Is Ant Financial feeling antsy ?

Is Ant Financial feeling antsy ?

by Pininvest Analysis

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Ant Financial, Alibaba's minority holding, is at the forefront of China's financial revolution - a "must-have" investment for sovereign and private equity funds, at vastly inflated prices

But China's financial regulators are containing Ant's expansion in asset management. Rolling back its flagship fund, the company is seeking new venues of growth as technology purveyor 

Fintech writ large - but still, not the same thing ...

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In our report on "Change agents in 21st century China", we highlighted how the mobile applications of third-party payment systems acted as a catalyst in China's retail (and banking) revolution

On the forefront, Ant Financial Services, which owns and operates China’s largest online and mobile-payments network Alipay, supporting Alibaba   merchants and consumers, is about financial technology, writ large

  • with more than 700 million annual active users globally (a 200 million user increase year-on-year)– of which 520 million in China – and a 54% market share as of Q1-2018, Alipay is the largest operator in China, followed by Tencent’s WeChat 40%
  • on a 2017 revenue of $8.9 billion, 55% is estimated to be mobile payment related, but the share is expected to fall to 35% by 2021 as the company focuses on higher margin data services

 

A comet striking China's fund management industry

Established in October 2014, Ant Financial has grown far beyond the Alipay mobile wallet, integrated originally on the Alibaba payment platform with the launch of a monetary fund, Yu’e Bao

Initially planned as option for Alipay clients to park idle cash temporarily, the fund’s short term yield vastly exceeded the 1.5% offered by traditional banking on one-year deposits, resulting in a stampede and concurrent withdrawals of bank deposits and becoming China’s largest money market fund

Extending their footprint and building on the sucess of Yu'e Bao, Ant’s businesses have come to include the online bank MYBank, a credit scoring service Sesame Credit, a lending marketplace Zhao Cai Bao and Ant Fortune, a wealth-management service

Within four years, Yu’e Bao collected  $266 billion in assets from its 370 million account holders in Q1-2018, which compared with the largest US ETF, SPDR S&P500 , and dominates the money-market fund market in China with almost 1/3 of net assets collected in China

Source Beijing Youth Daily (by Asia Times)

Ant Financial today serves more users than some of China’s largest banks, which themselves are considered systemically important global financial institutions by the Financial Stability Board, an international body that monitors the global financial system

Forcing Chinese regulators to step in, the fund has been subject to increasingly stringent regulations to rebalance assets across financial institutions

The shift comes as Chinese authorities have become wary of systemic risk, brought about by financial holding companies and conglomerates running various types of financial services

  • New liquidity rules require money-market funds to boost holdings of higher-quality short-term debt securities and imposed stricter capital reserve regulations
  • Yield has been managed down substantially under increased reserve obligations and liquidity focus on safe lower-yield securities
  • Voluntary daily withdrawal limits constrained client flexibility
  • Voluntary limitation to the size of individual accounts were introduced in 2 stages

Transforming the platform in a fundamental way, 11 competing money funds have been posted on the Yu’e Bao platform, collecting about $ 80 billion in 6 months since March ’18

As a result, assets dropped by 20% over 6 months to September ’18 on Yue' Bao – to ¥ 1.324 billion ($ 190 billion)

The severe regulatory pressure, combined with aggressive marketing in China and ambitious international investments, has started to take its toll

Pre-tax losses, resulting in a reversal of royalty fees to Alibaba of $114 million in Q1 and $ 132 million in Q3-2018, were estimated at around 1.9 billion yuan ($280 million) for the first 9 months 2018, according to the Wall Street Journal (paywall)

As Eric Jing, Ant Financial’s executive chairman and CEO, is on his way to reinvent the business model of Ant, the huge valuation, recently recognized to the company, is a tall order and a challenge to overcome

 

Talking real money

At $150 billion, Ant Financial has become  the world’s most valuable private financial-technology company

The latest private equity round for Ant Financial raised $14 billion in June ’18 from local Chinese and global investors

  • China's sovereign wealth fund, China Investment, State-owned China Construction Bank, National Social Security Fund and big state insurers were listed as local investors from previous funding rounds
  • Global investors of the most recent round included Singapore’s sovereign funds Temasek Holdings and GIC, Malaysian sovereign fund Khazanah Nasional Bhd, US private equity Warburg Pincus, Canada Pension Plan Investment Board, Silver Lake and General Atlantic as major investors.
  • US private equity firm Carlyle Group, venture capital firm Sequoia Capital, T. Rowe Price, Janchor Partners, Discovery Capital Management, Baillie Gifford and Primavera Capital Group were also involved


The rise in valuation to $150 billion, from about $60 billion after its previous fundraising of $4.5 billion in April 2016, was based on recent – though incomplete – company releases

  • 70% of revenue could derived from on-line payments, according to Jefferies analysts – valuing Ant in line with Paypal  at 7*2019 sales and $133 billion
  • Pre-tax 2017 earnings estimates of 13.2 billion ($2.1 billion) could imply a P/E (pre-tax) of 71 for a valuation of $150 billion

Given the unique opportunity to invest in what promises to be the world’s largest financial market, foreign investors could be forgiven to overlook the transformation from dominant player in the fund market to open platform

But justifying the June ’18 valuation has not become any easier and it is fair to assume an IPO is not in the cards any time soon…nor does it need to be

 

The vast ambitions of a mega-fund

Source Photo by David Higgins on Unsplash

“China’s market is too big, too valuable, and has too much untapped potential for international players to ignore “ in The Rise of Fintech in China, A DBS Bank & EY report, November 2016

But the company's outsized valuation is calling today for an outsized business strategy, to strengthen the grip of Ant Financial on China’s financial markets

  • by tracking the inefficiencies of China's financial system
    • beyond the tidal wave of mobile payments, online savings/investment, online lending and credit reporting systems
  • by giving true measure to its technological advance in the banking service industry
    • with "industry leading, financial-grade technologies in blockchain, artificial intelligence (AI), security, Internet of Things (IoT) and computing (BASIC)", in the words of Mr. Jung
  • by  extending the company's footprint internationally
    • serving Chinese visitors abroad (120 million / year),
    • expanding in South-East Asia with partners and subsidiaries
    • and making headway in Western international cash transfer

 

The ambitions of Ant Financial will meet head-to-head with Tencent , its strong challenger in mobile payment and with the large financial institutions of China

 

The challenge wil be discussed in our forthcoming comments on Fintech in China

The answer to our title question however - is Ant Financial feeling antsy ? - is 'probably no...'

Exploring new opportunities, Ant may feel revigorated...