Alibaba founder Jack Ma and his trusty advisers have pulled off a coup in gaining a $150bn valuation for Ant Financial ahead of a mooted listing next year.
It is easy to see how the pitch to investors went. Fintech group Ant, having rewritten the way the world’s most populous country pays for goods and services, boasts more than half of China’s $15.5tn payments market and is making inroads overseas. Throw in some heroic assumptions, a China-inflated multiple, and you quickly get to $150bn.
But it is also easy to see what did not make the slide deck — there is no shortage of factors that should give pause to investors. Ant occupies a legal limbo, its founding chairperson is leaving, regulatory scrutiny is increasing and profits are being squeezed by competition.
Questions over the company’s legal status date back to 2011 when Mr Ma riled Yahoo, then a major Alibaba shareholder, by carving out the payments arm in order, he said, to comply with Chinese regulations prohibiting foreign ownership of financial businesses. Yahoo said it was not informed at the time.
Seven years later there is still no clear ruling from Beijing as to whether it sanctions foreign ownership — not that this deterred Singapore’s sovereign wealth fund Temasek from taking a slice in the latest funding round. It is worth noting, however, that the agreement paving the way for Alibaba to switch its profit-share arrangement for a 33 per cent stake in Ant is still awaiting various green lights.
Then there is uncertainty over the company’s management. Highly regarded Lucy Peng, one of Alibaba’s founders, became Ant’s executive chair in October 2014. Yet Alibaba chose last month — ahead of a big fundraising, ownership restructuring and eventual initial public offering — to shunt her to Lazada, its south-east Asian ecommerce group. Those looming tasks now fall to Eric Jing, who this month added the chairmanship to his job as chief executive.
Meanwhile, Chinese regulators have Ant and its fintech peers firmly in their sights, cracking down on high payday loan rates, peer-to-peer lending, money market funds and cross-border foreign exchange payments. As a big player in some of these fields, Ant is in the line of fire — its Rmb1.6tn ($254bn) Yu’E Bao money market fund, for example, comprises a quarter of the country’s money market assets.
Ant has taken pre-emptive action in several cases, imposing its own caps on money market fund investments, banning consumer loans charging annual rates above 24 per cent from its platform and pledging to honour forthcoming P2P regulations and “uphold social responsibility”. Even if that is enough to appease regulators, the moves stand to crimp profits.
Overseas watchdogs are also a threat — the group has already been shut out of US acquisitions after the Committee on Foreign Investment in the United States blocked its $1.2bn bid for MoneyGram in January.
Competition is further pummelling profits. Ant has a formidable rival in the form of Tencent, which competes with Alibaba on everything from ecommerce to video streaming — and nowhere is the battle as fierce as in payments. Tencent scored an early win with Starbucks in China but late last year the coffee chain opted to accept Alipay too. Walmart’s stores in western China last month ditched Alipay in favour of Tencent’s WeChat Pay.
The duo are spending big to win market share — and the strategy is denting profits. Working back from Alibaba’s 37.5 per cent stake, worth Rmb1.84bn last year, and applying Alibaba’s usual 23 per cent tax rate gives Ant a net profit of roughly $600m. Even if Ant tracks iResearch projected payments growth of 66 per cent this year (payments account for 60 to 70 per cent of Ant revenues, Jefferies estimates), competition will continue to crimp margins.
Investors might also look at what Alibaba is paying. Under the restructuring, it is giving up its 37.5 per cent share of profits, and swapping intellectual property assets independently valued at about $2bn, along with some subsidiaries, for a 33 per cent stake.
That investors are prepared to go in at a valuation of $150bn is testament to the money sloshing around China and Jack Ma’s own magic. But these are not enough to ignore the risks.
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