China's Alibaba Group to invest 5 bln yuan in Taobao

By Kirby Chien

BEIJING, Oct 8 (Reuters) - The parent of China's top e-commerce firm Alibaba.com Inc said on Wednesday it would invest 5 billion yuan ($733 million) in its online auction unit Taobao over five years to build its business.

Alibaba Group said the investment -- an additional 3 billion yuan on top an earlier 2 billion yuan injection -- would go towards adding people, equipment and improving technology at the firm known as China's eBay .

However, the five-year old Taobao, which executives said broke even for the first time in August and could turn a profit next year, will continue to offer its services for free to buyers and individual sellers.

"We have never made making a profit a central goal for the company," Daniel Zhang, the chief operating officer told reporters. "Rather, we are looking to improve service and provide a better platform for customers."

But some Alibaba investors balked at the large investment in a loss-making unit when uncertainty and risk are overwhelming global stock markets.

Alibaba's Hong Kong-listed shares slumped 15.8 percent on the day, underperforming the 11.5 percent fall on the Hang Seng China Enterprises Index .HSCE.

"Alibaba's fall was due primarily to the unfavourable environment for small and medium enterprises, which are Alibaba's main customers," said Kevin Tam, an analyst at China Everbright Securities based in Hong Kong.

Tam was, however, still upbeat about Taobao's long-term prospects in China's fast growing online market, as were company executives.

"Given the rapid growth of Internet use in China, we expect online shopping will become a mainstream Internet application in the near future," Jonathan Lu, Taobao president, said in a statement.

China is estimated to have more Internet users than any other country.

According to iResearch, China's online shopping market grew in gross merchandise volume to 56 billion yuan last year from 16 billion yuan in 2005.

U.S. Internet company Yahoo is a key investor in Alibaba.com.

The announcement comes after Alibaba.com posted a 159 percent rise in second quarter net profit, while warning that prospects were darkening as global woes caused small and medium-sized firms to cut spending. ($1=6.820 Yuan) (Reporting by Kirby Chien)