China’s Ant Group, poised to make the biggest public sale of stocks of all time, poses a fundamental puzzle: what kind of company is it – a financial giant or a tech giant?
This is important for investors before and after the $ 34.4 billion initial public offering, which surpassed Saudi Aramco’s record $ 29.4 billion last year. The shares are expected to start trading in Shanghai and Hong Kong on Thursday.
Ant is a spin-off of billionaire Jack Ma’s Alibaba Group and presents itself as a technology company. Financial regulators suggest that the company remain in their jurisdiction.
The Hangzhou-based giant is benefiting from the far higher valuations the market has for technology companies than financial institutions. Analysts hope to avoid scrutiny by financial regulators.
China’s central bank and financial regulators met Monday in a rare supervisory interview with executives from Ma and Top Ant.
According to Bloomberg news agency, the Chinese financial services giant, which includes payments, lending, asset management and insurance, has been told it is being treated as a financial holding and is subject to similar regulations on capital and leverage, according to banks.
Executives are under scrutiny, they said, asking not to be identified as the discussions are private.
The central bank, banking regulator, and China Securities Regulatory Commission were unable to comment on Bloomberg outside of normal business hours.
Beijing has now published draft rules for online microloans
One rule would require companies like Ant to share default risk with banks while limiting leverage and loan amounts – all approaches to regulating banks. An Ant spokeswoman said the company would “thoroughly implement the views of the meeting.”
Ant was launched as Alibaba’s payment processor in 2004. The central Alipay app has more than 730 million monthly users in China.
It has also built an empire connecting China’s borrowers and lenders, securing short-term loans in minutes. It has branched out and used artificial intelligence and other sophisticated techniques to enable not only payments and loans, but products from insurance to wealth management.
Jack Ma, chairman of e-commerce giant Alibaba Group, which has spun off its Ant Group payments arm, says Ant is more of a “techfin” company than a “fintech” outfit [File: Marlene Awaad/Bloomberg]That means, says Ant, that it’s primarily a technology provider for financial institutions. Ma called it a “techfin” rather than a “fintech” outfit.
Skeptics find this argument unconvincing. They say financial regulators are unlikely to lower the heat on a company that changed its name from Ant Financial just this year.
The Ant Group declined to comment on the article on Reuters news agency.
“Tech in our DNA”
Tech teams, not financial bankers, are running IPOs at most of Ant’s underwriting banks, knowledgeable people told Reuters. You’ve secured tech-style prizes.
The double listing values Ant at $ 312 billion, or 31.4 times projected net profit of 2021 at the same stadium as Alibaba, trading 27.6 times futures profit and New York-listed peer PayPal with a 45- fold.
Some investors believe that Ant should be worth up to $ 400 billion or more when it goes public, two sources told Reuters.
Compare this with, for example, the Industrial and Commercial Bank of China, the world’s largest bank by assets, by a multiple of six.
Ant started moving from financial tech to technology two or three years ago when Chinese regulators tightened scrutiny to control the financial risks in the system. Last year, for the first time, the company generated most of its revenue from fees generated through its digital finance technology platform.
The Ant Group’s digital payment system, Alipay [File: Chan Long Hei/Bloomberg]Ant executives regularly emphasize that technology is in the company’s DNA. “Since we were founded over 16 years ago, digital technology has been an integral part of what we do,” said CEO Simon Hu recently.
According to the prospectus, more than 60 percent of Ant’s employees are engineers and programmers. It offers high-tech risk analysis but leaves lending decisions to the banks, according to two sources. And unlike banks, which traditionally rely on collateral to determine creditworthiness, Ant’s risk modeling algorithms use the data it collects, analysts say.
Ants Patriarch Ma, who drove the transition to a technical identity, recently described financial regulation as obsolete and ill-suited for companies trying to use technology to drive financial innovation.
“Fintech cannot evade regulation”
However, China’s financial regulators are becoming more cautious about financial technology. They view Ant’s business model of bringing borrowers and lenders together primarily as a financial service.
Ma’s comments on regulators point to a deep conflict between fintech development and financial regulation, said Ji Shaofeng, a former official with China’s Banking and Insurance Regulatory Authority.
“Although Ant is trying to step out of its financial identity and distinguish itself as a digital tech company, the dominant portion of its revenue that comes from the lending business and its high leverage has always attracted widespread attention from both regulators and the company Capital Markets, ”Ji wrote in a column for the financial news agency Caixin.
Ant’s most lucrative business, consumer credit, is based on income from interest. Analysts estimate that the company will cut interest rates on loans, which it allows, by an average of 30 to 40 percent.
“This is why the profit listed in Ant’s prospectus is so lucrative, even more lucrative than at banks,” said a source. “In business terms, you can think of Ant as the interbank counterpart of all lenders.”
Vice Finance Minister Zou Jiayi recently said at a conference Ma attended that fintech must not be allowed to evade regulation, engage in illegal arbitrage and strengthen a monopoly style that takes all winners into account.
“Fintech has not changed the type of credit-based and leveraged finance,” she said.
China’s Cabinet-level Financial Stability and Development Committee said in a statement on Sunday widely viewed in response to the debate about Ant’s nature, “Innovation and entrepreneurship should be encouraged, but at the same time we need to strengthen oversight and include all financial activities legally the legal framework. “