ANT GROUP: A promising IPO that calls for caution
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ANT GROUP: A promising IPO that calls for caution

 

Summary

 

China’s fintech firm, Ant Group, is due for a most awaited Initial Public Offering (IPO) soon. Going by the success of its affiliate company, Alibaba, and its own impressive growth; it looks like an investment that should not be missed. Big as the opportunities for the Ant Group are, there are risks to it as well, however. One of them is the US-China trade war and another is tightening regulations in the sector. This report ascertains how the balance of opportunities versus risks plays out.

 

Company Profile

 

Background

 

Ant Group has evolved rapidly over the years. It started in 2004 as Alipay, a mobile payments provider for the Chinese e-commerce giant, Alibaba. As of today, Alipay serves 1.3 billion users around the world. But the Ant Group encompasses many more services than just Alipay today.

 

In its current format, the fin-tech company was formed in 2011. It now has two key segments - ‘Digital payments’ and ‘Digital finance technology platform’. The first, as the name suggests is the original payments business. The latter consists of credit, investments and insurance. Of these, credit or lending is the biggest revenue generator for the company today; but its investment management and insurance businesses are fast growing too.

 

Ownership

 

Two entities - Hangzhou Junhan and Hanzhou Junao hold 29.9% and 20.7% respectively in the company too. While Hangzhou Junhan is jointly owned by key executives at Alibaba and Ant Group, Hangzhou Junhan is a shareholder representing Ant’s employees. Together they hold a controlling share of over 50% in Ant Group. Alibaba is the next biggest stakeholder with a 32.6% share. The remaining ownership is quite small. China’s social security fund comes next, with a stake of only 2.9%.

 

As far as individuals go, Jack Ma, the Alibaba co-founder,  is the single biggest shareholder, who alone is reported to have majority voting rights in the through both direct and indirect holdings.

 

Financials

 

Since Ant Group has not been public so far, it had no obligation to reveal its financial performance. However, in its IPO prospectus, it has shared that its revenue for last year is RMB 120.6bn. Over 63% of this is derived from its fin-tech platform, with 39% from credit, 16% from investments and 8% from insurance. Its payments business now accounts for only 35% of the total revenue.

 

While it is still growing in double-digits, the increase is far outstripped by the growth in financial-technology. In the first six months for 2020, the payments business grew by 13%, while the fin-tech business grew by a whole 57%. While a bulk of this increase is from credit, investments and insurance are growing fast too (see table/chart).

 

 

Key financials for Ant Group

 

Year ending December 31

Six months ending June 30

 

2017

2018

2019

2019

2020

 

Value (RMB mn)

Value (RMB mn)

Growth (%, yoy)

Value (RMB mn)

Growth (%, yoy)

Value (RMB mn)

Value (RMB mn)

Growth (%, yoy)

Total Revenue

65396

85722

31.1

120620.0

40.7

52541.0

72528

38.0

Digital payment and merchant services

35890

44361

23.6

51905

17.0

22994

26011

13.1

Digital finance technology platform

28992

40616

40.1

67785

66.9

29291

45973

57.0

   CreditTech

16187

22421

38.5

41886

86.8

17925

28586

59.5

   InvestmentTech

10490

13882

32.3

16952

22.1

7221

11283

56.3

   InsureTech

2315

4313

86.3

8947

107.4

4145

6104

47.3

Innovation initiatives and others

514

745

44.9

930

24.8

256

544

112.5

Profit

8205

2156

-73.7

18072

738.2

1892

21923

1058.7

Source: Ant Group IPO prospectus, Estimates

 

 

The IPO

 

Ant Group’s IPO is planned to be listed simultaneously at both the Shanghai and Hong Kong stock exchanges. Its valuations range from upwards of $150bn and up to $300 bn. As per latest reports, the group’s valuation target has been raised to $280 bn, because of strong demand. This could make it one the biggest listings in recent times. With this valuation, the group’s market value would be next only to JP Morgan, which is valued at $306 bn as per Bloomberg numbers.

 

Even if the valuation was not quite as high, it is reasonable to expect it to be around 40x, as is the case for its competitor Tencent, which owns WeChat or China’s answer to Whatsapp. This implies a valuation of around $240bn for Ant Group according to analysts. This is still bigger than the value of Bank of America, which is valued at $225bn.

 

Opportunities

 

Chinese Economy

 

The biggest driver for Chinese companies has been the fast growing Chinese economy in the past. Despite the pandemic this year, the economy’s recovery has been faster than expected. It is also forecast to continue showing relatively strong growth in 2021 of over 8%. This bodes well for Ant Group, which has anyway shown robust growth in 2020 so far. It also helps that it is associated with Alibaba, whose revenue grew by 34% in the second quarter of the year as the lockdown encouraged online spending.

 

Underserviced Chinese market

 

Even with the fast growth seen in the recent past, there’s much ground to cover in the Chinese market alone. While the number of small businesses are increasing in the country, their financing needs aren’t always met by traditional lenders. Moreover, credit cards have historically not taken off in China. As a result of this gap in the lending market, companies like Ant Group can step in to bridge it.

 

Focus blockchain

 

Ant Group intends to funnel 40% of the proceeds from the IPO into technology development, which has been a cornerstone of the company’s success so far. Besides others, it will focus on blockchain. It has already made headway, with the establishment of AntChain as a service, and has 583 patents to its credit related to blockchain. Consulting firm, Deloitte’s finds in its Global Blockchain Survey, 2020 that “leaders...now see it (Blockchain) as integral to organizational innovation”.  With the technology increasingly becoming a priority area for business, early adopters and innovators in the segment can stand to benefit. These include Ant Group.

 

Risks

 

Geopolitical Risks

 

Even with its fast progress so far and opportunities ahead, Ant Group’s future is not without risks. The key risk of course, is geo-political, with the US and China at loggerheads for sometime now. The US is the biggest country economy in the world today, with developed and deep financial markets. Limited trade and investment between the US and China can continue to hurt Chinese companies. Ant Group in its prospectus has specifically said that its cross-border payments can be impacted by this.

 

Another implication of the trade war can be that Chinese companies will have to de-list from US exchanges, according to a bill passed in May 2020 by the country’s senate. Some Chinese companies have already de-listed, including Sina, the owner of China’s popular micro-blogging site Weibo. Other examples are online travel agency, Ctrip and the web-search company Sogou.

 

In fact, Alibaba itself got listed in Hong Kong as well last year. This is believed to be the outcome of the US-China tensions. In fact, this is also the likely reason that Ant Group is not being listed on US exchanges, despite Alibaba’s record-breaking IPO there in 2014. This environment limits Ant Group’s potential.

Regulatory risks

Ant Group, along with other leading fin-tech companies in China like Tencent, are also coming under pressure from domestic regulators. The People’s Bank of China, which is China’s central bank, has recommended a look into whether the companies are using their position to limit entry of newer players into the system, maintaining their near monopoly. As per numbers from the final quarter of 2019, Alipay accounted for 55% of all the mobile banking market, while Tencent commanded 39%.

 

 

Outlook on Ant Group’s IPO

The Ant Group IPO is unquestionably an eagerly anticipated one, as much for its own growth as its affiliation to Alibaba. At any other point in time, it would be a no-brainer to put a ‘Buy’ into the IPO. But these are unique times. The pandemic has shaken investor confidence and has also contributed to increased US-China stress, which was mounting in any case. These factors detract from the huge potential of the Chinese market for Ant Group. Steep valuation for the company runs a higher risk of a share price come-off after the IPO. A more rational one, on the other hand, makes a more bullish case for the company.

 

 

 

 

 

 

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