Summary: In an IPO market that is to date nothing short of exuberant, the biggest this year is yet to come. Ant Group, China's dominant mobile payments firm, are set to dominate the listed fintech space with their upcoming, humongous, record setting IPO. The Chinese fintech company founded by former Alibaba Group Holding (BABA) Executive Chairman Jack Ma operates the e-commerce giant's Alipay payment service and could be the largest IPO ever when it dual-lists on the Hong Kong and Shanghai's Nasdaq-style STAR Market exchanges later this year.
Ant is expected to fetch a market valuation of around $US225 billion, minting a few fresh billionaires from the executive ranks of both Alibaba and Ant along the way. The company didn't disclose the size or timing for the listing in the draft IPO prospectuses filed with the exchanges, but the application for the Shanghai listing is set to be reviewed September 18 2020. According to those familiar, the company will issue at least 10% in new shares in the IPO, which Bloomberg estimates will raise close to $30 billion, a figure that would top Saudi Aramco’s $29 billion listing.
Ant Group’s move to list at home and in Hong Kong comes as sentiment for technology offerings in public markets runs high but also against the backdrop of the ongoing US/China disentanglement, with the phase 1 trade deal remaining a deal in name only. Smoke and mirrors. The US Senate has passed a bill in May 2020 that that could force Chinese companies to give up their listings on US exchanges, hence the homeward bound shift. There is no going back to the pre-trade war relationship, and tensions continue to mount with the COVID-19 blame game only fuelling the fire, which makes listing closer to home the obvious choice. The ideological differences and political fragmentations that drive US/SINO confrontations are on full display and tectonic shifts such as, the tech cold war, splinternet and supply chain relocations we discussed at length when the US/CH trade tensions first emerged are now coming to fruition.
In the current market environment, growth and technology offerings with earnings duration are garnering sky-high valuations. Ant Group will be capitalising on that. Newly listed companies are having a stellar year and the Renaissance IPO ETF, which invests in companies that have listed in the last two years, is hovering around record highs. Investors have a seemingly insatiable appetite for growth businesses, new names/ideas and blue-sky stories and they are willing to pay up for a slice of these businesses. Speculation is rife. Ant Group with their 700mn+ monthly active users, 30% profit margins and control of more than half of the Chinese market in payments, ticks those boxes; in addition, the listing has been long anticipated and expectations are running high. Notwithstanding the likely popularity for home investors with China's state media recently urging the public to load up on domestic stocks.
However, it is not that easy. Competing rivals, Tencent and JD.com, pose a long-term threat to the payments and lucrative technology service businesses. Alongside a fickle regulatory environment that is difficult to predict, just last week Beijing approved new regulatory rules that impact Ant Group, geopolitical risks and lack of comparables, all combine to make Ant Group’s trajectory harder to estimate and a difficult beast to value. Although if the bubble-icious environment is anything to go by, the fintech behemoth should score a home run at listing, but we wait for more information to be provided before drawing any conclusions. Particularly on whether Ant Group’s growth rate will justify the valuation once the hype fades.
The problem with sentiment driven momentum and pricing behaviour is that it is fickle and if the delivery falls short of expectations, disappointment can bring vicious readjustments. Paying up for growth is not always an issue, but generally, you must be looking at the best in breed, or industry winner.
The 674-page draft IPO prospectus filed at the Hong Kong Stock Exchange has much of the crucial information redacted. This includes the number of shares on offer, the price of shares, and the company’s total valuation.
Whilst we have to wait for further details on the above, the prospectus does deliver detailed financial data showing the size and scale of Ant Group’s business.
Profits and Growth Potential
Ant Group’s prospectus outlines the company made RMB 21.2 billion in net profit for the six months to June 2020, on revenue of RMB 72.5 billion, representing a YoY increase of 38%, and implying a net profit margin close to 30%.
43% of revenues in 2019 came from digital payment and merchant services, which houses the mobile payment services. Monthly active users of mobile payment app Alipay reached 711 million monthly active users as of end June 30 2020, and more than 1 billion annual active users, according to Ant’s draft filing. Ant also stated transaction volume for the app reached RMB 118 trillion in mainland China during the 12 months ended June 30. Alipay charge fees based on a percentage of transaction volumes and with more than 80 million businesses using the mobile app, it is easy to see the allure of the payments giant.
Payments services are a core revenue component; however, the fees collected from merchants are in some cases just 5 basis points. Ant Group’s real growth is delivered by the company’s digital finance technology platform arm, which has grown 56% YoY in the 6 months ended June 30, relative to the corresponding period the year before. These revenues are generated from “technology-service fees” paid by banks, asset managers and insurance companies that use the Alipay app as one stop shop to write loans, sell wealth management products, insurance and other financial services products to users. Where Ant group essentially acts as the intermediary connecting service providers with end users but also helping the vendors to asses risks based off the huge amounts of proprietary customer spending data Ant Group holds.
Within this segment the CreditTech business, which operates a suite of loan services, is the growth powerhouse. CreditTech revenue grew 59.5% year on year in the first six months of 2020 to RMB 28.6 billion, accounting for 39.4% of Ant Group’s total revenue in the 6 months ended June 30.
For investors looking for exposure to China’s growing online financial services sector and $US16 trillion digital payments industry, we can see the appeal.
Financial Services to Technology
The draft prospectus also clearly highlights the shift from payments services to technology provider that has been undertaken by the company alongside its transformation to financial services super-app. In 2017 payment services accounted for 55% of revenues, but this has declined as what was then Ant Financial repositioned itself as a “financial supermarket” of credit, insurance and wealth management services and rebranded to Ant Group.
The split of payment services vs. technology today is now close to 36%:64%. If Ant can continue to charge the same high “technology-service fees” and grow market share within China’s vast financial services industry this spilt can continue to decline as Ant Group grows the company’s digital finance technology platform arm.
Regulatory Risk factors
Ant’s draft prospectus flagged regulation in China as a potential risk factor, just last week Beijing approved new regulatory rules that impact Ant Group and will increase scrutiny on the business. Although the regulation broadly is aimed at promoting financial stability and avoiding Wirecard-esque scandals, China’s increasing focus on anti-monopoly laws mean any crack down on the hefty service fees Ant Group charges vendors will be felt on the bottom line.
Geopolitics
Ant also outlined the heightened geopolitical tensions between the US and China which pose the risk of increased regulations. Particularly as the battle between the two nations is centred around technology, and the bid for dominance, Ant Group, a fintech behemoth, could well find itself a target of heightened restrictions on Chinese technology companies. One only has to look at the fate of Huawei and TikTok to appreciate this risk factor.
Internal Interests
According to Ant Group’s filings, Ant is majority-controlled by billionaire Jack Ma, co-founder and retired chairman of Alibaba Group Holding Ltd. and China’s richest person, while Alibaba with 32.65% has no control over the company. Although conflicts of interest between Alibaba and Ant Group clearly still exist.
Following the public offering, internal interests will still own more than 80% of Ant. Junhan and Junao together control about half of the company:
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