Why the Ant IPO got cancelled
China's regulators put a stop to what would have been the biggest listing in history at the last minute angering both the company and investors looking to buy Ant shares. The FT's Asia markets correspondent Hudson Lockett explains why they did it
Filmed and produced by Tom Griggs, graphics by Russell Birkett and Kari-Ruth Pedersen. Additional footage by Reuters.
You can enable subtitles (captions) in the video player
Ant's initial public offering was supposed to be the biggest listing in history. Then new regulations in China turned the IPO from a seemingly sure thing into the biggest misstep for capital markets of 2020. So did Beijing squash a great deal, or were regulators just looking after the little guy?
China's biggest financial technology group had planned to start trading its shares on Thursday, November 5th in Shanghai and Hong Kong. But just days before it was set to list, Shanghai Stock Exchange slammed on the brakes. A day earlier, regulators had announced new draft measures for online micro lending, which makes up almost 40 per cent of Ant's revenue.
In the lead up to the IPO, Ant tried to brand itself as a tech company, even going so far as to remove financial from its name. But the message was clear, Ant's future would depend on China's banking regulators, the same ones Jack Ma had criticised a few days earlier in an outburst that earned him a dressing down from Beijing.
The draft rules mean the Ant and other online lenders will be treated much more like banks. They will have to hold significantly more capital to back loans made on their platforms. And there will be a cap on how much they can lend to each individual. Ant's payment platform, Alipay is ubiquitous in China. But its fast growing consumer lending business was the real driving force behind the IPO.
The business acts as a high-tech matchmaker between borrowers and banks, taking an estimated fee of about 2.5 per cent for each loan it arranges. But Ant took almost none of that risk on from $1.7tn renminbi in consumer loans. Now analysts say the new rules can force it to provide much more of the capital itself and hold far more of those loans on its own books.
One analyst estimates that the share of loans on the company's books could shoot to 20 per cent if Ant is treated like other lenders in China. That is music to the ears of China's biggest state banks, who have long been critical of Ant's business model.
For investors who have been salivating over Ant's $37bn IPO, the new rules send a signal that Ant's business model would have to change drastically from the one it had pitched during its roadshow. Ant's price to earnings ratio, which measures how much investors are prepared to pay for each dollar or renminbi of earnings and is a key metric of profitability, would have clocked in at a very techie 48 times based on its IPO pricing.
Banks, however, are generally valued under 10 times earnings. Treating it like a bank would almost certainly bring its PE ratio dramatically lower, and with it, the funds the company could expect to raise through a listing.
The $37bn question is whether Beijing was right to pull the IPO. Regulators had to determine whether the benefits of Ant's lending practises were worth the increased risk in China's financial system. Once they had decided it wasn't, the next call was whether they wanted to upset Jack Ma, the company, and the institutional investors who had backed the listing, or the hordes of retail investors who'd bought into the IPO and were set to take a serious loss when shares started trading.
Once the decision was made to treat online lenders more like banks, the heavy buy in from retail investors probably made pausing Ant's listing inevitable. But by doing so at the last minute regulators have upset pretty much everyone and raised questions about why they waited to step in until the 11th hour.
Ant, meanwhile, has to meet a host of new requirements and explain why it deserves a rich valuation when Beijing plans to treat it like a run of the mill lender. Whichever side you're on, nobody really comes out of this deal looking good. And when Ant does finally go public investors are unlikely to forget the biggest capital markets debacle of 2020.