Behind the implosion of Ant Group's mega IPO

Assif Shameen
Assif Shameen11/6/2020 07:00 AM GMT+08  • 11 min read
Behind the implosion of Ant Group's mega IPO
What's behind Beijing’s change of heart on Ant? And why did it punish a “national champ” that was about to do a world-beating IPO?
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Not since the listing of Chinese e-commerce giant Alibaba Group Holding six years ago had an IPO generated as much buzz as the listing of Ant Group. Alibaba’s IPO, which raised US$25 billion, was the biggest-ever at the time. So huge was the demand for Ant shares that the listing shattered all records. The retail portion soaked up US$3 trillion ($4.1 trillion), with Shanghai offering a whopping 870 times oversubscribed while the Hong Kong part was 389 times oversubscribed. Ant was set to raise US$34.4 billion in the IPO, at a valuation of US$313 billion. But just 36 hours before the ceremonial gong at the Hong Kong Stock Exchange was set to be struck for the record-setting listing, Beijing abruptly pulled the rug underneath it.

The suspension of the mega listing came just 10 days after Jack Ma gave a bluntly-worded speech at the Bund Summit in Shanghai lashing out at old-fashioned financial regulations that he claimed hampered financial innovations. The Basel Accord — a set of internationally agreed banking supervision regulations — the Alibaba founder said, was a “club for the elderly” which should not apply to China because it does not have a mature financial ecosystem yet.

Ma argued that China’s financial sector was overly regulated. China’s best known tech entrepreneur and richest man told the gathering that the country had “inertia” in its thinking. “Innovators must make mistakes,” Ma said. There are just too many “documents” that regulate what people can and cannot do in China with their money. “We cannot use the method for managing a railway station to manage an airport,” he said. “We cannot regulate the future with yesterday’s methods.”

The audience included the country’s top financial regulators like Wang Qishan, former security tsar and President Xi Jinping’s right-hand man; Yi Gang, the governor of People’s Bank of China (PBoC), the central bank; and Zou Jiayi, vice-finance minister. Indeed, Ma’s speech followed one by Wang who warned that there should be a balance between financial innovation and regulation. “Safety always comes first,” President Xi’s close confidant intoned.

Days later, Ma and Ant Group’s top executives were summoned by Chinese regulators including the central bank and the banking watchdog for a joint supervisory interview on Nov 2 where they were rebuked for Ma’s scathing remarks. The next day with the clock ticking away at Ant’s mega listing, Shanghai and Hong Kong exchanges abruptly pulled the plug on the IPO. The exchanges said listing was being suspended because “Ant may not be able to meet listing qualifications due to significant regulatory changes in the country’s FinTech industry”.

The reaction from the markets was swift. Shares of dual Hong Kong and US-listed Alibaba, which owns 33% stake in Ant, at one point plummeted by as much as 9.7% in New York to US$280.78 before stabilising at 8% below the previous day’s close. Newly-listed Lufax, an online financial services platform affiliated with Ping An Insurance, plunged 13% or below its IPO just four days earlier.

What is behind Beijing’s change of heart on Ant? Why were China’s regulators punishing a “national champion” that was about to do a world-beating IPO? In many ways, the writing had been on the wall for months. In July, China’s central bank asked the country’s antitrust agency to launch an investigation into Ant’s Alipay payment platform, as well as the rival Tencent Holding’s WeChat’s payment platform. In the weeks before Ant’s listing, Chinese state media as well as regulators had dropped broad hints of more stringent regulations on micro lending. Moreover, in the past, Beijing has made no secret of its desire to prevent a credit bubble and made it clear that it views large unregulated entities like Ant with suspicion.

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On Nov 2, regulators proposed new rules to limit the amount of money that online lenders like Ant can provide. The rules also require fintech loan facilitators like Ant to take some of the risk in the loan origination process rather than outsourcing all the risk to partner banks. Analysts in Hong Kong speculate that Ma probably knew that the new rules were coming and was just venting his frustration.

Former investment banker Duncan Clark, head of investment advisory group BDA China, and author of Alibaba: the House that Jack Ma Built, says the retail frenzy around Ant’s IPO with people across China desperately trying to partake in the action may have spooked Beijing. Investors were borrowing money to buy funds and all sort of other products to get exposure to Ant. The spectre of a huge IPO pop and a subsequent crash probably worried Chinese officials, he adds.

The draft rules issued this past week on microlending are the latest move by Beijing to increase regulation. “The most urgent matter for Ant Group is to restructure according to the demands of the regulatory authorities,” says an opinion piece in the influential Beijing Economic Daily. “The postponement of the IPO is for the benefit of investors and the long-term health of the capital market.” Bill Bishop, the author of the China newsletter Sinocism, says by cancelling the world’s largest-ever listing at the last minute Beijing “has once again reminded all private entrepreneurs that no matter how rich and successful they may be, it can pull the rug out from under their feet at any time”.

To be sure, Ant has been criticised for pushing the limits too far and has repeatedly run afoul of China’s state-owned banks, who see its growth as a threat. Regulators have from time to time taken steps to rein in Ant. Last year, they forced Alipay to route all payments through a third-party platform that would give the PBoC more visibility into the flow of money to and from Ant. “Chinese regulators have been looking at FinTech companies’ role in lending as they get a pass on taking credit risk while facilitating borrowing,” says Brendan Ahern, chief investment officer for KraneShares Advisors, a New York-based ETF provider. Ahern believes Beijing regulators do not want an unregulated FinTech player like Ant providing households with unlimited credit growth. “Helping households and small businesses garner access is a good thing but the regulator is waving a yellow flag on a credit highway without toll booths,” he told The Edge Singapore.

Hangzhou-born English teacher Jack Ma, 56, founded Alibaba during the 1999 tech bubble by scraping together US$60,000 from family and friends. He named the payment firm after an insect because no transaction is too small in what is a volume game. Ant operates a cloud-based financial platform offering mobile payment processing services, consumer loans, online wealth management, crowdfunding as well as credit rating services that help consumers and enterprise users to access a wide variety of financial services in China.

Cash is dead, long live King Ant

At the core of Ant is its mobile payment app, Alipay, with over a billion registered users. Only Facebook with its 2.7 billion users, messaging app WeChat with 1.2 billion users and Instagram with 1.1 billion users, are bigger. You can use Alipay to buy a bus, train or plane ticket, pay for ride hailing or food delivery, buy anything online or in a store or a mall, even noodles from a street hawker, pay bills and, indeed, use it for a range of services. The source of funds can be your credit or debit card, your e-wallet account’s balance or money from your Yu’e Bao investment account with Ant, or from Huabei, your line of credit from Ant.

Alipay was conceived as an escrow service solution for the payment challenges facing traders on Alibaba’s Taobao marketplace, holding money from buyers that was released to the sellers only after the goods had been received. Since most Chinese do not have credit cards, it allowed Alipay to extend a range of services, including lending, deposits, wealth management and insurance, to its users. Alipay also used the “float” from its deposits to generate short-term interest for itself though regulators tightened rules around it.

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Ant reported revenue of RMB118.19 billion ($24.17 billion) in the nine months ended September, up 43% over the same period in 2019. With 731 million monthly average users, it is twice as big as global payments firm PayPal, which has 350 million monthly active accounts and generated revenue of US$14.8 billion in the first nine months of 2019. Consultancy iResearch forecasts China’s digital payment transaction volume to double from RMB201 trillion last year to RMB412 trillion by 2025. Ant’s user base has grown over 15% annually over the past three years, and is expected to grow 12% annually over the next three years.

The burgeoning Alipay payment system has helped Ant attract customers who now also borrow money and buy wealth management products like money market accounts, mutual funds and insurance. About 39% of Ant’s revenue comes from its credit tech platform, which includes virtual credit card Huabei with 400 million users, and micro lender Jiebei. Want to buy something and do not have enough cash in your account? Put it on Huabei and pay it back like you do with a credit card. If you own a corner noodle shop and have temporary cash flow issues, Jiebei, the largest micro lender in China, will advance you some money.

Ant has benefited from China’s underdeveloped financial infrastructure. Until recently, Chinese state-owned banks mainly lent to state-owned businesses. That meant consumers and small businesses did not have a lot of great options. Ant stepped in to fill that void. It began rebuilding consumer and small-enterprise finance in China and brought it to the modern smartphone era.

To take advantage of China’s antiquated deposit business, Ant created Yu’e Bao, the world’s largest money market fund with 700 million customers, which has US$610 billion in assets under management, while its wealth management platform Ant Fortune offers funds from 60 asset management firms to investors. Small businesses or budding entrepreneurs who use the Alibaba platform leave spare money in their Ant accounts, which eventually finds its way into Yu’e Bao’s or one of Ant’s other funds

Another part of Ant’s business is insurance, which makes up 9% of its total revenue even though it is one of the largest online insurance platforms in China in terms of premiums generated. China’s online insurance market is expected to grow 38% annually over the next five years, according to research firm Oliver Wyman.

Data trove to die for

At the heart of Ant is data collection and analytics. Much of the raw data comes through Alipay. If you are using its app to buy something and have never use cash or credit cards like most Chinese, imagine how much Ant knows about you and your spending habits. That data helps power its online financial services for consumers as well as for corporate clients, including sellers of goods and services who want to know who is buying their stuff, how much more they can buy, and when. Ant’s advantage is that it has more data than anyone, except perhaps the Chinese government.

Ant is not the only player with a lot of data in China. The company behind popular messaging app WeChat has even more financial data than Ant. Weixin Pay, the payment arm of WeChat, has twice as many daily transactions as Alipay though the average transaction size is less than a third of Alipay. Kevin Kwek, Bernstein’s financial services analyst in Singapore, reckons Alipay now accounts for about 51% of China’s digital payment transactions while WeChat accounts for just over 45%.

So, what’s next? Analysts and portfolio managers in Hong Kong and the US who have spoken to The Edge Singapore in recent days say they believe it would be six to 18 months before Ant takes another shot at a listing. The Chinese payment giant is also said to be looking proposals to dramatically restructure its business. One idea being mooted is spinning off some or indeed all of its consumer loan business. Because credit and loan services make up more than a third of its total revenues, hiving them off would mean a drastic cut in Ant’s valuation. Ma or Ant officials have not commented on restructuring plans since the listing was pulled off. Whether Ant tries to re-list early next year or sometimes in 2022, it is likely to be a much more leaner outfit that might struggle to match US$25 billion that Alibaba raised in its own IPO six years ago.

Assif Shameen is a technology and business writer based in North America

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