Shinsegae shares drop as Alibaba deal deemed unlikely to increase short-term profits

Shinsegae Group shares dropped Friday as analysts said the retail group's recent deal with Alibaba to form a joint venture on their respective online marketplaces was not likely to increase profits for shareholders in the short term.

Shinsegae signed a deal with Alibaba to create a joint venture that will operate their respective e-commerce platforms GMarket and AliExpress. [GMARKET, AliExpress]

Shinsegae Group shares dropped Friday as analysts said the retail group's recent deal with Alibaba to form a joint venture on their respective online marketplaces was not likely to increase profits for shareholders in the short term.

Shinsegae said Thursday that it was investing its entire stake in its e-commerce platform Gmarket to create a joint venture, tentatively named Grand Opus Holdings, with Alibaba.

The group owns 80 percent of Gmarket through Emart, a supermarket chain operated by Shinsegae. Alibaba will reportedly invest 300 billion won ($203 million) in cash on top of an in-kind investment using its own platform, AliExpress Korea.

The joint venture will be split evenly between the two partners and will incorporate AliExpress Korea and Gmarket as subsidiaries. While the group declined to confirm the size of the deal, it is valued at around 6 trillion won, according to local reports.

Park Sang-joon from Kiwoom Securities said it was unlikely that the joint venture would improve the net income attributable to controlling interests.

AliExpress was likely to have poor profitability, as the latecomer made its competitive prices its strategy to enter the saturated Korean market, Park explained.

“It is questionable whether the joint venture will be able to pose any threat to the top two companies in the market,” Park said.

Naver and Coupang currently hold the top spots as Korea’s two largest e-commerce players, making up 22 percent and 20 percent, respectively, according to consulting firm Samjong KPMG in June. Gmarket placed third with 15 percent in market share.

Other analysts considered both potential upsides and downsides.

A positive aspect for Emart in the deal was that its effective share ratio in the joint venture fell while it became an equity method company, Lee Jin-hyeob from Hanwha Investment and Securities said in a report. Gmarket had no clear momentum for growth, and now its operating losses would not affect Emart’s performance, which is expected to improve the supermarket chain’s profitability. It also turned the previous Chinese e-commerce rival into a partner that could boost Gmarket’s momentum for growth.

Lee said the deal, however, could also harm Emart, as Korean consumers hold a general wariness and prejudice toward entities with Chinese capital.

“Consumers could especially be sensitive about issues regarding their personal data being leaked to China, so Emart and the joint venture will have to convince them of [the platforms’] safety,” Lee wrote.

Baek Jae-seung, senior analyst at Samsung Securities, said the deal would bring significant economies of scale in terms of logistics for the two marketplaces. Shinsegae had recently signed a logistics alliance with CJ Logistics to handle delivery for the group’s e-commerce platforms, including SSG.com and Gmarket.

Baek cautioned that it was still too early to assess the joint venture’s impact on Emart, as there were not enough details confirmed.

Emart’s shares plummeted by 9.8 percent, or 7,400 won, to close at 68,100 won on Friday, while Shinsegae shed 1.5 percent to 131,400 won.

BY KIM JU-YEON [kim.juyeon2@joongang.co.kr]