hong Kong market. The stock price was once speculated to over HK$1.5 in the first quarter of 2011. After DX successfully injected Yibao in the second half of 2011, Yibao's stock price was around HK$1.1, with a market value of approximately HK$5.6 billion (about US$720 million), but the stock price has been declining since 2012. As of June 2013, the stock price was only HK$0.32, the market value was only HK$1.6 billion (US$200 million), the TTM price-to-sales ratio was 1.18 times, the price-to-earnings ratio was 16.4 times, and the transaction volume was light, becoming a "phenomenon stock"

How did DX "fall" from its $1 billion e-commerce darling to a sacred stock in the Hong Kong stock market? It can be seen that when DX first went public in Hong Kong, the market gave it very high expectations. In the early stages of DX's listing in Hong Kong, DX's revenue in the two quarters from June 30 to September 30, 2011 to December 31, 2011, DX's revenue was 355 million and 398 million Hong Kong dollars respectively, which was the best record of the company's performance. However, in the first and second quarters of 2012, DX's revenue growth began to be exhausted. By the third and fourth quarters of 2012, DX's revenue declined continuously year-on-year, and profit margins also dropped sharply. This performance cannot support a high valuation.

Comparing the latest quarterly financial data of Lanting Jishi and DX: Lanting's net revenue increased by 98.7% to US$73.3 million in Q1 2013, with gross profit margin rising to 45.4% from 40.1% in the same period last year, and net profit margin 3.6%; during the same period, Yibao's revenue increased by 15% year-on-year to HK$374 million (US$48.19 million), and gross profit margin fell to 40.25% from 43.43% in the same period last year, with net profit margin 6.62%.

Assuming that Lanting Jishi's revenue in 2013 increased by 70% to US$340 million, and the gross profit margin remained at 45%. Referring to the price-to-sales ratio of DX in Hong Kong stocks, Lanting Jishi's valuation is US$400 million; considering that Lanting Jishi's growth and business scale are far higher than DX, Lanting enjoys a valuation premium and gives it a price-to-sales ratio of 1.5 times, Lanting's valuation is about US$510 million. In summary, Lanting Jishi's valuation range will be between US$400 million and US$500 million.

(via i US stocks)