Ant Group’s long-awaited IPO
AThe IPO of nt Group should take place in October, with a double listing on the Hong Kong and Shanghai stock exchanges. It is expected to raise $ 35 billion, valuing the company at around $ 250 billion and making the largest IPO on record, surpassing the $ 25.6 billion raised by Saudi Aramco when it debuted last December.
To put the IPO and the valuation of Ant Group into perspective, as of October 7, Paypal [PYPL] the market capitalization is $ 227.8 billion and MasterCard [MA] the market capitalization is $ 343.9 billion.
It’s not hard to see why Ant Group’s IPO has generated such interest and significant valuation. In many ways, Ant Group is more like a credit card company than just a payment solutions company.
Historically, its digital payment and merchant services segment, the Alipay app, has been the main driver of revenue growth and is likely a major driver of the hype surrounding Ant’s IPO. Group. Reuters reports that Alipay was the main source of revenue in 2017 and 2018, but accounted for 36% of total revenue for the first half of 2020, which totaled 72.5 billion RMB, up 38% from the first half of 2019.
Alipay H1 2020 revenue – up 38% year-on-year
Alipay dominates the payment processing landscape in mainland China, where revenue is generated by charging merchants transaction fees. The company said it processed 118 billion RMB through its platform in the country in the twelve months ending at the end of June, while 622 billion RMB was processed overseas. This was a much higher amount than that managed by Tencent Holdings.  WeChat, further fueling anticipation of Ant Group’s IPO.
Although revenues generated by digital payments and merchant services have slowed due to the impact of the coronavirus pandemic on consumer spending, Ant Group has made up for this with its digital finance technology platform, which has contributed 63% of total revenue in the first half of 2020. The platform is divided into a consumer credit. company, a wealth management arm and a provider of insurance products.
Online loans to individuals represented 39.4% of total turnover in the first half of 2020. At the end of June, Ant Group’s CreditTech activity had a credit balance of 2.1 trn RMB, of which 1.7 trn RMB consumer credit, Reuters Noted.
Of Ant Group’s total sales in the first half of the year represented by online consumer loans
Almost all of its credit balance is underwritten by partners and financial institutions, which means there is little risk to the company’s balance sheet.
Reacting to the growth in Ant Group’s consumer credit business, Kevin Kwek, analyst at Bernstein, described the credit segment as potentially the crown jewel of Ant Group’s IPO:
“Everyone has heard of the ‘fintech model’ where information about online activity data will be used for underwriting and everything will happen digitally (and quickly, even instantly),” Kwek wrote in a note to clients. seen by MarketWatch.
“Everyone has heard of the ‘fintech model’, where information about online activity data will be used for underwriting and everything will happen digitally (and quickly, even instantly)” – Kevin Kwek, Bernstein analyst
“But to see growth on this scale was indeed a surprise,” he added.
Kwek explains that while the digital payments and merchant services segment may not have the potential for profit, it may be a ‘hook product’ to attract new customers, who might decide to take out a small loan. with the company later.
Assuming that each of the Ant Group’s 500 million current customers took out only one loan per year, Kwek calculated that the company would approve a new loan every 16 seconds.
Reduce the debt burden
That said, there are some caveats to consider before you get too enthusiastic about Ant Group’s IPO.
On the one hand, the financial uncertainty caused by the pandemic could lead to a deterioration in the quality of assets and a decline in household income. This could potentially lead to more defaulting customers.
Another potential challenge facing Ant Group’s IPO is China’s recent move to cut legal interest rates on private loans, which could reduce revenue generated by Ant Group through its credit division. for consumption.
The cap is to be lowered to an annualized rate of around 15.4%, although it has not been confirmed to what extent this would apply to fintech companies. The country’s government has taken this step to keep borrowers from getting into debt and to prevent companies from using aggressive tactics to drive those debts away. It is hoped that this could stimulate economic growth.
In the near term, however, all eyes will be on Ant Group’s IPO, to see if the company can live up to the hype.
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