Ant Group, about to make the largest public sale of shares ever, introduces a basic conundrum: what kind of business is it – a financial colossus or a tech giant?
That is important for investors after the first public offering of $34.4 billion, exceeding Saudi Aramco’s record $29.4 billion float this past year. Shares are expected to start trading on Thursday in Shanghai and Hong Kong.
A spinoff from Alibaba Group, Ant presents itself as a technology company, while financial regulators suggest the company remains under their purview.
The Hangzhou-based giant benefits from the much richer valuations the marketplace affords to technology firms than to financial institutions. It hopes to escape the closer scrutiny of financial analysts say.
China’s central bank and financial institutions met on Monday with Ma and high Ant executives as Beijing published draft principles for online micro-lending.
1 rule would require companies like Ant to shoulder default risks along with banks, while limiting lending and leverage amounts – all approaches utilized to regulate banks. An Ant spokeswoman said the corporation would “implement the meeting opinions in depth”.
Ant launched in 2004 as Alibaba’s payments chip. Its core Alipay app has more than 730 million monthly users in China.
It has also built an empire connecting China’s borrowers and creditors, procuring short-term loans in minutes. It has branched out, with artificial intelligence and other advanced techniques to facilitate not only loans and payments but products from insurance to wealth management.
This implies, Ant states, it’s chiefly a tech vendor for financial institutions. Ma has called it a “techfin” instead of the usual “fintech” outfit.
Sceptics find this argument unconvincing. They say financial regulators are unlikely to turn the heat down on a business that just this season changed its name from Ant Financial.
Ant Group declined to comment for this report.
Tech teams, not finance bankers, at nearly all of Ant’s underwriter banks are contributing the IPO, people with knowledge of this matter told journalists at our partner news agency Reuters. They have procured tech-style pricing.
The double listing values Ant at $312 billion, or 31.4 times its forecast 2021 net profit, in the exact same ballpark as Alibaba, trading in 27.6 times forward earnings and New York-listed peer PayPal in a 45 multiple.
Some investors believe Ant ought to be valued at up to $400 billion or more in the IPO, two sources said.
Compare that with, say, Industrial and Commercial Bank of China, the world’s largest bank by assets, at a multiple around 6.
A couple of years before, Ant began its fin-to-tech shift as Chinese regulators improved scrutiny to control financial risks in the system. This past year the firm for the first time made most of its earnings from fees generated by its electronic finance technology stage.
Ant executives regularly stress that technology is currently in the firm’s DNA.
More than 60 percent of Ant’s workers are engineers and programmers, its prospectus says. It supplies high-tech risk investigation but leaves lending conclusions to the banks, two sources said. And unlike banks, which traditionally rely on security to determine creditworthiness, Ant’s risk-modelling algorithms leverage data it has collected, analysts say.
Patriarch Ma, who has propelled the shift to a technician identity, recently called financial regulation obsolete, badly suited to businesses hoping to utilize technology to drive financial innovation.
‘FINTECH CAN’T DODGE REGULATION’
However, China’s financial regulators are just growing warier about financial engineering. They consider Ant’s business model of borrowers and creditors mainly a financial support.
Ma’s remarks on authorities point to a profound conflict between fintech development and fiscal regulation,” stated Ji Shaofeng, a former officer at the China Banking and Insurance Regulatory Commission.
Ant’s most lucrative business, consumer credit, is based on interest income. The firm takes a typical 30%-40% cut of the interest on loans that it facilitates, analysts estimate.
“That’s why the profit written in Ant’s prospectus is so lucrative, even more lucrative than banks,” one source said.
Vice Finance Minister Zou Jiayi told a recent convention, which Ma attended, that fintech should not be allowed to withhold law, run prohibited arbitrage and bolster a winner-take-all fashion of monopoly.
China’s cabinet-level Financial Stability and Development Committee, at a Sunday statement broadly seen as responding to the discussion within Ant’s nature, said, “Innovation and entrepreneurship should be encouraged, but at the same time we need to strengthen supervision and include all financial activities into the regulatory framework by law.”
The team at Platform Executive hope you have enjoyed this news article. Initial reporting via our official content partners at Thomson Reuters. Reporting by Yingzhi Yang and Cheng Leng in Beijing and Julie Zhu in Hong Kong. Editing by William Mallard.
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