Jack Ma's Ant is more Mastercard than PayPal

[HONG KONG] Valuing billionaire Jack Ma's Ant Group, which filed its prospectus for a mega initial public offering (IPO) on Tuesday, will be more art than science. It looks like a financial-services company but sells itself as a technology firm. Is it a Mastercard or a PayPal?

On a number of counts, Ant is more like the former.

First, the company has made a lot of progress diversifying its business operations over the past year. Online loans to consumers and small businesses have overtaken mobile payments - the segment Ant is best known for - as the group's largest revenue generator, accounting for 39.4 per cent of the 72 billion yuan (S$114.29 billion) business for the first half. As at June, its lending platforms had a 2.2 trillion yuan credit balance.

Then consider the company's loan offerings. There's Huabei, a revolving credit product that gives consumers interest-free loans for up to 40 days. And for cash loans on larger consumption transactions with no strings attached, borrowers can go to Jiebei. Most interest rates at these two platforms are capped at 0.04 per cent daily, or 15.6 per cent on an annualised basis. Both are unsecured.

The way Ant handles credit risk looks a lot like a credit-card company, too. The prospectus repeatedly reminds readers that Ant doesn't use its own balance sheet or provide guarantees. As at June, about 98 per cent of its credit balances were underwritten by partners, such as banks or trust companies, or packaged and sold off as asset-backed securities. Ant, in turn, earns service fees from its partners.

Ant also has its own licensed small-loan subsidiaries that provide consumer-credit loans through its CreditTech platform. Loan receivables enabled and retained by these totalled 36.2 billion yuan at the end of June.

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Ant has tried to beef up its technology credentials, boasting that 63.9 per cent of its 16,660 employees work in technology functions. But since it's responsible for loan-collection services for its financial partners, you can bet management is more concerned with credit cycles and delinquency rates than Big Data algorithms.

Ant says it will rely on "intelligent decisioning systems" to ensure it takes on worthy borrowers before passing them on to partners. But what happens when that system doesn't work? "In the event that the creditworthiness of borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be rendered ineffective," according to the prospectus.

In the current economic environment, that's a big if. The company acknowledges in its filing that it hasn't tested a full credit cycle in China.

As asset quality gets worse and household incomes drop amid Covid-19, Ant's delinquency and default rates could climb. So while the company doesn't hold the loans itself, Ant will likely end up being a significant doorkeeper for its partner banks and trust companies, which are already laden with bad debt. Over the past six months, delinquency rates on consumer loans past due by over 30 days rose to 2.97 per cent in July from 1.76 per cent in January, after peaking at 3.01 per cent in May.

Having deep trenches in the financial sector also means Ant will be subject to a shifting regulatory landscape. On Aug 20, for example, China lowered the cap on interest rates for private lending to 15.4 per cent. While this ruling doesn't apply to licensed players like Ant, the company acknowledges it needs to prepare for the possibility that the regulation will be extended to its small-loan subsidiaries.

With the information available, putting a fair valuation on Ant will be difficult. The company breaks down its revenue by segments, but not at the cost or profit levels. We can only speculate that its newer digital-finance business, from online loans to wealth management, is highly lucrative, because Ant's gross and operating profit have risen.

We also have little sense of how volatile Ant's earnings can be. In its filing, Ant disclosed annual - not quarterly - figures for the three years through 2019. That could obscure its sensitivity to Beijing's policy flip-flops. Starting late 2017, for example, Ant had to drastically alter its online credit business as Beijing launched sweeping regulations to clamp down on debt.

There are many mystic animals in Chinese folklore; some take the head of an elephant and the legs of a monkey. Ant could end up having aspects of both Mastercard and PayPal, or neither. Until it discloses more information, we won't know how to value it.

BLOOMBERG