Squashing the world’s biggest Ant
Poor old Jack Ma. The Alibaba founder has been on top of the world, with Ant Group making headlines as the largest expected IPO of all time.
An IPO is the process through which a company comes to market. The shares are listed on a public exchange which facilitates trade in them. As part of the process, new capital is typically raised from investors. In other words, an IPO is the debut of a company on a stock exchange.
Ant was spun out of Alibaba a decade ago, with Alibaba now owning around a third of Ant.
Ant was on track to raise a colossal $34bn through this IPO, valuing the company at around $315bn. The next largest IPO in history was Saudi Aramco, the oil interests of Saudi Arabia, which raised $29.4bn and had a much larger valuation at the time of listing ($1.7tn which grew to $2tn within weeks of listing in December 2019).
Unfortunately, you don’t get on the wrong side of the Chinese regulators and come out best.
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Big in China
Ant is a payments company that allows people across China to pay on their smartphones for goods and services. WeChat, owned by Tencent (responsible for the success of Naspers on the JSE), offers a similar service.
Half of Ant’s revenue is from peripheral services, like insurance and investment products. It’s a textbook platform business where users are attracted by a single dominant feature (payments), before being cross-sold a host of other products or services.
Alipay has 730 million monthly users. Paypal has 346 million active accounts. Ant’s other numbers are just as incredible: $17tn in digital payments during the 12 months ended June and $300bn in credit to consumers and small businesses.
95% of Alipay’s revenue is from China. That’s where the problems start.
The biggest Ant gets squashed
Ant offers an alternative to China’s state-dominated banking system. On top of that irritation for regulators, Ant has been criticised for not adequately protecting user data. The regulatory issues are nothing new for Ant, but the events around this IPO are extraordinary and will cause irreparable damage to China’s reputation as a market for raising capital.
Ant planned to list in China and Hong Kong to take advantage of investor familiarity with the service, rather than coming to market on the Nasdaq in U.S. and having to explain to American investors how Alipay works.
The Shanghai Stock Exchange shocked the world with an announcement that the proposed listing may no longer meet the requirements for listing. Company executives were summoned to a meeting and the rest is history. The listing isn’t going ahead.
The Hong Kong leg of the listing has also been suspended, as the company planned to list on both exchanges. That’s no fault of the Hong Kong regulators.
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The company apologised to investors “for any inconvenience” – surely the politest PR person in all of China was hired to write something so passive after such a terrible outcome.
Those investors were practically hurling food at each other to get to the front of the queue. Ant won a waiver to only sell 11% of the company (vs. the normal free float of at least 25%), which created a shortage of available shares. As is taught in Economics 101, a shortage of supply drives demand.
Retail investors (normal individuals rather than institutions) put in bids of $2.8tn, 872 times more than the value of shares on offer. Talk about being oversubscribed!
The pre-IPO period caused huge headaches for the Hong Kong central bank, which had to intervene numerous times in the market this year to try weaken the Hong Kong Dollar as money poured into the country ahead of the IPO.
Ant was supposed to be deciding which investors to allow onto the register, achieving a mix of anchor investors and tradeable free float. Instead, it’s sending apology letters.
What next?
Nobody knows.
The Chinese government is clearly flexing its muscles here. Even if Ant tried to list on an offshore exchange instead, the damage has been done. Why would investors be interested in a company that is clearly dealing with major regulatory issues?
Ant is going to have to arrive at a sustainable solution with the Chinese regulators. Jack Ma will need to amend his approach, avoiding public criticism of Chinese regulators and the banking system.
It would be a lot simpler of course if Alipay wasn’t entirely dependent on the Chinese market.
As Western investors suddenly became nervous about China, shares in Prosus (the company that sits between Naspers and Tencent) dropped 4.3% even though Tencent’s share price was largely unchanged in Hong Kong. Naspers dropped 4.2%.
The fallout from this financial disaster will be significant. Alipay wasn’t relying on Western money for the IPO, but will Chinese investors pile in with such enthusiasm the second time around, assuming Ant sorts all the issues out?
What a mess.
In South Africa, Vodacom had announced an intention to partner with Alipay to create a “super app” aimed at consumers and SMEs in South Africa. It will be interesting to see whether the repercussions of this listing nightmare will impact that partnership.
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