Prospectus Summary
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under "Risk Factors" before deciding whether to buy our ADSs. This prospectus contains information from the iResearch China Online Classifieds Market Research Report, an industry report commissioned by us and conducted by iResearch Consulting Group, or iResearch, a third-party market research firm, to provide information on our market position among online classifieds providers in China. We refer to this report as the iResearch Report in this prospectus. The iResearch Report uses data for the relevant period as of May 31, 2013 when estimating the size of the online classifieds market and the position of the market participants including us. The iResearch Report uses monthly unique visitors data of online marketplaces on personal computers from January 2012 to May 2013 and data of online marketplaces on mobile applications from August 2012 to May 2013, when estimating the position of the market participants including us. iResearch started collecting monthly unique visitors data of online marketplaces on mobile applications in August 2012.
Our Business
We operate the largest online marketplace serving local merchants and consumers in China, as measured by monthly unique visitors on both our www.58.com website and mobile applications, according to the iResearch Report. Our online marketplace enables local merchants and consumers to connect, share information and conduct business. Our large and growing user base, merchant network and massive database of local information create a powerful network effect that enables us to maintain our leadership position.
Our online marketplace contains a vast amount of credible and up-to-date local information in approximately 380 cities, across diverse content categories, including housing, jobs, used goods, automotive, pets, tickets, yellow pages and other local services. We conduct automatic and manual screening using proprietary technology and processes to ensure relevance and accuracy of the information on our online marketplace. To further increase the quality of information and enhance user experience, we leverage our years of experience and continue to develop processes and features to certify local merchants, encourage user reviews, collect and respond to customer feedback through our customer service team and provide designed templates to local merchants to make listings more informative and effective. Our broad, in-depth and high quality local information, combined with our easy-to-use website and mobile applications, has made us a trusted marketplace for consumers.
Our online marketplace also provides merchants with an affordable and effective marketing channel to reach a broad and targeted local consumer base. Our sales and customer service teams stay in regular contact with our customers to help them use our online marketing services to achieve optimal marketing effectiveness. Our well-recognized brand, "58.com," further helps local merchants to attract consumers in China. As a result, we had approximately 4.3 million active local merchants on our marketplace in the second quarter of 2013.
Our business model is highly compatible with mobile internet. Our listing-based content is easy to display through mobile devices. Our location-based services and other mobile functionalities significantly increase user engagement. We have launched a separate merchant mobile application to increase consumer-merchant communication and enhance the ability of merchants to manage content and attract consumers. In the second quarter of 2013, 39.4% of our average monthly page views were on mobile applications.
Leveraging the network effect of our online marketplace with our focus on providing the best user experience, we have achieved market leadership with significant user traffic and growing user engagement, as shown by:
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- our no.1 market position represented by 38.1% market share in terms of cash receipts in China's online classifieds market
in 2012, according to the iResearch Report;
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- an average of 129.7 million monthly unique visitors who visited our website or used our mobile applications in the
second quarter of 2013;
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- the number of page views per unique visitor on our website, which more than doubled in the second quarter of 2013 as
compared to the same period in 2010; and
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- an average of 56.4 million monthly listings of local information that our users posted on our website and mobile applications in the second quarter of 2013.
We generate revenues primarily from memberships and online marketing services. A membership is a basic service package consisting of merchant certification, display of an online storefront on our marketplace, preferential listing benefits such as daily priority listings and higher quota for daily listings and access to our dedicated customer service support team and online account management system. Our online marketing services mainly include listing services, such as real-time bidding and priority listing, and marketing services through collaboration with third-party internet companies in China. Merchants can use our real-time bidding services to bid for the most prominent placement of their listings in specific categories and locations on a daily basis. Merchants can also purchase our priority listing services, which place their listings below real-time bidding listings and above paying merchant members' listings.
Our revenues were US$10.7 million, US$41.5 million and US$87.1 million in 2010, 2011 and 2012, respectively. We incurred net loss of US$13.9 million, US$83.4 million and US$30.4 million in 2010, 2011 and 2012, respectively. Our revenues were US$58.8 million and we had a net income of US$0.3 million in the six months ended June 30, 2013.
Our Industry
China's online marketing industry has grown significantly as the internet continues to gain popularity as an effective marketing medium. According to the iResearch Report, China's online marketing industry is expected to grow from US$12.1 billion in 2012 to US$39.3 billion in 2017 representing a five-year compound annual growth rate, or CAGR, of 26.6%. Based on iResearch's estimates, online marketing is expected to become the largest marketing medium in China in 2013.
The rapid proliferation of internet usage is also driving a shift in marketing services towards the online channel. The online classifieds market in China is expected to grow from US$275.4 million in 2012 to US$2.4 billion in 2017, and online classifieds as a percentage of total classifieds is expected to increase from 10.6% in 2012 to 43.9% in 2017, according to the iResearch Report, due to China's large number of megacities and the resources constraints faced by local merchants, especially small and medium-sized enterprises, or SMEs. There will be 57 million SMEs in China in 2013, according to the iResearch Report. Due to their relatively smaller scale, local merchants in China face a number of inherent challenges when conducting business, which include marketing effectively and gaining credibility and consumer trust. These challenges have set the stage for the emergence of online classifieds platforms as a cost-effective medium to connect local merchants with potential customers.
The growing adoption of mobile internet usage combined with technological advancement has enabled the proliferation of rich content and more complex applications on mobile devices. According to the iResearch Report, the number of mobile internet users in China has been growing, and is expected to continue to grow at a fast pace, increasing from 420 million in 2012 to 784 million in 2017. The accessibility and range of functionalities provided by mobile devices will lead to a higher level of user engagement, and also allow local merchants to better manage their product offerings. Mobile applications also allow online marketing services providers to better track user behavior and monitor listing effectiveness, which will in turn drive more product innovation.
Why Consumers Choose Us
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- Depth of information at the local level
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- Breadth of content categories
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- Up-to-date and credible information
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- Ease of use
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- Compelling mobile experience
Why Merchants Choose Us
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- Broad consumer reach
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- Affordable and effective marketing channel
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- Ability to target consumers
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- Strong customer service
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- Well recognized brand
Our Strengths
We believe that our success is largely attributable to the following key competitive strengths:
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- Leading market position
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- Powerful network effect
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- Trusted marketplace
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- Proven mobile adoption
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- Extensive and engaged merchant network
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- Strong brand recognition
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- Significant monetization potential
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- Strong product development and engineering capabilities
Our Strategies
Our vision is to provide the most convenient and trusted online marketplace for local merchants and consumers in China. We intend to achieve our vision by pursing the following growth strategies:
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- Grow user base and enhance user experience
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- Expand and strengthen merchant network
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- Enhance mobile capabilities
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- Further monetize traffic
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- Pursue strategic alliances and acquisition opportunities
Our Challenges
We operate in a fast-evolving industry and face risks and uncertainties that could adversely impact our business, including those relating to our ability to:
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- continually anticipate user preferences and provide attractive services on our online marketplace;
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- retain existing and attract new local merchants to use our online marketplace and pay for our membership and online
marketing services;
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- achieve and sustain operating profitability, given our history of losses;
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- effectively respond to competition;
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- manage our growth or execute our strategies effectively;
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- maintain a strong brand image and avoid events that could cause negative publicity and harm our reputation;
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- offer new, innovative and effective services at competitive prices to attract and retain a large user base;
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- balance the need to market and advertise our services with the significant costs of doing
so;
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- capture and retain a significant portion of the growing number of users who access online marketplaces through
mobile devices; and
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- attract, train and retain qualified personnel.
In addition, we face risks and uncertainties related to our corporate structure and doing business in China, including:
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- risks associated with our control over Beijing 58 Information Technology Co., Ltd., or Beijing 58, which is
based on contractual arrangements rather than equity ownership;
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- risks related to the potential conflict between PRC and Cayman Islands fiduciary duties owed by directors of Beijing 58
and our company and the lack of framework for the resolution of fiduciary duty conflicts between these different jurisdictions;
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- uncertainties associated with the interpretation and application of PRC regulations and policies, including those relating
to the distribution of internet content in China; and
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- risks related to our ability to use the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries as a result of PRC regulations and governmental control of currency conversion.
Please see "Risk Factors" for a more detailed discussion of these and other risks and uncertainties we face.
Corporate History and Structure
We began our operations in China in 2005 through Beijing 58, a PRC limited liability company, which became one of our consolidated affiliated entities through certain contractual arrangements. Due to the legal restrictions and qualification requirements on foreign ownership of value-added telecommunications services, we operate our online marketplace through Beijing 58.
In January 2010, we incorporated China Classified Network Corporation, or CCNC BVI, a holding company established in the British Virgin Islands. Subsequently, CCNC BVI established China Classified Information Corporation Limited, or CCIC HK, a Hong Kong limited liability company, as its wholly owned subsidiary. CCIC HK then established Beijing Chengshi Wanglin Information Technology Co., Ltd., or Wanglin, as a wholly foreign-owned enterprise in China. Wanglin entered into a series of contractual agreements with Beijing 58 and its shareholders, including the exclusive business cooperation agreement, the equity pledge agreement, the exclusive option agreement and the power of attorney, under which Wanglin exercises effective control over the operations of Beijing 58. The shareholders of Beijing 58 received nominal monetary benefits in return for entering into the contractual arrangements with Wanglin.
Our current holding company, 58.com Inc., was incorporated in May 2011 as a limited liability company in the Cayman Islands. Through a share exchange in July 2011, CCNC BVI became a wholly owned subsidiary of 58.com Inc.
In March 2012, CCIC HK established 58 Tongcheng Information Technology Co., Ltd. or 58 Technology, as a wholly foreign-owned enterprise in China, to operate our customer service operations in China.
Due to PRC legal restrictions and qualification requirements on foreign ownership and investment in value-added telecommunications services in China, we operate a portion of our business through our consolidated affiliated entity, Beijing 58, and its subsidiaries. We do not hold any equity interest in Beijing 58; however, through a series of contractual arrangements with Beijing 58 and its shareholders, we effectively control Beijing 58 and its subsidiaries and enjoy their economic benefits. Beijing 58 and its subsidiaries are considered "variable interest entities" of our company under U.S. generally accepted accounting principles. Therefore, we have consolidated the financial results of Beijing 58 and its subsidiaries into our financial statements. If Beijing 58 or its shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over Beijing 58. Furthermore, if we are unable to maintain effective control over Beijing 58, we would not be able to continue to consolidate the financial results of Beijing 58 and its subsidiaries with ours.
Under the exclusive business cooperation agreement, Wanglin has the exclusive right to provide technical and business support and consulting services to Beijing 58 in exchange for service fees. Beijing 58 agrees to pay a quarterly service fee to Wanglin at an amount determined solely by Wanglin after taking into account factors including the complexity and difficulty of the services provided, the time consumed, the seniority of the Wanglin employees providing the services to Beijing 58, the value of services provided, the market price of comparable services and the operating conditions of Beijing 58. The exclusive business cooperation agreement will remain in effect unless Wanglin terminates the agreement in writing at its sole discretion or a relevant government authority rejects the renewal applications by either Beijing 58 or Wanglin to renew its respective business license upon expiration. The shareholders of Beijing 58, under the equity pledge agreements, pledged their equity interests in Beijing 58 to secure Beijing 58's and its shareholders' performance under the contractual arrangements. As a result, Wanglin is entitled to all dividends and other distributions made by Beijing 58. In order to maintain sufficient working capital in Beijing 58, Wanglin has not yet exercised its right to provide services to Beijing 58 and thus has not yet received any service fee payment from Beijing 58, as of the date of this prospectus. We currently expect Beijing 58 to begin paying a portion of its quarterly profit as service fee to Wanglin once Beijing 58 becomes profitable net of accumulated losses, taking into account Beijing 58's working capital requirements. In addition, Beijing 58's shareholders, in the exclusive option agreements, irrevocably granted Wanglin, or Wanglin's designees, an unconditional and exclusive option to purchase, to the extent permitted by applicable PRC laws, all of the equity interests in Beijing 58 from the shareholders for either a nominal price or a specified price equal to the loan provided by Wanglin to the individual shareholder. If the lowest price permitted under PRC law is higher than the above price, the lowest price permitted under PRC law shall apply. The exclusive option agreements will remain effective until all equity interests in Beijing 58 held by Beijing 58's shareholders are transferred or assigned to Wanglin or Wanglin's designee. The equity pledge agreements will remain in effect until Beijing 58 and its shareholders fulfill all of their obligations under the contractual arrangements. The equity pledge agreements can only be terminated when Beijing 58 and its shareholders discharge all of their obligations under the contractual arrangements to the satisfaction of Wanglin. Furthermore, Beijing 58's shareholders irrevocably appointed Wanglin as their exclusive agent and attorney and vested Wanglin with full power to exercise all their rights as Beijing 58's shareholders under the powers of attorney. The powers of attorney remain in effect indefinitely as long as the shareholders remain Beijing 58's shareholders.
The following diagram illustrates our corporate structure, including our principal subsidiaries and consolidated affiliated entities as of the date of this prospectus:
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- (1)
- Jinbo Yao, Lianqing Zhang, Jianbo Su, Beijing Wanglintong Information Technology Co., Ltd., or Beijing Wanglintong, hold 37.8%, 39.8%, 9.0%, and 13.4% equity interests in Beijing 58, respectively. Among the shareholders of Beijing 58, Jinbo Yao and Jianbo Su are shareholders of our company. Lianqing Zhang is an employee of SAIF Partners, one of our shareholders. Mr. Yao is the sole director and holds a 16.7% equity interest in Beijing Wanglintong, which is jointly owned by Mr. Yao, Mr. Xiaohua Chen, holding 15.92% equity interest, Mr. Jiandong Zhuang, holding 15.8% equity interest, and five other individuals who are employees or ex-employees of our company. Beijing Wanglintong, a PRC domestic company, does not have any business operations or assets other than its equity interest in Beijing 58. The registered business scope of Beijing Wanglintong includes technology promotional services, software development and computer technology training.
Mr. Jinbo Yao is the chairman, chief executive officer and a shareholder of our company and beneficially owns 27.9% of our outstanding share capital prior to this offering. He is also the sole director, an executive officer and a shareholder of Beijing 58, holding 37.8% equity interest in Beijing 58. In addition, Mr. Yao is the sole director and a 16.7% shareholder of Beijing Wanglintong Information Technology Co., Ltd., an entity that holds 13.4% equity interest in Beijing 58. Thus, conflicts of interest between his fiduciary duties to our company, his duties to Beijing 58 and his interests as a major shareholder of Beijing 58 may arise. We cannot assure you that he will act entirely in our interests when conflicts of interest arise or that conflicts of interest will be resolved in our favor. Furthermore, in the context of Mr. Yao's acting as the director and an executive officer of Beijing 58, PRC law would not require him to consider our company's best interests. We rely on Mr. Yao to abide by PRC law, which provides that directors and executive officers owe a duty of loyalty and duty of care to a company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of Cayman Islands which provide that directors owe a duty of care and duty of loyalty to the company. The respective legal framework of China and the Cayman Islands does not provide guidance in the event of a conflict with another corporate governance regime. If we cannot resolve any conflict of interest or dispute between us and directors and executive officers of Beijing 58 should any arise, we would have to rely on legal proceedings, the outcome of which would be uncertain. Any such dispute could result in significant disruption of our business and possibly temporary or permanent loss of control over Beijing 58 and its subsidiaries. See "Risk Factors—Risks Related to Our Business—The shareholders of our affiliated PRC entities have potential conflicts of interest with us, which may adversely affect our business."
Prior to 2012, we conducted substantially all of our business operations through Beijing 58. Since 2012, we have started to conduct our business operations that are not subject to PRC legal restrictions on foreign ownership through our wholly owned subsidiaries, Wanglin and 58 Technology, to address risks related to the contractual arrangements discussed above and under "Risk Factors—Risks Relating to Our Corporate Structure and Restrictions on Our Industry." Currently, we primarily use Wanglin and 58 Technology, rather than Beijing 58, to provide services to our customers, and we have transferred a significant portion of our personnel, including substantially all of our administrative and product development personnel, from Beijing 58 to Wanglin and 58 Technology. As of June 30, 2013, the substantial majority of our assets were held by Wanglin and 58 Technology. Wanglin and 58 Technology collectively generated a majority of our revenues in the six months ended June 30, 2013, and we currently expect that they will continue to generate a majority of our revenues going forward. We further expect Beijing 58's business to be limited primarily to services that are legally required to be conducted through a PRC domestic entity.