Ant Group's Digital Treasure

Ant Group's Digital Treasure

by Pininvest Analysis

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Ant Group, the 33% owned Alibaba subsidiary, is China's technological wizard which expanded third-party digital processing - the original function of Alipay on Alibaba's platform - into digital integration of every aspect of China's finance - money markets, credit, insurance and wealth management

To imply that hopes at the announcement of the IPO for early November '20 were running high would be an understatement....

Ant Group's early November '20 IPO announcement had gained massive following with prospective shares subscribed 870 times over, in a frenzied rush of Mainland retail investors (although splitting the IPO between the exchanges of Shenzhen and Hong Kong and reservation of 80% of the shares - 69.57% including the 'green shoe' - to strategic investors did contribute to extreme and perhaps intentional scarcity....)

Expected to become the largest IPO ever, the listing was called off by the Chinese regulator just days before launch

Ferreting out the underlying motives in the debacle may be an impossibility because of so many overlapping factors – some of which fairly subjective, related to the personality of Alibaba's founder, Mr Ma himself, some reflecting China’s authoritarian government and some – probably more fundamental – credit risks of Ant’s business model

As this note will show, data collected by Ant from its immense following - 1 billion Alipay consumers, 500 million clients and 20 million businesses relying on credit serviced by the company - are a digital treasure and the foundation of its extraordinary valuation


For now, regulations seems to be the 'straw' breaking Ant's back

However, China's ambitions in the digital realm are still burning bright and seemingly contradictory options will need to be resolved

  • China's global ambitions - of which the outsized success of Ant is a standard-bearer - must be advanced
  • but the exposure of unbridled digital growth - of which Ant's willy expansion is the symbol - must be controlled

...pointing the way to a 'New Ant' ?

Instead of making history with a stock market debut raising an expected $35 billion, valuing the company at more than $313 billion and topping the world’s largest IPO to date, Aramco' $29.4 billion float in Dec. '19, the firm got…nothing

As discussed in ‘Ant Group, is a non-bank a bank?

Undoubtedly, by intervening at the very last minute, the heavy-handed approach of the regulators has put a dent in China’s effort to gain recognition as a world-class financial center

If China’s authorities were willing to bear the reputational costs to a financial and monetary strategy which has been years in the making, and which remains of paramount importance, the planned IPO must have been recognized as a landslide sweeping all before it

Ferreting out the underlying motives in the debacle may be an impossibility because of so many overlapping factors – some of which fairly subjective, related to the personality of Mr Ma himself, some reflecting China’s authoritarian government and some – probably more fundamental – credit risks of Ant’s business model

One might argue that the motives fed upon one another, building up pressure until the dam burst at the eleventh hour…and there should be a grain of truth to this ‘dynamic’ explanation


Morals and politics

It has been argued in a documented Wall Street Journal article,  Feb.16, 2021, quoting unnamed Chinese officials, that probes into Ant's complex ownership structure uncovered some key reasons behind the decision to halt the IPO

While subjective factors, such as extraordinary enrichment of some individuals, may have contributed in bringing out-of-favor political challengers to reckoning, it remains improbable that decisions regarding as influential a firm as Ant Group are about anything but control

Ant's ownership is unquestionably complex and deliberately obscure, linking successive layers of investment vehicles with ultimate ownership devolved to well-connected individuals in the Chinese power structures, but whether such frameworks are unique to Ant appears unlikely


Ant's growing dominance in China's financial landscape may be best understood as 'transactional'

Mr. Ma, Alibaba founder and guiding spirit,  has been careful in seeking official acceptance of his fast growing financial subsidiary - Ant Group, after all, is a private enterprise in a Chinese financial world which is anything but...

By sharing partial ownership of Ant between influential business leaders and with public enterprises such as China Life Insurance or National Council for Social Security Fund, China's sovereign wealth fund, China Investment or State-owned China Construction Bank, Mr. Ma was committing the financial establishment to his success

In seeking partial ownership by well-regarded foreign private equity funds as well, Mr. Ma was no less transactional to gain international credibility...


On the whole, it appears probable that conceptual choices regarding China's domestic financial system, and regional ambitions sustained by a network of Chinese third-party digital processors in South-East Asia, will weigh on Ant Group's future, while tactical 'point-scoring' against individual interest does not


The two faces of lending

The biface is a prehistoric stone implement flaked on both faces, the longest-used tool in human history

hand axe - a prehistoric biface - source -

Without being quite as ancient, the lending practice has duality in common with the biface, requiring knowledge about the borrower and willingness to take on the risk 

In focusing on the Group's lending activities, the disconnect between Ant's credit rating system and the Chinese banking system's risk exposure to actual loans is the central issue


What must have raised official concern, and what made Ant's credit rating unique, has been

  • the size of its data collection and the power of its analytics,
  • its exclusive knowledge of an ever-growing mass of digital transactions
  • and its ability to control - potentially - most of the loans underwritten by the Chinese banking system (without sharing the risk)

If this interpretation is accurate, one can only wonder how foreign investors could ignore the implications of the potential financial blow-up, when monetary regulators in their home countries effectively rely on anti-trust rulings and controls honed over decades 

Chinese and global investors committed $14 billion in June '18, valuing Ant at $150 billion, up from $60 billion two years earlier (April '16), at a time Ant's money market fund Yu'e' Bao was already under intense regulatory pressure

By '18 , within 4 years of its launch, the fund had come to dominate the money-market in China with almost 1/3 of net assets collected in China and 370 million subscribers, becoming the world's largest with $268 billion assets

As reviewed on the Indian site Your Story in August 2018, the writing was on the wall as early as 2015,  when more than 70 percent of Yu'e' Bao’s investments were locked in financial instruments of maturity higher than three months, whereas the Alipay facility backing the investment product offered same-day withdrawal facility to clients.

Not a healthy proposition when the clients are prone to promptly withdraw their funds following a dip in overnight returns on their investments

Regulations must have been unwelcome for Ant's managers but, by stemming the flow out of the banking system into Ant's fund and by encouraging competition (opening the Yu'e' Bao platform to third party funds), as discussed in 'Is Ant Group feeling antsy ?', they achieved their purpose

History may not repeat itself, but there cannot be any doubt that past regulatory experience will weigh in the pivot about to be foisted upon the Group


Data, a small matter of size

By way of digital payments handled by Alipay, the widely distributed third-party payment processor, Ant controls a data base with detailed information on the consumer profiles of 1 billion users of the app, and of 80 million businesses delivering the consumer purchases and buying merchandise themselves with the digital app

Providing insights in real time about credit worthiness of consumers and of small-to-medium businesses, the information collected from a still underbanked Chinese population, and the financial trail between merchants and their own providers, create a virtuous circle as more data becomes exclusive to the digital payment process, chipping away at the quality of banking credit evaluations over time

The business model, skewed in favor of Ant Group which collects a 'technology service fee', is

  • self-supporting as the data, essentially covering the entire Chinese population, accounts for ever more detailed spending profiles - from daily expenses to insurance and wealth management (also served by Ant)
  • untethered because Ant's loan 'advisory' does not expose the firm to any  significant exposure to capital risk (or regulatory constraint)

And also very profitable...the service fee - a commission on loan origination by Ant Group - is a 2.08% charge on the value of the loan, according to Forbes, alternatively estimated at 30%-40% of the interest on the loans facilitated, according to Reuters

Revenue on lending, from about half the 'legacy' digital payment business  generated by Alipay in 2018,  rocketed ahead in 2019 (+87%) and surpassed Alipay by mid-2020

in ¥ (billion) Lending Digital payment Total
2017 16,19 35,89 52,08
2018 22,42 44,36 66,78
2019 41,89 51,91 93,8
6m2020 28,59 26,01 54,6
(1) est.2020 57,18 52,02 109,2
    source Ant Group
    (1) based on 6m'20 * 2


in $ (million) Lending Digital payment Total
2017 2 348 5 204 7 552
2018 3 251 6 432 9 683
2019 6 074 7 527 13 601
6m2020 4 146 3 771 7 917
(1) est.2020 8 291 7 543 15 834
    source Ant Group
    (1) based on 6m'20 * 2
    RMB/USD - approx 1/0.145

With data at the heart of its oversized influence, Ant could still legitimately elude regulatory capital constraints but, without any 'skin in the game', the company was in fact pushing acceptance of FinTech innovation by the Chinese regulator to breaking point


Fintech lending...and more

Ant Group provides limited borrower information to about 100 banks

By relying on Ant's credit rating to underwrite loans, the banking system, especially the smaller banks, in fact lose direct access to the detailed credit information of their borrowers while they remain (almost) solely exposed to potential losses

On the other hand, by serving small-and-medium business which had been kept out of the loans underwritten by the major banks, Ant's processes have proven to be more inclusive and popular with the consumers

The firm's evaluation of creditworthiness has also been consistently very reliable: according to Group CEO Hu Xiaoming, the non-performing rate of small and micro-enterprise credit for Huabei and Internet Commercial Bank has risen from around 1.5% before the epidemic to around 2%.


As of June '20, Ant Group processed 1.7 trillion yuan ($263 billion) worth of consumer loans, of which 98% were underwritten by other financial institutions or securitized  - Ant holding on to 2% of the loans, an exposure essentially covered by the 2.03% fee levied by the company

Ant's loan origination grew by 38% in 2018/2017 and by 86% in 2019/2018 - with 2020 looking even better at the mid-year, when the IPO prospectus was made public

According to Reuters, Ant accounted for 21% of all short-term consumer loans issued by Chinese deposit-taking financial institutions by June '20, according to its IPO prospectus and People's Bank of China (PBOC) data

In the space of 4 years (2017-2020), the company was on the way to quadruple its lending fees and the volume of loans originated...Arguably, Ant was riding a wave of credit-powered consumerism in China, the like the world had never seen before


However, victim of its own success,  feeling presumably smug about the popular recognition of its model, Ant Group may have downplayed the inherent risk of a model allocating unsecured loans on the basis of fairly short term data history - not a prospect to be entertained 

The flaw in the analytical foundation of origination is further exacerbated by the lure of fast growth engineered by flexing rule stringency, resulting in a decline of loan quality - an unpleasant reminder of the sub-prime financial crisis 


To enhance the reliability of its prized data on every consumer and to profile the credit-worthiness of every business in a mirror image of retail turnover, Ant Group had many reasons to force the pace

Expansion at breakneck speed - from payments (in store and on platform) to financial services, money markets, insurance, loans and portfolio investment - kept testing the boundaries of regulatory tolerance

2019   in ¥ (billion) in $ (million)
digital payments 43% 51,91 7 527
micro lending 34,70% 41,89 6 074
weathmanagement 14% 17,4 2 523
insurance 7,40% 9,4 1 363
Total 100% 120,6 17 487
    source Ant Group
    RMB/USD - approx 1/0.145

With everything at size, 

  • the loans of RMB 1.7 trillion ($ 263 billion) benefitted 500 million users and 20 million businesses
  • digital payments managed by Ant amounted to RMB 118 trillion ($17.1 trillion), generating fees of RMB 51.9 billion ($7.5 billion)
  • commissions on wealth management of RMB 4.1 trillion ($0.6 trillion) amounted to RMB 17.4 billion ($2.5 billion)
  • commissions on insurance premiums of RMB 52 billion ($8 billion) reached RMB 9.4 billion ($ 1 billion) - with health insurance, launched in October '18 signing up 100 million customers within its first year alone....

Ant brought a digital transformation to every nook of the Chinese financial system, leaving the regulatory framework with an unenviable choice 

  • ad hoc regulatory constraints with unpredictable consequences on a global success story
  • or flexible remodeling of the Chinese financial system 


As will be discussed in 'Inventing New Ant', the - seemingly contradictory - options of the Chinese authorities are framed

  • by their global ambitions - of which the outsized success of Ant is a standard-bearer -
  • and by the exposure of unbridled digital growth - of which Ant's willy expansion is the symbol