Going South

Alibaba's $1-billion South-East Asia buy tests limits

Alibaba's $1-billion move into Southeast Asia will test its limits. The Chinese e-commerce group is taking control of local upstart Lazada in its largest overseas deal to date. Expanding into countries like Indonesia and Malaysia opens up new sources of growth. But wide losses and fierce competition mean expansion is not cheap.

The $195-billion group led by Jack Ma is buying shares worth $500 million from Lazada's existing shareholders, including Germany's Rocket Internet and British retailer Tesco at a valuation of around $1.5 billion. It is also injecting $500 million in exchange for new shares, lifting its shareholding above 50 per cent.

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For Alibaba, that seems a modest investment for a controlling stake in an e-commerce business and logistics network that spans six countries with a combined population of 560 million, just over a third of whom are online. China's dominant online retailer churned out free cashflow of $3.7 billion in the three months to December alone.

Such growth opportunities don't come cheap, though. Lazada's net revenue jumped 81 per cent to $191 million in the nine months to last September. Assuming it achieved the same rate of expansion in the full year, Alibaba's investment values the business at five times its 2015 sales.

Moreover, the four-year-old Lazada is nowhere close to achieving its new parent's levels of profitability. Unlike Alibaba, which arranges transactions but has others take care of warehousing and delivery, Lazada operates its own logistics network. This requires heavy up-front investment, which may explain why losses before interest, tax, depreciation and amortisation more than doubled to $213 million in the nine months to last September.

Local rivals are circling. Just last month, Indonesian conglomerate Lippo Group announced a new partnership with car-hailing app Grab to boost its e-commerce business. International competitors who are effectively shut out of China are also unlikely to let Alibaba march into South-East Asia unchallenged. Buying Lazada is the first big step for former Goldman Sachs executive Michael Evans, who joined Alibaba last year to lead its international strategy. His land-grab is only just beginning.