Inside Ant Group’s Giant Valuation: One Billion Alipay Users and Big Profit Margins

(WSJ) Ant Group Co., the Chinese financial-technology giant controlled by billionaire Jack Ma, revealed how highly profitable its business has been as it gears up for what is likely to be a record-breaking initial public offering.

The owner of the popular payments and lifestyle app Alipay on Tuesday filed listing documents for IPOs on stock exchanges in Shanghai and Hong Kong, publicly disclosing for the first time detailed financial data showing the size and scale of its business.

Ant said it made 21.2 billion yuan ($3 billion) in net profit for the six months to June 2020, on revenue of 72.5 billion yuan ($10.5 billion). That implied a net profit margin of around 30%, fairly high for a relatively young company that is growing rapidly.

The Hangzhou-headquartered company is aiming to go public as soon as this fall, and is targeting a market valuation above $200 billion, The Wall Street Journal previously reported. Ant said in one of its filings that the new shares it plans to sell would comprise at least 10% of the company’s share capital, implying that it could raise more than $20 billion.

If achieved, it would propel Ant into the ranks of China’s most valuable listed companies and the world’s top financial-technology companies, in the vicinity of PayPal Holdings Inc. and Mastercard Inc., which recently had market capitalizations of $233 billion and $344 billion respectively.

Ant’s origins date to 2004, when Alipay was first created to facilitate payment transactions on e-commerce sites operated by Alibaba Group Holding Ltd. Alipay subsequently expanded into a payments provider for a range of online, in-store and other retail and business transactions.

A predecessor to Ant was spun off from Alibaba in 2011, and the company became known as Ant Financial Services Group in 2014. It changed its name earlier this year to Ant Group. Alibaba, whose New York IPO raised $25 billion in 2014, currently owns a third of Ant, while Mr. Ma controls 50.5% of Ant’s voting rights, the filing said.

Alipay, which Chinese citizens use for a wide range of financial transactions, had 711 million monthly active users as of June, and more than one billion annual active users, according to Ant’s filing.

Ant said its revenue grew roughly 40% in the first half as well as in 2019, when it collected 120.6 billion yuan ($17 billion).

About 43% of its revenue last year came from what the company called digital payment and merchant services. Ant said Alipay handled 118 trillion yuan ($17 trillion) worth of transactions in mainland China in the year to June, and international transactions totaling 622 billion yuan. Alipay charges merchants fees based on a percentage of their transaction volumes, and more than 80 million businesses use its mobile app.

The bulk of Ant’s other revenue came from what it calls its digital finance technology platform, which collects technology-service fees from numerous banks, asset managers and insurance companies that use Alipay to make loans, sell mutual funds, insurance and offer other products to customers.

Ant said its consumer and small-business lending platforms had a 2.1 trillion yuan ($300 billion) credit balance and its wealth management platform facilitated 4.1 trillion ($590 billion) worth of investments as of June 30. Most of the loans have been funded by banks that the company partners with.

During the first half of 2020, Ant said the Covid-19 pandemic and resulting lockdowns hurt consumption across China, particularly in stores and other offline venues, and negatively affected growth in transaction volumes and the performance of its lending operations. Still, some analysts said big jumps in Ant’s first-half revenue and profits showed the company’s ability to withstand economic shocks.

“The Covid impact didn’t slow them much as expected; instead it provided a boost” to other online transactions and offset disruption in some areas, said Duncan Clark, chairman of BDA China, a business consulting firm, and author of a book about Jack Ma and Alibaba.

Ant’s filing Tuesday flagged regulation in China as a potential risk factor. It said that in 2019, the People’s Bank of China issued a draft regulation on financial-holding companies. It might become subject to that if the central bank moves forward with new rules.

The company has long contended that it is a technology company rather than a financial-services firm, a view that was behind its recent name change.

Ant also noted how geopolitical tensions between the U.S. and China have led to a worsening relationship between the two countries, resulting in “intense potential conflicts between the two countries in trade, technology, finance and other areas.” It said this has raised the prospect of increased regulatory challenges or restrictions on Chinese technology companies, including itself and Alibaba in a range of areas.

Two years ago, Ant was valued at $150 billion in a $14 billion fundraising round that drew large checks from both domestic and global investors.

The company’s filings Tuesday listed numerous domestic and foreign institutions as shareholders, including China’s national pension fund and other state-owned institutions; Singapore and Malaysia’s sovereign-wealth funds; units of private-equity firms General Atlantic and Warburg Pincus; the Canada Pension Plan; and mutual-fund managers T. Rowe Price Group Inc., BlackRock Inc. and Fidelity Investments. Some of these investors have significantly marked up the value of Ant shares they hold.

Ant’s coming listing will provide a big boost to China’s nascent STAR Market, which was established a year ago to draw listings from homegrown technology companies. Inside the company, the listing plan has been called “Project Star,” the Journal previously reported.

The company intends to use 30% of its IPO proceeds to expand its user base and on digital services, 40% on innovation, research and development, and the rest on cross-border payment and general corporate use, its filings said. Ant had 16,660 employees at the end of June.

Citigroup Inc., JPMorgan Chase & Co, Morgan Stanley and China International Capital Corp. were listed as joint sponsors of Ant’s Hong Kong IPO. CICC and China Securities Co. Ltd. are the joint sponsors of the Shanghai share sale.

Source: Wall Street Journal by Stella Yifan Xie and Jing Yang

Inside Ant Group’s Giant Valuation: One Billion Alipay Users and Big Profit Margins Inside Ant Group’s Giant Valuation: One Billion Alipay Users and Big Profit Margins Reviewed by TechCO on 8/27/2020 Rating: 5

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