Alibaba.com, China's largest e-commerce company, reported its worst profit in three quarters after betting on acquisitions and product development to tap the region's early recovery from the global downturn.
The company, Yahoo's business partner in China, sees limited growth potential from this year's fourth quarter to the beginning of next year and is looking for more partnerships in the United States to expand its business.
Despite the weak profit, the growth campaign is helping to drive up the company's user base.
From these numbers it looks like fourth quarter will be strong, said Patrick Yau an analyst with Macquarie Research.
The membership base is growing nicely both in the domestic marketplace and the international marketplace and growth is picking up rather than slowing down, he said.
Alibaba.com, the listed unit of Alibaba Group, in which Yahoo holds a nearly 40 percent stake, reported a 20 percent decline in its third-quarter profit to 236 million yuan ($35 million).
That was roughly in line with the average forecast for a profit of 222 million yuan, according to two analysts polled by Thomson Reuters I/B/E/S. The profit was driven down by total operating expenses that shot up 61 percent to 669 million yuan in the third quarter.
As we enter recovery, we see a stronger economic environment in Q4 and we remain cautiously optimistic for next year to remain relatively flat, Alibaba CEO David Wei said in a statement.
He said on a conference call the company will see a strong recovery in the fourth quarter due to restocking and increased demand for Chinese exports as the global economy starts to recover, but that such growth may not continue at such a high rate into next year's first quarter.
Alibaba.com's shares have more than tripled this year on hopes that China's economy would help pull the region out of recession on the back of a 4 trillion yuan stimulus spending plan by Beijing, which has encouraged more spending through easy credit and other incentives.
But the shares are still well below highs hit just two years ago, shortly after the company's IPO.
Alibaba.com, which last month agreed to buy a majority stake in Chinese web hosting company HiChina for $63.8 million, has said that 2009 will be a year of investment for the company as it seeks to grow beyond its home China market.
Web commerce in China has surged in recent years, as buyers look to the Internet for better deals from more reliable suppliers in China's highly fragmented retail sector.
Buying of goods by businesses from other businesses (B2B) reached a transaction volume of about 2.3 trillion yuan in 2008, according to Analysys International.
Alibaba.com's revenue grew 32 percent in the third quarter, with net additions to its premium fee-paying service, China Gold Supplier, up 175 percent.
Deferred revenue, a widely watched metric due to its forward looking nature, rose 42 percent year on year to 3 billion yuan.
In September, Yahoo sold its 1 percent direct holding in Alibaba.com to take advantage of the surge in the company's share price. The U.S. company still retains a nearly 40 percent stake in Alibaba.com's parent, which it considers its major China investment.
Yahoo's sale came after Jack Ma, Alibaba's chairman and founder, sold less than 5 percent of his total holdings in the company for $35 million.
Alibaba.com, which operates an online site connecting millions of buyers and sellers, competes with Global Sources in China's 1.5 billion yuan B2B industry.
(Editing by Doug Young and Jean Yoon)