China Suspends the Largest IPO Ever
Ant Group’s massive IPO had been recently suspended following a meeting between the company’s billionaire co-founder Jack Ma and regulators in China.
Ant Group’s massive IPO had been recently suspended following a meeting between the company’s billionaire co-founder Jack Ma and regulators in China. The reasons for the same as stated by the Shanghai Stock Exchange were “major issues” that might cause it “not to meet the listing conditions or disclosure requirements.” Ant Group apologised in its official WeChat account to its investors for “any inconvenience caused by this development.” This listing would be the biggest share sale in history at a whopping $37b, beating the $29.4b record currently held by the Saudi state oil company Aramco.
The Journey Began with Alipay
The Ant Group was born as Alipay, a third-party online payment tool created by Alibaba in 2004. A major reason behind the establishment of Ant was eBay’s announcement to enter the Chinese market in 2003. In order to offer stiff competition, Alibaba launched Taobao — a cross between eBay and Amazon. Despite conjuring up millions of users, Taobao suffered from an issue of trust between vendors and buyers. In an attempt to address this issue, Alipay began as a simple escrow service to secure transactions between independent buyers and sellers on Taobao. Even though Alipay did not the appropriate licenses, Jack Ma pushed forward and began collaborating with Chinese banks. Due to the archaic and bureaucratic obstacles, and because online banking was still very new, building a new infrastructure from scratch was the only way to scale Alipay.
Today, Alipay has over 1.3 billion active users — 55% share of Chinese mobile payments — and has captured a huge amount of value for Alibaba by enhancing its sales proposition. Alipay has always understood that capturing value depends on retaining customers’ loyalty and also that payments alone were never going to be enough. That led to Alipay building on its two main resources, access to funds and customer data, to branch into other financial services. And so, Ant Financial was established in 2014 as a vehicle for the entire operation.
Ant Financial was Established and Does Wonder
The insect name Ant is a metaphor for no transaction or investment being too small — when added up, they become significant. Alibaba owns a 33% equity interest, with the remainder controlled by Ma (about 50%) and early investors. Ant Group offers services across five major domains: payments, wealth management, lending, credit scoring, and insurance. In 2013, the group launched Yu’e Bao (“leftover treasure”), to allow even the smallest customers to invest leftover funds. One of the largest money market funds in the world, Yu’e Bao offers an average of 2% greater returns than traditional bank deposit interest, plus lower fees to its asset management partners. Ant Fortune is a wealth management platform created by Ant Financial, which allows users to choose between Yu’e Bao and other rival funds. The platform boasts over 4,000 wealth management products from over 100 asset management companies.
A mutual insurance platform Xiang Hu Bai was launched by the Ant Group in 2018 in order to address the lack of affordable healthcare for lower-wage workers. Free to join and only charging premiums upon a treatment, 100 million users joined in the first year alone. This incredibly diversified ecosystem of service offerings and their brilliant ability to cross-sell is why Ant Group is worth so much today. The group’s success in cross-selling is evident from the fact that over 80% of its customers use three or more services offered by it, and 40% use all five. By taking a platform approach, direct competition with traditional financial institutions has been reduced.
Massive Potential of the Ant Group
At about $315b market valuation, Ant Group is worth more than the gross domestic product (GDP) of Egypt ($303b), and Finland ($269b). Ant’s strong potential is evident from its strong profitability and expansive network. In 2019, Ant Group made profits of more than $2.6b from a revenue stream of $17.5b; the company’s profits in just the first half of 2020 superseded 2019 at $3.2b. (For comparison, PayPal’s net income over the same period was $1.6 billion!)
There exists a very strong potential for the Ant Group to grow outside China since they have formed strategic partnerships with mobile payments providers in India, Thailand and Mexico. Such partnerships and expansions have added over $90b to the $17t in processed transactions in China in 2019. Besides generating revenue, operations abroad have successfully drawn new users into the services ecosystem. As of recent, however, Ant Group has refocused on maximising the potential gains from the domestic Chinese market itself.
The group has developed a portfolio of tech capabilities including cloud and blockchain platforms in an attempt to further broaden its financial service offerings. It sells such services to financial companies, emphasizing that the group is primarily about tech, not finance — coining itself “tech fin” not “fintech.” Around 50% of revenue in 2019 came from such tech services, compared to payments, which brought in 36%, and this switch has further excited investors.
Jack Ma’s Ant Group IPO will be the biggest ever in history, taking over the record set by oil giant Saudi Aramco’s $29.4b IPO in 2019.
According to Bloomberg, Ant Group’s market valuation is bigger than JPMorgan Chase & Company, and Bank of America. Ant is larger than Paypal Holdings Inc. ($238b), and Walt Disney Company ($232b); it is also three times larger than IBM Corp and four times Goldman Sachs Group.
Jack Ma holds 8.8% stake in the company, worth over $27.4b based on the stock pricing in Hong Kong and Shanghai.
In Ant’s IPO, institutional investors put in orders for 76b shares which is over 284 times the initial offering, according to the Shanghai filing. Brokers were willing to lend individual investors credit worth 20 times their investment so they could load up on the shares, according to Bloomberg.
Jack Ma is a big fan of number eight, which rhymes with prosperity in China. Six is also considered a lucky number in China. The shares in Shanghai were priced at 68.8 yuan and at HK$80 in Hong Kong.
Why was the IPO Suspended?
The decision to suspend the IPO of Ant Group came in after the People’s Bank of China and three other financial regulators summoned Ma and two Ant Group executives for questioning on November 2. Just over a week before that, Ma had publicly criticized Chinese regulators for stifling innovation by being too risk-averse.
On the 2nd of November, the China Banking and Insurance Regulatory Commission — one of the regulators that summoned the Ant executives — proposed new rules for online lenders. The rules could mean that Ant would have to set aside more cash for the loans it facilitates and would place more credit risk on its balance sheet. Furthermore, such a dramatic move so close to the listing date will damage Beijing’s drive to develop its capital markets.
In September, China’s ruling Communist Party published a set of guidelines for private businesses, stating that the private sector needs “politically sensible people” who will “firmly listen to the party and follow the party.” The directive indicates that President Xi Jinping is not afraid to take more aggressive measures to ensure that private companies support the Communist Party’s philosophies.
Senior geo-technology analyst at Eurasia Group, Xiaomeng Lu had this to say regarding the suspension: “Jack Ma’s aggressive comments last weekend exacerbate the brewing conflict between large Chinese tech companies and powerful regulators. Ant is likely to adjust its IPO valuation as a result of this intervention and delay its launch date.”
Duncan Clark, the author of “Alibaba: The House that Jack Ma Built” and chairman of investment advisory firm BDA China, said before the IPO was halted that Chinese regulators “want to put out statements that they’re the ones in charge, the ones in control. No regulator anywhere wants to be irrelevant.” He hinted at the possibility that this could be an attempt by Beijing to remind Ma and all other private enterprises “who calls the shots.”
Ant Group’s statement post the suspension was, “We will overcome the challenges and live up to the trust on the principles of stable innovation; embrace of regulation; service to the real economy; and win-win cooperation. We will continue to serve small and micro businesses and ordinary citizens with our passion, professionalism and commitment for society.”
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