Banking & Finance

Ant heads for elephant IPO

Alibaba’s financial services unit moves closer to blockbuster listing

Alibaba founder and chairman Ma makes a presentation during the official opening of the CeBIT trade fair in Hanover

Ma in talkative mood, with Alipay’s new face-recognition technology

Just over a decade ago, Steven Spielberg’s sci-fi film Minority Report predicted a future in which advertising billboards would use retinal scanners to send targeted ads to passersby.

Last week Alibaba’s Jack Ma brought that vision a step closer, making the first ever purchase on his e-commerce company’s website using facial recognition technology.

Ma was at the CeBIT trade fair in Germany and used his keynote speech to demonstrate how Alibaba’s payments service Alipay is beta-testing facial recognition software for transactions online.

The app validates mobile payments by matching a photo taken by the user at the point of purchase to a stored profile photo.

After purchasing a stamp that commemorated the 1948 Hannover Trade Fair (by taking a selfie) Ma told delegates that his purchase would be delivered to the city’s mayor as a gift.

The new service is called Smile To Pay, although the international media has dubbed it ‘pay-with-a-selfie’.

“[Using] online payments to buy things is always a big headache,” Ma told the conference. “You forget your password, you worry about security. Today we’ll show you a new technology, how in the future people will buy things online.”

Ma’s latest purchase demonstrates Alibaba’s innovative edge, but also highlights his unerring ability to generate headlines, especially when he is drumming up interest from investors.

And having settled his dispute with SAIC over sales of counterfeit goods on Alibaba websites (the government agency said the two would work together on the issue), Ma is turning his attention towards the next big fundraising, the likely IPO of Alipay’s holding company, Zhejiang Ant Small and Micro Financial Services Group, or Ant Financial.

In recent weeks, Ma has played down speculation about when and where the firm will go public, teasing that Ant is “still a baby” and that it is “too early to say who it will marry”.

However, he is in the process of securing pre-IPO investors and at the end of February, Shanghai Securities News flagged a Shanghai listing in early 2017.

There had been speculation that Ant Financial would opt for a dual listing in Hong Kong but these hopes seemed to be dashed last week after Bloomberg reported that Ant intends to adopt the same partnership structure as Alibaba, principally so that current board members led by Ma can retain control.

Hong Kong lost out on Alibaba’s listing (to New York) because it doesn’t allow different classes of shareholders. However, more recently Hong Kong’s SFC officials have been telling the Wall Street Journal that they were not averse to considering Ant’s application as long as investor rights are protected.

Either way, Ant Financial could rank as the largest IPO on an Asian stock exchange, beating the Agricultural Bank of China (it raised $10 billion in Shanghai and $12.1 billion in Hong Kong from its dual listing in 2010). The irony of an internet-based lender with only a decade of experience trumping a traditional state-owned monolith with more than 60 years under its belt is unlikely to be lost on investors.

Alipay was controversially spun out of Alibaba in 2011, ostensibly because of foreign ownership rules governing the financial services sector. Ma ultimately controls it through YunBo Investment Consultancy and tweaked its profit-sharing agreement with Alibaba shortly before the latter’s $25 billion IPO last autumn. This agreement states that Ant Financial must have a minimum equity valuation of $25 billion when it is floated. At this point, Alibaba has the option of receiving a one-off payment equal to 33% of the listed company’s issued share capital, or it can continue receiving 37.5% of its pre-tax profits. Payments are proportionally reduced should Alibaba receive less than 33% of the shares.

There is no cap on the value of Alibaba’s potential stake, but there is a floor of $9.375 billion based on the $25 billion minimum valuation. This floor valuation was said to have been surpassed during the recent fundraising round, although Chinese newspapers were divided as to by how much.

For example, in February, Century Weekly reported that three domestic institutions were purchasing an 11% stake for Rmb17 billion to Rmb20 billion ($2.74 billion to $3.23 billion). The magazine said the Social Security Fund would get 5%, with the Postal Savings Bank and CDB Capital on 3% each. This implied an overall valuation of $24.9 billion to $29.36 billion.

A few weeks later, Shanghai Securities News suggested that the group’s financial advisor CICC was brokering the sale of a combined equity stake for $4 billion, at a valuation of just over $36.36 billion.

The Global Times has argued that the company could have attained an even higher valuation were it not for “China’s ban on foreign ownership of electronic payment providers like Alipay”.

(The newspaper advocated a “two-tiered system allowing foreign investors in sensitive areas, but only on condition management control remains in the hands of local Chinese.”)

And yet the valuation looks fairly punchy based on Ant Financial’s most recent earnings. According to Century Weekly, 2014 net profits amounted to Rmb2.6 billion. This means the rumoured $25 billion to $36 billion price tag is already valuing Ant Financial at 60 to 86 times last year’s earnings.

By contrast, Alibaba itself is trading at 45 times 2014 earnings. Comparables in the US such as Google and eBay trade at around 22 times, with only Amazon higher up the stratosphere (116.5 times forward earnings) because it has only recently turned profitable again.

The main problem in valuing Ant is that many of its business lines are at a very early stage of development. If it is able to make the same inroads in financial services as Alibaba has in online shopping, then profitability will increase rapidly and its valuation will boom.

Alipay – the online payment tool – currently dominates the financial mix, with future returns heavily dependent on consumption growth and the expansion of online shopping. According to iResearch, it has a dominant market share, accounting for 49.2% of online payments and 82.6% of mobile payments in the third quarter of 2014.

The second biggest contributor to current earnings is financial products distribution – the money market fund Yu’E Bao (see issues 202 and 225) and peer-to-peer (P2P) service Zhao Cai Bao. The former now has Rmb572 billion under management (a 26% market share according to Fitch), while the latter is projecting a Rmb1 trillion loan portfolio by the end of 2016.

Other earnings drivers currently contribute very little or nothing. They are: Ant Small and Micro Loans, online insurer Zhong An (a partnership with Ping An and Tencent), MYBank (one of China’s new batch of private commercial banks) and Sesame Credit (an agency that checks a consumer’s credit).

The PBOC recently chose eight companies to trial similar credit rating services and is expected to issue licences later this summer. Sesame Credit has a major advantage: an ability to mine data from Alibaba’s extensive customer histories.

The Wall Street Journal believes the Chinese government has bought into Ma’s vision given the calibre of the domestic investors which recently purchased stakes. “The message is clear,” it says. “Ant Financial has backing from Beijing.”

Just like Alibaba, Ant Financial has global ambitions.

For example, it has talked about working with eBay (some speculate that Ant could try to buy PayPal, which eBay owns). And it has signed a deal with Apple, allowing customers to download the Alipay app onto the new Apple Watch. Likewise it is in the process of investing $575 million alongside Alibaba for a 30% stake in Indian online payments service One97.

Back at home, Caijing predicts another major deal could be inked with Postal Savings Bank (which is set to list next year in Shanghai). Ant lacks branches, while PostBank is short of cutting-edge technology. So were Ant’s big data know-how and cloud computing infrastructure combined with PostBank’s extensive network of outlets it is reckoned it could create a powerful new force in the financial system.


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