The Olympics in Beijing were quite a spectacle. It is clear what an economic powerhouse China is becoming. The middle class is growing, and many of the new rich are spending their increased wealth online.
According to MasterCard (NYSE:MA), Asian ecommerce is expected to increase 23% annually for the next 10 years, growing to $168.7 billion by 2011. The study gave Singapore and South Korea the nod as Asia's top online spenders although they will play second fiddle to China soon enough. MasterCard believes China and India will be the fastest-growing markets due to an ever-increasing middle class. Seoul-based Gmarket (Nasdaq:GMKT) is one of many benefiting from Asia's desire to shop on the internet. This is a look at its future.
Eight Years Old And Growing
Gmarket got its start in April 2000, originally operating under the name GOODSDAQ, Ltd. Up until the third quarter, 2003, it operated as an online retailer. It then transitioned to an online marketplace where it sold merchandise for others. By December 2004, it sold its entire inventory, changing its name to Gmarket.
In the last five years, Gmarket's sales have grown to $238 million in 2007 from $3.14 million in 2003. Operating income has risen every year, going from a loss of $1.41 million in 2003 to a profit of $28.5 million in 2007. At the same time, gross merchandise value (GMV) sold in 2003 was $55 million, rising to $3.5 billion in 2007 and the average monthly unique visitors grew from 1.26 million in 2003 to 17.79 million in 2007. Clearly, the transition was a success.
It's a Small Virtual World
One of Gmarket's competitors in the South Korean ecommerce marketplace is Interpark Corp., owners of 36.7% of Gmarket's common stock. At the end of 2007, Interpark announced it was considering selling its ownership interest. The latest suitor for the stock is none other than Ebay (Nasdaq:EBAY). Ebay is apparently prepared to spend $404 million for the minority stake in the company. The purchase would have to receive approval from the Korean Fair Trade Commission.
Ebay already owns the second largest online shopping site in Korea, Internet Auction. The move would certainly help its foray into Asia and could be the precursor to a takeover. Here you have a part owner that competes with Gmarket, looking to sell to another competitor and yet another competitor, Yahoo (Nasdaq:YHOO), already owns 10% of its stock. Complicated enough for you? (For more read The Wacky World of M&As.)
The Road Is Paved With Gold
Gmarket's future looks bright. Sure, it might not operate in China, but it's certainly growing in South Korea. Gross merchandise value transacted is up 73% annually since 2005. In 2007, it had $3.5 billion in online sales out of a total of $16.85 billion for all of Korea, a 20% market share. Total revenue was up 44% to $238.18 million and net income up more than double to $35.6 million. Its operating margin of 11.9% was very impressive. Profitable and growing, I like it.
On July 29, Gmarket announced second quarter earnings. Revenue was up $66.9 million; this was a 26% increase year-over-year. Operating income was up 74% to $12.6 million and net income up 91% to $15.4 million year-over-year. Gross merchandise value increased 25% to $927.7 million. Transaction fee revenues were up 16% to $35.7 million and advertising revenues up 39% to $31.2 million. By focusing on new and emerging categories to grow revenue and continuing to build ad revenues, its special tax treatment in Korea will come in handy. Good for the remainder of the year, the designation carries a 13.75% tax rate, half the normal amount. With operating margins in Q2 18.8%, up from 16% in the same quarter last year, and doubling in the last three years, the business is healthy indeed. (For more on reading into company earnings releases, check out Advanced Financial Statement Analysis.)
At the end of 2007, Gmarket launched a Japanese-language website. It will begin providing online shopping in the second half of 2008. Future opportunities exist in other parts of Asia and the U.S. No wonder the stock up 23.7% in the last year and 55% since going public in 2006. While its stock isn't cheap and two of its biggest competitors (Yahoo and Ebay) may each end up owning a piece of the company, it still is worth a long-term look. Not many can match its margins.