LinkedIn (LNKD) has introduced its local Chinese website and intends to tap into the opportunity that the world’s second largest economy presents with its vast pool of professionals.  The company has also formed a joint venture with Sequoia China and CBC to further its business interests in the region. Doing business in China has never been easy for U.S. companies, which have pulled out in the past due to overly strict rules and regulations, and threat of local competition. In addition, they have found it challenging to adapt their products and services to the local taste.
LinkedIn is trying to address these issues by testing its local website, leveraging the joint venture, and publicly declaring that it will abide by the government’s censorship rules. This is somewhat at odds with the stand that other technology companies such as Facebook (FB) and Twitter (TWTR) have taken in the past, and could draw some criticism. Nevertheless, LinkedIn is ready to do what it takes to be successful in China, and could add meaningful value to its stock if it can penetrate even a quarter of the potential market. Although there are some local competitors, they lack the scale which gives LinkedIn some advantage.
Our price estimate for LinkedIn stands at $141, implying a discount of about 30% to the market price.
LinkedIn Can Add 10%-15% To Its Value With Strong Expansion In China
It is impossible for LinkedIn to ignore China’s market as Chinese professionals represent roughly 20% of global knowledge workers.  The company intends to target more than 140 million professionals in the country overtime through its local website.  This stands in stark contrast with 4 million Chinese members that it currently has, suggesting a significant potential to expand.
Wealth management, insurance, tourism and e-commerce are some of the fastest growing industries in China. These industries also have heavy demand for knowledge workers, which favors LinkedIn’s business model. As the company further expands in the region, it will have an opportunity to market its corporate solutions products to recruiters, as well as grow its premium membership. LinkedIn has entered a joint venture through which it can leverage local expertise and ramp up its field sales team. The proportion of field sales in total revenues has increased over the past few years, and this marketing channel is essential in striking long-term deals with corporate clients. The offline sales channel also tends to have higher average selling prices for LinkedIn’s products, and is an important driver of the company’s revenue growth.
To better understand the value addition, we create a hypothetical scenario wherein LinkedIn is able to penetrate 25% of the potential market, thus taking its Chinese membership base to 35 million over the next few years. LinkedIn’s annual revenue per registered member has increased from $2.75 in 2009 to close to $6.39 in 2013 despite its expansion in emerging markets. It must be noted that this figure represents revenue earned from all of LinkedIn’s products and services, including corporate solutions. We further expect this metric to reach close to $10 in the long run. Even if the company is able to extract $7.50 per registered member in China in the long run, it can add incremental revenues of close to $260 million. A market penetration of 50% could imply incremental revenues of more than $520 million, thus adding 10%-15% upside to our price estimate.
- Introducing LinkedIn’s Simplified Chinese Beta Site, Official LinkedIn Blog, Feb 24 2014
Disclosure: No positions