China’s financial technology giant Ant Group, which was gearing up for the world’s biggest IPO, could see its valuation come crashing down after its public listing was suspended, experts said.
It comes as Beijing announced there will be proposed regulations on micro-lending — a move that could force Ant Group to hold more capital, and make the company look a bit more like a bank rather than a technology company.
“The biggest risk for Ant will be shifting from a fintech to a capital intensive regulated bank and not losing its competitive connection with consumers,” Eric Schiffer, CEO of private equity firm The Patriarch Organization, told CNBC by email. “The proposed regulation decimates Ant’s valuation to more than 1/2 taking it under $150 billion.”
Ant Group, which is a third owned by e-commerce giant Alibaba and controlled by founder Jack Ma, was set to start trading on Nov. 5 in Shanghai and Hong Kong. The initial public listing would have raised just under $34.5 billion — setting a new world record, and valued it at $313 billion.
But two days before that listing, the Shanghai Stock Exchange said it was suspending the IPO and that Ant Group reported “significant issues such as the changes in financial technology regulatory environment.” The shock move came after Ma appeared to criticize Chinese regulators and after he and two other other top Ant Group executives were called into a meeting with regulators three days before the listing.
Chinese regulators also released draft rules for the micro-lending sector in China last week, which could directly impact Ant Group’s business. The company’s biggest revenue driver is what it calls “CreditTech.”
Ant Group offers loans which are independently underwritten by the company’s partner financial institutions, which includes around 100 banks. The Chinese giant says that around 98% of credit balance originated through its platform as of June 30 2020, were by its partner financial institutions or securitized.
That allows Ant Group to tout itself as a capital-light business. But Beijing has proposed a joint lending model where internet platforms should fund no less than 30% of total loans. That appears to be the most significant point of the regulator’s draft proposals.
The result would effectively mean Ant Group needs to hold more capital. “This would mean a shift away from the ‘asset light’ model which makes it more like a tech company selling tech services, (to) more like a bank backing up loans with its balance sheet,” Kevin Kwek, managing director and senior analyst at Bernstein.
“Views on valuation will also be affected as a result since tech multiples are much higher.” Iris Tan, Morningstar’s senior equity analyst, estimated that Ant Group could be required to hold an additional 50 billion yuan ($7.56 billion) to 90 billion yuan under the joint funding proposal.
“Profit & loss impact should be insignificant, as the additional revenue as interests generated from self-funded loans should be able to cover expected credit losses in our view,” Tan said in an note published last week. “But the impact on valuation could be significant.”
Tan said Ant could top up its registered capital, shift the operating entity to a newly established consumer finance company and scale back their total consumer credit size.
“Ant isn’t short of the required capital today,” Bernstein’s Kwek noted. “The issue is more around the perceptions on operating model and potential constraints on growth in the future should capital not be sufficient.”