(Giorgio Curti, Matthew Lingham & Jeanne Royer)
THE COMPANY AND ITS BUSINESS MODEL
Ant Technology group, the payments arm of the Alibaba Group has a total estimated valuation of $150bn, making it the highest-valued FinTech company in the world. Founded by Jackie Ma in October 2000, it has grown to be the largest mobile payment app (Alipay) based in China with a total user count of over 900 million. It also offers other financial services and technology products, including wealth management (Ant Fortune), a money-market fund (Yu’e Bao), a third-party credit-rating system (Sesame Credit) a consumer loan service (Ant Cash), etc.
More and more startups and tech unicorns, like Ant Group, are choosing to list on Asian stock exchanges, which is another illustration of the growing geopolitical tensions between the world’s two largest economies.
This planned dual listing falls in line with Beijing’s ambitions to develop the STAR exchange to be a rival to the US NASDAQ and represents another sign of the growing influence of Chinese capital markets in the global world of finance.
In addition, the recent Sino-American tensions have made the potential for retaliation from US regulators likely in the event of a listing on the US stock exchange. Therefore, this dual listing allows the company to raise a level of liquidity, similar to one offered by a New York listing, both through Shanghai’s onshore market and Hong Kong’s offshore market whilst avoiding the risks of retaliation by a US regulatory body (Tudor-Ackroyd, 2020).
Ant Group is speculated to follow an A and H listing process with its IPO. This means that both A shares and H shares are offered in the general listing. This is because many institutional investors do not have a mandate to invest in yuan-denominated assets due to the capital control regime. Ant Group plans to list 10% of its total shares on Shanghai’s STAR board and the remaining 5% on the Hong Kong Stock Exchange (Brown, 2020). To this day, there has been no additional details on the pricing of shares.
In 2018, Ant group raised $14 billion in its last major fundraising event, from domestic and international investors. At that time, the company was valued at $150 billion, but recent transactions in secondary markets involving shares in the company have changed hands at a level which implies that the company’s total valuation could be as high as around $200 billion (McMorrow Et al., 2020). Coincidentally Goldman Sachs sum-of-the-parts analysis of Ant gave a valuation of $205 billion. For comparison, Paypal has a total market capitalization of $204 billion.
The dual listing will also have the advantage of allowing Ant Group to raise capital close to home via the Shanghai Star exchange, where most of its customer base is located. The listing in Hong Kong will not only give access to foreign capital markets, as well as making it easier for foreign investors, who invested in earlier funding rounds such as Carlyle and Ant employees who own company stock, to sell shares (Tudor-Ackroyd, 2020), but also allow the company to take advantage of the renewal of the Hang Seng Tech Index, which is designed to track the performance of 30 top tech companies. Overall, the dual listing will have the advantage of allowing access to a large number of investors.
Some significant other points are that the company was recently renamed from Ant Financial Services Group Co. Ltd to Ant Technology Group Co. This could have two potential benefits for a future IPO:
- The valuation attributed to a Tech Company by institutional investors tends to be much higher than those attributed to financial services companies.
- There is far less regulatory scrutiny on tech companies in comparison to financial companies.
In addition, Alibaba has also taken up an option of a 33% equity stake at the expense of a right to 37.5% of the pre-tax profit of Ant group (McMorrow Et al., 2020).
The Fintech sector in China has grown rapidly over the last few years, a phenomenon in contrast with the country’s traditional financial sector which is still underdeveloped when compared with other large economies. Thanks to this, nowadays some of China’s cities, like Shanghai and Shenzhen, represent concrete competitors for established financial centres such as New York and London. In 2016, when the size of the country’s internet finance sector was more than USD 1.8 trillion, eight of the world’s 27 ‘unicorns’ were Chinese companies and four of the top ten public internet companies in the world were also from China – these were Alibaba, Tencent, Baidu and JD (Ngai et al., 2016).
In terms of Ant Group, Alipay has a strong presence within China, with a 55% share in the country’s total mobile payment market compared to 39% held by the next largest competitor, WeChat Pay, which is owned by Tencent (see chart below). In addition, the company is extensively involved in other areas of the Chinese Financial system, with wealth management, online lending and insurance contributing to over 50% of its revenue. Furthermore, the company also runs the Tianhong Yu’e Bao money market fund, which a total of 600M Chinese – roughly 50% of the total population – have an investment in.
The remarkable success and expansion of the Chinese FinTech industry, with particular regard to mobile payments, were allowed by a combination of factors and government policies. Firstly, the Chinese financial sector is relatively loosely regulated, representing a fertile environment for Fintech firms. Moreover, barriers to entry and in some cases outright exclusion of foreign firms has fostered the rise of domestic startups and giants alike. Thirdly, the widespread willingness of Chinese consumers – especially those born in the 80’s and 90’s, which are the greater users of digital financial services – to share their personal data with FinTech companies has facilitated the expansion of ever more targeted services (Preen et al., 2017).
No official offer date has been scheduled for the joint listing by Ant Group yet, however an October listing is being targeted and banks such as JP Morgan, Citi and Morgan Stanley have been hired to both underwrite and manage the IPO (Tudor-Ackroyd, 2020). In addition, there is also significant pressure being exerted by Ant group to move the IPO forward as it will allow the company to carry greater favour with Bureaucrats in mainland China.
At the moment, there is some significant political risk with the IPO. Indeed, the Hong Kong Autonomy Act signed into law on the 14th of July by President Trump could affect Hong Kong’s position as a global financial hub (Hansson Et al., 2020). By revoking Hong Kong’s preferential trade status, it could limit the potential for outside investment as it requires Donald Trump to impose sanctions on individuals and entities assisting in Beijing’s implementation of its new national security law as well as on foreign financial institutions engaging in important financial transactions with those individuals and entities.
The state council antitrust committee have also been considering an investigation into Ant Group and whether or not it has used its market leading position to block competition. The investigation was formally recommended by the People’s Bank of China in the second quarter and is being taken very seriously by the council (Brown, 2020). Although no formal investigations have been announced yet, the committee have been gathering information for the past month and any formal announcement is likely to be a significant damper on the prospects of an Ant Group IPO.
However, this IPO, if it goes ahead as planned, will be one of the biggest of 2020 and one of the largest Asian IPOs in history. If successful in its attempt to raise $30 billion, it will be the world’s biggest IPO, surpassing the Saudi Aramco IPO. When the news went out about Ant Group’s listing, Alibaba’s shares were up over 5%, showing that investors take the IPO as a positive event for the Chinese e-commerce giant and that they are feeling confident about it. Within this context, Ant Group’s colossal IPO would not only help the firm establish its dominance in China, it would also pave the way to increased supremacy by Chinese Fintech giants, in line with the country’s aspiration to become a leader in financial technology development and adoption (Preen et al., 2017).
- Initial Public Offering (IPO) – the process of offering shares of a private company to the public in a new stock issuance.
- Technology unicorns – term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion.
- Shanghai STAR exchange – the world’s 4th largest stock market by market capitalisation, based in Shanghai. It is one of the two stock exchanges operating in mainland China.
- Hong Kong Stock Exchange – Asia’s third largest stock exchange in terms of market capitalisation, after the STAR exchange and the 4th single largest stock market in the world.
- A shares – these types of shares offered for companies based in China and are generally only available to mainland Chinese citizens.
- H shares – these shares are issued for companies floated on the Hong Kong exchange. They are quoted and traded in Hong Kong Dollars and are available to trade for all investors.
- Hang Seng Index (HSI) – index used to monitor the daily changes of the 30 largest companies of the Hong Kong stock market and main indicator of the overall market performance in Hong Kong.
- Preferential trade status – this is a trading bloc which gives preferential access to certain products from the participating countries.
- Sum-of-the-parts analysis – this type of valuation is the process of determining what the individual divisions of a company would be worth if they were bought by a different company.
Ngai, J. L., Qu, J. and Zhou, N. (2016). What’s next for China’s booming fintech sector? McKinsey and Company. Available at: https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Whats%20next%20for%20Chinas%20booming%20fintech%20sector/Whats-next-for-Chinas-booming-fintech-sector.pdf [Accessed 14/08/2020].
Preen, M., Dezan Shira & Associates (2017). China’s Fintech Industry. China Briefing. Available at: https://leaglobal.com/thought_leadership/Chinas%20FinTech%20Industry.pdf [Accessed 14/08/2020].
McMorrow, Ryan; Sender, Henny; and Ruehl, Mercedes. (2020). Ant Group poised for one of 2020’s biggest IPOs, Financial Times. Available at: https://www.ft.com/content/0ede30bb-ef34-436e-89d5-f62a02b78aa0 [Accessed 12/08/2020].
Brown, Tanner. (2020). Ant Group says it’s shooting for a record-breaking $30 billion IPO by October, MarketWatch. Available at: https://www.marketwatch.com/story/ant-group-says-its-shooting-for-a-record-breaking-30-billion-ipo-by-october-11596494575 [Accessed 12/08/2020].
Giovannini, Matteo. (2020) Ant Group’s IPO is a turning point for China’s financial market, CGTN. Available at: https://news.cgtn.com/news/2020-07-24/Ant-Group-s-IPO-is-a-turning-point-for-China-s-financial-market-Sob5tHd4Iw/index.html [Accessed 13/08/2020].
Kharpal, Arjun. (2020). Alibaba’s Ant could be bigger than some Wall Street banks — What you need to know about the dual IPO, CNBC. Available at: https://www.cnbc.com/2020/07/21/alibaba-ant-group-ipo-hong-kong-shanghai-explained.html [Accessed 13/08/2020].
Gopalan, Nisha. (2020). Ant Will Have an Elephant-Sized Coming Out Party, Bloomberg. Available at: https://www.bloomberg.com/opinion/articles/2020-07-21/ant-will-have-an-elephant-sized-coming-out-party [Accessed 12/08/2020].
Leigh T. Hansson Lianjun Li Alexander Brandt Miao Li Eli Rymland-Kelly Noah T. Jaffe Ray-Shio Ho Arthur Lam. (2020). President Trump signs the Hong Kong Autonomy Act into law, Reed Smith. Available at: https://www.reedsmith.com/en/perspectives/2020/07/president-trump-signs-the-hong-kong-autonomy-act-into-law [Accessed 14/08/2020].
Liu, Coco. (2020). Ant’s IPO plan: what to know about China’s $200bn fintech king, Nikkei Asian Review. Available at: https://asia.nikkei.com/Business/Finance/Ant-s-IPO-plan-What-to-know-about-China-s-200bn-fintech-king [Accessed 14/08/2020].
Tudor-Ackroyd, Alison. (2020). Why Jack Ma’s Ant Group chose a dual IPO in Hong Kong and Shanghai and not New York, South China Morning Post. Available at:
Featured Image: Business Wire