An Unprecedented IPO,
But Ant Group's Road to Internationalization
Remains Long and Bumpy
By CHEN Gen
Ant Group, the parent company of the Chinese online payment platform Alipay and affiliate of Alibaba, has recently become the focus of international financial market, its every move attracting huge amount of attention. Ant Group is going public, and it is going public in a different way from that of Alibaba. Not only has Ant Group chose not to be listed in the US, it has also chosen to be listed simultaneously on the new Shanghai STAR market and the Hong Kong Stock Exchange. As of now, Ant's IPO process has been full of twists and turns, but what the investors are more concerned about is Ant's IPO value, and its future growth. With the market's love of and strong demands for fintech companies, Ant Group may possibly raise its IPO valuation again and bring its IPO target valuation to at least 280 billion US dollars.
If the valuation does indeed go up, Ant may reduce the shares issued. However, with the goal of raising 35 billion USD, judging by the information available right now, the Ant IPO will surpass that of Saudi Aramco in 2019 and become the biggest in the world.
Ant formally presented its IPO prospectus on August 24. 25 days later, on September 18, it passed the review of the China Securities Regulatory Commission. In preparation for the IPO, Ant Group has made a lot of internal adjustments, from human resources to business structure and directions.
However, last week came the report that the Chinese securities regulatory agency was investigating potential conflicts of interests in Ant Group's 35 billion USD stock listing, and delayed its approval of the potentially biggest IPO plan in the world. This was also the biggest controversy Ant Group has encountered since it announced its IPO.
On the heel of the above news came reporting that the US, out of "national security" concerns, were considering restrictive measures against the digital payment platforms of both Ant Group and Tencent, another Chinese giant. This might affect Alipay's business expansion abroad.
Finally, after multiple rumored rounds of IPO delays, Ant Group saw new development in its planned listings on both the Shanghai and Hong Kong Exchanges. On October 19, the CSRC's website showed that Ant Group had, on October 16, received the CSRC's administrative approval decision concerning its application to be listed in Hong Kong. The next step in Ant's Hong Kong IPO process is to go through the Hong Kong Exchange's hearing. Upon approval there, the IPO will be in the public offering stage.
The dust has finally settled on Ant's IPO. Obviously, going public is a brand new starting point for Ant Group, but its road to internationalization is still long and bumpy.
From Ant Financial to Ant Group
In 2004, Ant Financial launched Alipay, which initially was just a service provided to shoppers on the Alibaba E-commerce site. Now, Alipay has become an important tool in the payment industry, as well as a means to promote social credibility. Alipay has also been widely used in the real world. Over 80 million businesses every month use the app to process payments.
Even though payment is the channel to attract users into Ant Financial' entire ecosystem of products, payment itself, in fact, is not profitable as an independent business line. This is partly because starting from 2017, regulators required payment institutions to gradually reach the goal of handing 100% of their customers' reserve funds to the Chinese central bank. Prior to that, payment institutions were able to profit from investing their customers' reserves, an important source of their income.
Which brings us to Ant Group's other important lines of business - lending and wealth management. In 2010 and 2011, Ant started "Ali Small Loans" in Hangzhou and Chongqing respectively, providing loans, based on the applicants' business orders and credit worthiness, that are under 1 million RMB to the businesses on Ali's three platforms - Alibaba B2B business, Taobao and Tmall.
This enabled Ali to, on the one hand, accurately build the credit profiles of individual consumers and small/micro businesses through the big data its E-commerce had accumulated; and on the other, further understand the credit needs of small and medium businesses. All this work, in turn, paved the way for the establishment of the E-commerce Bank under Ant Financial. In 2014, the E-commerce Bank was approved, and became China's first "bank on the cloud" in its pure sense.
If the E-commerce bank has expanded the credit system to include small and micro businesses, Zhima Credit is representative of how the growing credit market started to affect individuals. In other words, Zhima ventured into the personal digital credit area.
As early as in 2012, Ant started to think about offering credit services. After 3 year's preparation, when the Chinese central bank issued Notice on Doing a Good Job in Conducting Personal Credit Evaluation on January 5, 2015, Zhima Credit under Ant obtained a precious pass from the Chinese regulators.
Zhima Credit, in essence, is an idea borrowed from the US Company FICO's personal credit scoring system, which is able to give a score to a consumer's credit based on its technical and data capacities accumulated over many years. With the launching of Zhima Credit, the space that traditional credit reporting agencies had failed to serve - i.e., the credit of regular people - suddenly was covered; products based on Zhima Credit such as Huabei (Ant Credit Pay) and Jiebei (Ant Cash Now) revolutionized the public's view of finance.
According to data available, in 2019, Ant Group's credit and lending business income increased 87% compared to the year before, to 42 billion RMB; moreover, credit business was Ant Group's biggest source of income during the first half of this year. During the past 12 months, roughly 500 million consumers have borrowed through Alipay.
As of June 30 of this year, the balance of consumer credit and lending facilitated by Ant Group reached 1.7 trillion RMB; 98% of the credit and lending was either issued by the 100 partner banks of Ant group, or securitized by Ant and then sold in the market. In comparison, the total credit balance of all Chinese bank issued cards and credit cards as of June 30 was 6.5 trillion RMB.
In the area of wealth management, Ant Financial launched Yu'e Bao in 2013. Ye'e Bao not only integrated all transaction data of each individual in the Alibaba system; more importantly, it brought down the high threshold of traditional wealth management offered by banks, earning it the praise of being "the public's wealth management magic weapon". In the same period of time, Ant Financial also launched Zhao Cai Bao, which offered its users more fixed term income generating products. In a mere 6 months after going online, cumulative investment on both Yu'e Bao and Zhao Cai Bao surpassed 20 billion. For years, Tianhong Asset Management, in which Ant Group has a controlling stake, has been in charge of investing all this money, and in the process become the biggest money market fund in the world.
As of today, Ant Financial holds the most number of financial licenses in mainland China. In addition to the traditional fund business, private banking, insurance and guarantee, it also offers third party payment, personal credit evaluation, financial cloud, and databases, services that traditional financial institutions do not provide. Ant Financial's business tentacles have reached everywhere.
Ant Financial also shed its finance shell. In July 2020, it formally changed its name to Ant Group, which was an important step in Ant's advancing in the market.
Ant's road to internationalization is still long and bumpy
Ant Group, as the world's most valuable global unicorn that is yet to be listed, has seen its IPO market capitalization go from 225 billion to 250 Billion USD. The newest estimate put it up as high as 280 billion USD (an equivalent of roughly 1.87 trillion RMB). At that number, Ant is valued 3 times of Citi Group (91.3 billion USD market cap), 6.25 times of that of UBS (44.8 billion USD market cap), and 239 billion more than Paypal (the market cap numbers above were at 10 am Eastern Standard Time on October 20).
However, it will not be easy for Ant Group to replicate its success in story in China internationally. Ant Group's international ambition started far back, when Eric Jing, then CEO of Ant, took going global as one of Ant's core missions. At the Davos Forum, Mr. Jing articulated the vision to obtain 2 billion global customers in 10 years.
In reality, however, Ant Groups investment business has been suffering setbacks in recent years, from the UK to India and the Southeast Asian markets. Overseas business still accounts for less than 5% of Ant's operating income.
In order to reach its internationalization goal, the first step of Ant's strategy is to have businesses abroad to accept Alipay. In recent years, more and more Chinese have been going abroad as tourists; in addition, through the business opportunities generated by Alibaba's international E-commerce joint ventures Lazada and AliExpress, Ant has been able to encourage customers to use Alipay. Both factors have been helping the expansion of Ant's international payment business. In 2019, international payment handled by Ant reached 62 billion RMB.
However, it is undeniable that Ant still does not possess any obvious competitive advantages globally. This is closely related to the international settlement system. The international settlement system dominated by US dollars has given the US tech giants natural advantages in the area of payment. Despite the big fluctuations in the US economy this year due to both the Covid-19 pandemic and the oil crisis, US dollar remains the dominant currency in the international market.
For the above reasons, even though Ant Group has become a company with international reach, it still faces uphill battles in going global. In order to gain access to the billions of people without adequate banking services in south Asia and Southeast Asia, Ant group has acquired minority stakes in 10 E-wallet businesses, as well as sharing with local partners Ant's expertise and know-hows. Despite these efforts, Ant Group, even in Southeast Asia, is still regarded as a very Chinese company. In Indonesia, the fourth most populous country in the world, the Ant supported E-wallet platform Dana has been marginalized by local competitors.
On the other hand, geopolitical shocks are also limiting Ant's options. Huawei and ByteDance, two important Chinese tech companies, have suffered setbacks due to US restrictions, and any US limit on Ant Group will cause even more damage to the Chinese financial industry. More recently, there have been reports that the Trump administration is exploring implementing restriction on both Ant and Tencent's digital payment platforms due to national security concerns, even if such restrictions would also hurt US companies.
In the India market, since 2015, Ant Group has invested 2.9 billion RMB into Paytm and now owns 30% of the company. Paytm was once the major payment service provider in this South Asian country, but its market share has declined. Last year, Paytm's net loss surpassed its total income, and its total income went down 6% from that in 2018.
The same is happening to the Ant supported British payment group WorldFirst. In February 2019, Ant acquired WorldFirst with 700 million US dollars. This was the biggest action Ant ever took in expanding into the western markets. However, Ant's IPO application documents indicate that WorldFirst, after joining Ant Group, has seen its loss surpassing its income last year.
As China's high tech innovation giant with an unprecedented IPO valuation, Ant Group shoulders great expectations from the public. News and commentaries have been full of praises of Ant Financial, and objective analysis and insights are rather rare. Ant Group's road to internationalization will also be of great concern to people both inside and outside of China. At the same time, internationalization will be a difficult goal to reach in the short term, whether it is Alibaba, Tencent or Ant Group. Despite the fact that these companies are seeing huge market valuations and good growth, their core businesses still remain in the Chinese home markets.
One key reason that internationalization is difficult for Chinese companies is the gap between the Chinese system, culture, and values and those of the democracies. This gap means that the western democracies instinctively feel closer to US companies who share the same values, than to Chinese companies who have a different value system. The western versions of Alibaba and Ant Group are Amazon and Paypal. While Amazon and Paypal are undoubtedly globally acknowledged and widely accepted international companies, most of Alibaba or Ant Group's business currently is still mostly in the areas of China related trade and interactions.
Judging from the experiences of Chinese companies' efforts in going international over the past many years, if a Chinese company wants to be international, particularly in some new tech industries, technology, management and business model issues aside, a more critical but less obvious force of resistance it has to face is how to integrate the Chinese national image, culture, values, legal system and even education system into the mainstream universal value system in the democracies. Addressing this issue will be fundamental in helping Chinese companies to go international. Perhaps this might become a direction of China's continuing reform and openness pursuit.
Ant Group's IPO might be hugely successful in the capital market, and enables international capital to get a share of the dividend of China's development. However, Ant is still at the early stage of its advance into the international market, and it will not be easy to replicate its domestic success outside of China. Ant has yet to explore its way forward.
About the author: CHEN Gen is a science and technology writer in China. He writes about new developments in the Internet, Fintech, biomedical and other fields. His email is:firstname.lastname@example.org.
29/10/2020 Dissemination of a Marketing Press Release, transmitted by EQS Group.