China’s move to suspend Ant Group’s mega IPO earlier this month has sent ripples across the fintech industry, in not only China but Southeast Asia as well.
The company is, after all, an investor in major fintech players in Southeast Asia.
A significant chunk of the IPO proceeds, that was meant to fund its ambitious global designs, including investments in regional subsidiaries, has now been postponed indefinitely.
Source: DSA R&A report: Chinese Tech Giants’ E-wallet Proxy War in SE-Asia
Industry participants, that DealStreetAsia spoke to, however, expect the impact of the frozen IPO to be confined to only the micro-lending industry in mainland China.
It will not affect the firm’s mobile payments businesses, nor will it influence other fintech players whose services have no relation to consumer lending — the reason that prompted authorities to suspend Ant’s IPO, said Joe Chan, partner at MindWorks Capital, a Greater China and Asia-focused venture capital firm with investments in fintech.
“Regulators always need to work with big companies, I think it happens in any industry and is not necessarily a bad thing,” said Chan, who believes that innovation among Asia’s early-stage fintech startups will continue, regardless of the Ant episode.
The halted dual listing of at least $34.5 billion in Shanghai and Hong Kong, which could have been the world’s biggest IPO, valuing Ant Group at $313 billion, is unlikely to be revived for another six months. It hit a wall two days before its bell-ringing ceremony as Chinese regulators released draft rules to rein in risky tendencies in the country’s consumer credit businesses.
Fin or tech?
At the heart of China’s concerns is whether Ant Group is primarily a technology company, as it claims, or a financial services entity.
The IPO may not have been blocked if not for the firm’s deep involvement in the consumer credit business.
Created in 2004 as a payments processor for Jack Ma’s e-commerce firm Alibaba Group, Ant runs one of China’s most popular mobile payments systems, Alipay, serving over one billion users and 80 million merchants globally.
Its IPO prospectus shows that 39.4 per cent of its revenue in H1 2020 was from CreditTech. The other major revenue streams are InvestmentTech (15.6 per cent) and InsureTech (8.4 per cent).
CreditTech comprises consumer credit offerings including Huabei (‘just spend’), which operates like a virtual credit card, and short-term consumer loan provider Jiebei (‘just borrow’). It also covers MYbank, an online bank that delivers lending services to small businesses.
The CreditTech unit had a total lending balance of 2.1 trillion yuan ($317.3 billion) at end-June 2020, of which 1.7 trillion yuan ($256.8 billion) came from consumer credit, according to its prospectus.
Only 2 per cent of consumer loans it had facilitated were on its balance sheet. The remaining, the prospectus shows, was underwritten by more than 2,000 “partner financial institutions” or securitised, allowing Ant to take less risks. In addition, analysts estimate that Ant takes an average 30-40 per cent cut of the interest on loans it facilitates, according to a Reuters report.
This is believed to be what prompted China’s Vice Finance Minister Zou Jiayi to remark that fintech must not be used as an excuse to “dodge regulations, conduct illegal arbitrage, and bolster a winner-take-all style of monopoly.” “Fintech has not changed the nature of finance that depends on credit and uses leverage,” she said. “While fintech has enhanced service efficiency and financial inclusion, it has also imposed a greater challenge to financial security.”
China’s draft rules would require micro-lenders to put up at least 30 per cent of the capital in all syndicated loans, and cap the maximum loan amounts. The draft rules are open for public feedback until December 2, 2020, but it is unclear when the regulations will be finalised and implemented.
“The entire consumer lending space in China will be tightened,” said MindWorks’ Chan.
There should be “more clarity” on the proposed regulations for stakeholders to fully understand the overall impact on the fintech space, said Chan. But as long as technology companies “do not use their own balance sheet to lend” and only act as a data provider or a middleman to partner with financial institutions, they should be in a safe zone.
Alibaba shares dropped close to 14.5 per cent from HK$299.8 ($38.7) on November 3 to HK$257 ($33.1) on November 13. Shares of other China-based fintech firms, such as New York-listed Lufax and OneConnect, have held relatively steady since the news of the Ant IPO suspension emerged.
This suggests investors’ retained confidence in Chinese fintech players, as they are likely isolating Ant from its domestic peers.
War chest shrinks
While experts DealStreetAsia spoke to said Ant’s overseas operations, investments, and partnerships will “remain as usual,” its war chest for market expansion in China and worldwide will almost certainly reduce, as professionals expect the firm’s valuation to be slashed upon the relaunch of the IPO. That will lead to fundraisings far smaller than what was planned in the first attempt.
In its prospectus, Ant has stated its intention to use 40 per cent of net proceeds from the IPO (around $13.8 billion) to expand “cross-border payment and merchant services initiatives… developing more digital services for consumers, merchants, and partners beyond China.”
Globally, the Chinese fintech giant has so far invested $28.1 billion across 139 investments since 2015, according to data from S&P Global Market Intelligence. The deal value includes $3.4 billion in M&A transactions and $24.7 billion in funding.
The IPO freeze means that Ant and its regional subsidiaries will not get the capital boost anytime soon for their next phase of global expansion.
“I think there will be two paths in front of Ant: First is to split the CreditTech business before the IPO. Second is to replenish the capital required [in syndicated loans] and pursue a listing at a valuation akin to banks,” said a Beijing-based investment banker, cited by Chinese financial media outlet 21st Century Business Herald.
“But neither of the two paths makes much sense to Ant. It will face a dive in valuation without its core business of micro-lending; yet, the option of putting up more capital and being valued at the same level as banks will also lead to a traumatic listing result.”
Ant set its Shanghai offering price at 68.8 yuan ($10.4) apiece, close to its offering price of HK$80 ($10.3) on the Hong Kong stock exchange. Based on its adjusted net profits for the 12 months ended June 2020, its price-to-earnings ratio (P/E ratio) would be 48.12 times, in line with multiples of 39.24 for Alibaba and 49.09 for Tencent.
In comparison, China Merchants Bank, one of the highest-valued banks in China, only had a P/E ratio of 12.49 on November 13.
The sentiment on Ant Group’s IPO, indicted by Refinitiv data, has already been on a descent before the IPO suspension, diverging from the overall direction of the Chinese market.
(*Refinitiv’s sentiment data is a normalised ratio between positive and negative references to Ant on the top 2,000 plus global news outlets — mostly English-based, but also in Chinese, Arabic, Japanese and Portuguese — and about 800 financial social media platforms, boards, and blogs. The number of positive references is subtracted by the number of negative ones, and the result is divided by the total buzz within a given period.)
Ant in Hong Kong and SE Asia
But it’s not all bad news. Despite setbacks in mainland China, Ant has so far faced no regulatory alert on its operations elsewhere. While investors might be jittery over Beijing’s tightening grip on Hong Kong, the latter’s local authority assures that Ant will continue to play an important role in Hong Kong’s financial scene.
There has been a major take-up of e-wallet services in Hong Kong’s retail space over the past few years, said Nelson Chow, Chief Fintech Officer of Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, in a recent interview with Bloomberg.
He said that the “tone” is “very upbeat” among market participants including investors, technology firms, and incumbent financial institutions, despite what happened to Ant’s dual listing plan.
Now serving over two million users in Hong Kong, Ant forayed into the city’s mobile payments market in May 2017 with the launch of its local version of e-wallet mobile app, AlipayHK.
The company, which was then called Ant Financial, won approval to operate digital wallets for customers in the Asian financial hub in August 2016, along with other players including its homegrown archrival Tencent. Such operation is endorsed by a Stored Value Facility (SVF) licence.
Apart from the SVF licence, it also holds one of the eight virtual banking licenses granted by the HKMA in May 2019. It rolled out the virtual banking arm, Ant Bank, in September 2020 to offer 24/7 banking services to individuals and small and medium-sized enterprises (SMEs).
Asia, particularly Hong Kong, is still considered as “one of the major places for fintech development” after the Ant’s scuttled IPO, said Chow, pointing out that it is important to have “a clear and easy-to-understand regulatory framework”.
In Southeast Asia, meanwhile, Ant has picked up stakes in major e-wallet operators, including Thailand’s Ascend Money, with its TrueMoney brand; Indonesia’s DANA; Mynt in the Philippines, and most recently, Myanmar’s Wave Money.
The company has been steadily building up its presence in Southeast Asia by taking strategic stakes in ascendant fintech startups. It planned in November 2019 to launch a $1 billion fund to up its investments in emerging markets including Southeast Asia and India. The fund targets to make investments centred around its “strategic businesses,” which include online payments and related technologies.
Local regulators might also follow the playbook of their Chinese counterpart to look into “systemic” risks that fintech giants may pose. But since foreign players are typically not allowed to have a majority stake in e-wallet or similar intermediary payment services, there could be little impact on local players with foreign shareholdings.
Chinese mobile payments providers like Ant and WeChat Pay still have “substantial advantages” in Southeast Asia, thanks to Chinese outbound tourists who are accustomed to settling payments with Alipay and WeChat Pay in overseas restaurants and shopping malls, said Ke Yan, head of research at Asia Pacific-focused small- and mid-cap equities specialist DZT Research.
“Chinese companies also replicate the success factor of Ant in China, which is to develop payment services from e-commerce,” he said. “Chinese companies like Alibaba and Tencent are behind two of the largest e-commerce companies in Southeast Asia, namely Lazada and Shopee, so they are kind of occupying the entry point of user acquisition for payment services.”
However, with its wings being clipped at home, Ant will have less capital to keep its foothold in Southeast Asia to rival against competitors including Xiaomi, JD.com, and Tencent, who are also looking to take a slice in the region’s burgeoning financial ecosystem.
In Singapore, it is in the running for one of three wholesale digital bank licences that will allow the firm to serve non-retail clients. The pulled IPO might stir regulators in the city-state to re-evaluate the applicant’s capital adequacy, especially after the Monetary Authority of Singapore purposely delayed the announcement of the licence awards based on concerns caused by the COVID-19 pandemic.