BEIJING – There's big, there's huge, and then there's Chinese e-commerce.
Almost 700 million Chinese use the internet today with another 500 million on the way over the next new few years. That's an extra 21 Australia's worth of smartphone-checking, tablet-tapping internet users.
We're busy people – 14 meetings over 12 days in 3 cities here in China – but you can see why we made a beeline to meet with leading internet companies, including a visit with Zhaopin (Nasdaq:ZPIN), after touching down in Beijing.
There's just one problem – a big one – that's causing tech CEOs from Shanghai to San Fran to scramble to adapt or die: Mobile. The ones who master mobile will reap fortunes for shareholders. The ones who don't are on the wrong side of history.
Fortunately, we've found some ways to profit…
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The Magnitude of Mobile
Your phone is your world. It's how you connect, shop, get directions, take selfies, play games, read the news, listen to music, and organize your life. That's why Apple (Nasdaq:AAPL) sold 34,000 iPhones an hour last quarter and the average person checks their phone 150 times a day.
Mobile has poured petrol on the fire of traditional software and internet business models, which already burned bright for investors. Such companies are scalable and capital light (they get big fast) and have loyal customers, self-reinforcing scale advantages, and network effects (and stay that way).
This magic economic elixir allows for shockingly fast value creation and destruction. Facebook (Nasdaq: FB) didn't exist in 2003, for example. Today, it's worth $210 billion.
Location, Location, Location
Not every online company benefits from the rise of mobile, though. We met with one company, a leading online matchmaking site, which has run into two gale-force headwinds because of mobile.
First, its users increasingly preferring shorter-form messaging over longer-form emails, which had been how most of the company's users interacted on its platform. It's had to race to change its platform, rocking the boat of its revenue model in the process.
Second, new services like Tinder are leveraging our phones' locations to help singles find other nearby singles. Tinder might not be the best way to find your soul mate, but it is stealing attention and mindshare from the longer-form, more marriage-centric platforms.
(P.S. Ask your interesting single friends about Tinder. Trust me.)
Zhaopin is China's largest jobs site with more than 18 million annual job postings tempting its 92 million active users into pursuing new careers. Its 93% gross margin is luscious and the market's 15% annual growth should be enough to attract new competition. And it does – it's just that they fail.
It's hard to break into an industry where Zhaopin and the next biggest player control around 60% of the market, especially when the businesses benefit from powerful network effects. Employers promote jobs with Zhaopin because that's where the job seekers are, and job seekers go there because that's where the jobs are.
Finding a new job online isn't all that different from finding a partner, so you might think Zhaopin could get Tindered. Nope. That's because a lot fewer job seekers are looking for short-term work than they are one-night stands. So even though 30% of Zhaopin's users are already coming via mobile the site won't get upended by location-centric mobile apps. Zhaopin is hard to kill and here to stay.
We also think Zhaopin has room to raise prices. The company is in no rush because it has been successful at cross-selling, but it's been three years since the last increase, the industry is consolidating, and the business adds immense value for employers.
Head hunters charge around 20%-25% of a place employee's first year's salary for a successful job placement. Meanwhile, Zhaopin's standard package for employers, which allows them to post up to 150 jobs, goes for around 2,000RMB.
Considering salaries for typical job postings on Zhaopin range from 2,000RMB to 3,500RMB, we think Zhaopin and its ilk could boost prices by upwards of 50% before nudging employers to reconsider their options. Profits, meanwhile, would explode much, much higher.
Will they anytime soon? Likely not, and rightly so. Best to ground down the smaller rivals before grinding on pricing. Still, it goes to show the latent pricing power Zhaopin has on top of its long growth runway.
Aussie investors can cash in on Zhaopin and its massive market opportunity without having to invest abroad, though, thanks to Seek's (ASX:SEK) 64% ownership stake in Zhaopin. That stake amounts to 11% of Seek's market value – not huge, but enough to give Seek investors a firm stake in China's largest jobs site.
There's a lot more to like about Seek than just Zhaopin, of course. CEO and co-founder Andrew Bassat still owns 5% of the business, which makes for great alignment with smaller investors like us, and the shares pay a fast-growing, fully franked 1.7% dividend.
It's easy to see why Seek has been such a huge winner for our sister service, Share Advisor, and why we're giving the shares a closer inspection after we get back from Shanghai.
Of course, Motley Fool Pro members have already invested in a handful of choice companies poised to benefit from mobile, including one boasting a rock solid balance sheet and 4% yield. We're meeting with the CFO in Shanghai later today, so stay tuned for more insights on what is one of our top ideas for new money today.
The next week is a whirlwind with 10 meetings in Shanghai! We're touring factories and sitting down with locals, executives, and a select group of Aussie expats. And, hey, maybe I'll get dared to eat more scorpions.
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Stay tuned for more coverage, including on the future of iron ore!