Alibaba, the Chinese peer of Amazon and eBay, reported most-recent quarterly revenues of US$2.5bn on US$80bn of gross merchandise value (GMV, the value of all products shipped). What is more impressive, though, is Alibaba’s 43.4% operating margin, compared with 17.9% at eBay and an operating loss at Amazon. That gave Alibaba US$1.6bn in operating cash flow for the most recent quarter; about the same as Amazon’s, but growing much faster.
Alibaba seems much better at turning business into profits and cash flow than its developed market peers.
The same pattern can be seen elsewhere. Google is an enormously successful business, with an operating margin in the most recent quarter of 22.5%. In China, Tencent has an operating margin of 31.9%, partly from the incredible achievement of having US$1.8bn in quarterly revenues from online gaming alone.
Also in China, Badu has an operating margin of 29.0%. Despite the very weak domestic economy in Russia, Yandel runs an operating margin of 32.5%.
In the IT services and software industry, SAP of Germany, with its US$23.4bn of revenues and 27.2% operating margin is an industry heavyweight. Tata Consultancy Services of India may only do US$14.6bn in revenues but monetises far more successfully, with a 36.4% operating margin.
Leadership is a hard metric to define (‘you know it when you see it’), but profit margins suggest that emerging companies enjoy a level of success that developed market peers struggle to achieve.
The last ten years has seen the rise of the emerging market multi-national, with hardware firms such as Samsung Electronics, Lenovo and Acer the best known in the technology space.
We believe that there are emerging market software, service and e-commerce giants with global scale, robust and innovative business models, high levels of profitability and years of strong growth ahead.
J O Hambro is our London-based investment boutique with equities capabilities across the UK, Europe, Asia, as well as Developed and Emerging Markets. James is one of the managers of our Global Emerging Markets Opportunities Fund.