Most of you should have already known. There has been a change in Ant Group’s IPO listing plans. First came the announcement from Shanghai Stock Exchange, suspending Ant Group’s listing. When investors were still reeling from the news and debating whether the incident would affect Ant Group’s H-Shares, Hong Kong also announced that the stock listing plan has also been suspended.
Ant Group was orignally scheduled to go public in both Shanghai and Hong Kong on 5th November 2020, raising more than US$30billion with a valuation of more than US$280billion.
When it rains, it pours
As the firm to preparing to sell shares to the public, Ant Group was hit by regulations to contain the risks in China’s online lending industry. Fresh rules were issued to cap the use of asset-backed securities to fund quick consumer loans. This will slow down Ant’s expansion plans in this business segment. The regulation places a limit on this type of funding to 4 x a firm’s net assets. Ant currently has 4.7x such debt against its capital.
On 2nd November Monday, Jack Ma, Eric Jing (Executive Chairman) and Simon Hu (CEO) were summoned for an interview over the IPO by the People’s Bank of China and numerous regulators.
That same day, China financial regulators also issued draft rules that imposed more restriction on microlending activities. It stipulates stricter standards for a range of operational and financial metrics including leverage levels, joint lending and cross provincial business.
Ant Group IPO
Due to increased regulatory risks, Ant Group’s valuation will inevitably be lowered, and the company’s future performance will also be cast a shadow. Re-listing requires adequate compliance audits. At the same time, investors’ expectations must be adjusted and the repackaging of Ant’s business segments in order to meet compliance. I don’t think these are problems that can be solved in a short period of time.
Relisting may take a while longer than expected.
Alibaba Group Holdings, which owns 33% of Ant Group, saw its share price tanked after new broke out yesterday. Their market cap fell nearly US$60billion.
Besides share price performance, failure to list Ant Group would also affect Alibaba’s expansion plans. Ant Group’s IPO would have accentuated Alibaba Group’s ex-eCommerce offerings and cement its reputation as an internet titan. Its eCommerce platform is also synergistically connected to the Ant Group ecosystem. People who use AliPay are more likely to shop on Alibaba’s properties, and vice-versa.
China’s Finance Industry
The new rules are applicable to the whole industry. Tencent(HKEX:0700) (WeChat Pay) and Lufax Holdings (NASDAQ:LU) (personal financial services platform) were also negatively impacted by the rules.
I believe that the main concern is whether Ant Group’s digital technology is somehow bypassing financial regulations. And that whether the risk of online microlending can be supervised strictly.
If Ant Group were able to satisfy the regulators, they would be fully certified as a financial institution. This will give them a first mover advantage over their peers. Other than having adequate capital, Ant’s competitors are subjected to tougher restrictions such as the cross provincial business.
At present, Alibaba’s domestic consumption segment T-Mall and Taobao is in a very competitive environment. Besides fighting for market share with Pinduoduo(NASDAQ:PDD) and JD.com(NASDAQ:JD), Alibaba also has to content with the strong rise in on-demand services provider Meituan Dianping(HKEX:3690). The new e-commerce battlefield could very well be the community group buying field where WeChat, which belongs to Tencent(HKEX:0700) is widely used. (Note Alibaba’s recent takeover of supermarket chain Sun Art)
This is a battle on many fronts. Which is why Ant is not only important to Alibaba merely due to just the increasing value of the equity stake and in unlocking additional value realization for Alibaba to regain their dominance in the domestic consumption sector
Now that Ant Group is unable to raise funds, their competitors would have some much-needed breathing space.
Obviously, suspension of listing does not mean termination. However, the recent moves by China’s finance regulators have made it unclear as to when Ant Group will be listed. Ant Group may be required to reevaluate their business segments. Hence, it is not yet possible to see the impact on its valuation.
Alibaba’s share price plunge on Tuesday could be a buying opportunity if investors are optimistic about the growth of its other business segments. In addition, the reinstatement of Ant Group’s IPO would be a strong catalyst.