What PayPal Needs to Do to Break Out in China
For PayPal Holdings Inc. (PYPL) - Get Report , China represents one of the "most attractive, yet nuanced" opportunities to grow its already-massive base of 200 million users, Barclays Capital analyst Darrin Peller notes in a report.
The company's partnerships with Baidu Inc. (BIDU) - Get Report and Alibaba Group Holding Ltd (BABA) - Get Report give it a foothold in the market. Deals with powers such as AliPay, owned by Alibaba-affiliate Ant Financial, or Tencent Holdings Limited's (TCEHY) WeChat Pay would push the company deeper into China, although Peller suggested it may be time for PayPal to open its wallet and make an acquisition in Asia.
Domestic payments, in which the buyer and seller are based in China, are a tough proposition for PayPal with AliPay and Tencent dominating. However, Peller suggested that the San Jose, Calif., company could use its vast number of users and merchants outside of China to lure local paytech companies into partnerships to handle international transactions.
"The China cross-border eCommerce market is more nuanced compared to other corridors given the consolidated market share and unique consumer preferences, which makes it challenging to predict exactly how much share PayPal can gain over time," Peller wrote in an email.
"That said, PayPal brings attractive value propositions for Chinese payments companies looking to easily tap into a base of (about 17 million) merchants (mostly in western regions)," he added, suggesting that international transactions could be more than five times more profitable for Chinese companies if they worked with PayPal.
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By 2020, Barclays suggsets, such cross-border e-commerce involving Chinese parties could hit $150 billion to $300 billion annually. Each 1% of of that deal volume that PayPal can get its hands on would add 1 cent to 2 cents to earnings per share, Peller estimates.
PayPal's agreement with Baidu gives it access to 100 million users of the Baidu Wallet in China. Peller suggests that PayPal could strike similar deals with AliPay, which has 520 million users, and Tencent's pay processing operations, which have more than 600 million users and include the payment app of social media network WeChat. If it can strike deals with AliPay and Tencent, the analyst suggests that PayPal could gain a mid-single-digit share of Chinese cross-border e-commerce by 2020.
PayPal CEO Dan Schulman could speed things up by making acquisitions in Southeast Asia. With its cash on hand and the ability to raise debt, Peller estimates that PayPal could dish out $10 billion to $15 billion for a major acquisition. Schulman told TheStreet.com recently that the company is looking out for global acquisitions between $100 million and into the billions.
Barclays analyst Peller declined to suggest targets. PayPal isn't the only Western company with resources targeting the region. Dutch payments processor Adyen NV -- which has backing from General Atlantic, Singaporean sovereign wealth fund Temasek, Index Ventures and Felicia Ventures -- recently told Bloomberg it is gearing up for rapid expansion in Asia.
