China’s Xiaohongshu on track for 2023 net profit

CHINA’S Instagram-like social platform Xiaohongshu Technology will book a profit this year, according to people familiar with the matter, signalling its e-commerce venture is paying off.

Xiaohongshu, whose name literally means “little red book,” is on track for US$500 million in net income in 2023, the people said, asking not to be identified discussing a private matter. It’s a big step-up from the company’s projection of less than US$50 million in profit made early this year, one of the people said.

The strong performance could propel the prospect of a new funding round or eventual IPO for the popular lifestyle app backed by heavyweight investors including Alibaba Group Holding, Tencent Holdings, Temasek Holdings, and GGV Capital. The firm last raised US$500 million at a valuation of US$20 billion in 2021, the people said.

Like many closely held firms, Xiaohongshu isn’t obligated to disclose its finances, which in turn aren’t subject to independent audit. But many startups share their results with backers and potential investors.

A Xiaohongshu representative declined to comment.

Xiaohongshu’s feat is all the more remarkable because Western peers from Meta Platforms’ Instagram to Pinterest have struggled for years to convert their enormous traffic into online commerce revenue. Instagram this year suffered a major e-commerce retreat, shutting its live shopping function to focus on ads.

China’s closest equivalent to Instagram has established itself as a trusted review site for everything from skincare to food and travel. For a long time Xiaohongshu’s 200 million monthly users largely treated the app as a mere trendsetter, and they would turn to bigger e-commerce platforms to actually spend their money.

But like ByteDance’s Douyin, the Shanghai-based startup has now successfully amassed an army of influencers, partly by offering them cash incentives, to attract eyeballs and peddle products to millions of users, from which it takes a cut.

To grow sales from e-commerce, Xiaohongshu is leveraging its rich content to lure consumers to make purchases on the platform. When users scroll through videos and photos, they can buy tagged products with just a few clicks.

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The startup is also focusing on capturing a bigger slice of advertising US dollars from brands after announcing a plan to shutter its self-operated store in September.

But Xiaohongshu is not immune to challenges brought by China’s increasingly volatile economic and political environment.

The startup’s valuation fell to between US$10 billion and US$16 billion in private market stake sales last year, the Financial Times has reported.

This was largely due to growing uncertainties on the prospects for investors to exit their investments. China proposed tougher rules in July 2021 for firms seeking overseas initial public offerings amid a yearslong crackdown on technology companies.

Xiaohongshu was among several companies that were forced to revisit their US listing plans and had weighed Hong Kong as an alternative, Bloomberg News reported 2021. BLOOMBERG