Ant Group’s $200 Billion Hill Could Soon Become Mountainous
Ant’s IPO looks enormous but less so in the context of other, even pricier payment firms like Square and PayPal
Chinese financial-technology company Ant Group may sound small, but it could ride China’s technology-investment wave to grow into a market behemoth.
The company, controlled by Chinese billionaire Jack Ma, has filed for concurrent initial public offerings in Shanghai and Hong Kong. Ant is expected to fetch a valuation above $200 billion. With the company selling at least 10% of share capital, the IPOs could together amount to one of the largest listings ever.
Ant, a third owned by Alibaba, is perhaps best-known for its Alipay app, one of the two dominant mobile-payment systems in China. For the 12 months ended June, Ant recorded 118 trillion yuan ($17 trillion) of payment transactions. That includes Venmo-like personal transfers between users and payments to both online and bricks-and-mortar shops.
Yet while Ant is part of an effective duopoly in China’s mobile-payment market, that probably isn’t what investors are most interested in. Ant’s revenue from payment accounted for about a third of the total in the first half of this year, but that is equal to only 0.05% of Ant’s transaction volume. A big part of those transactions are personal transfers, which are mostly free, and Ant also charges very low take rates for merchants.
Ant likely isn’t making much profit from this segment but such cheap cost is part of the reasons why digital payment has become ubiquitous in China. Alipay had 711 million monthly active users as of June.
Instead, Ant’s user base in payment allows it to act as a platform to sell financial services including loans and insurance. Such businesses have been growing extremely fast: They accounted for 63% of Ant’s total revenue in the first half, compared with 44% in 2017. The company has a total outstanding consumer credit balance of $250 billion, for example.
In the past few years, Ant has switched from being a provider of such services to acting merely as a platform in most of these transactions. Ninety-eight percent of the loans originated on the platform are now either underwritten by partner banks or securitized. That allows Ant to earn higher margins and makes it easier to grow its business. The biggest risk remains tougher regulations should Beijing act more decisively to control the pace of debt growth at households and small businesses, which are Ant’s key customers.
At $200 billion, Ant will be valued at 37 times its earnings for the 12 months ended June. There will be plenty of investor appetite. Visa and Mastercard have an average price-earnings ratio of 44 while new fintech challengers like Square and PayPal trade at even higher multiples.
The buoyant Chinese stock market will no doubt give further help. A cool $200 billion might be just the beginning of Ant’s hill.