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US$200b IPO for Ant will be a cheap buy
THE stock market continues to stampede away from the real economy. The US Federal Reserve is keeping near-zero interest rates and increasing its holdings in securities. All that liquidity has pushed the stock market to a record high. Apple has reached a US$2 trillion market valuation, the first American company to do so. It's in this environment that Ant Group has filed for its initial public offering (IPO). The Alibaba company reportedly wants a market valuation above US$200 billion. It'll be listed in Shanghai and Hong Kong as the largest IPO of all time. If all goes well, Ant will be bigger than Goldman Sachs or Wells Fargo. (clarification note)
Are the Chinese crazy? Or has the world sleepwalked for too long?
SHOW ME THE NUMBERS
Most startups lose money, even when they are unicorns. Uber lost US$8.5 billion in 2019, the year it was listed on the New York Stock Exchange. It's valued at US$55 billion today. General Motors, in contrast, raked in US$137 billion in revenue in 2019, but was only valued at US$42 billion. Clearly, the financial market values things differently. It goes wild especially when a promising startup shows substantial profits.
When Facebook went public in 2012, it was making US$1 billion profit. The company, priced at US$38 per share at the time, was valued at US$100 billion. The social networking giant's value has since ballooned to US$830 billion. Which brings us to the story of Ant.
Ant said it generated US$17 billion in revenue in 2019, a jump of more than 40 per cent from 2018. Profit last year was around US$2.5 billion. For the first six months of 2020, it made US$3 billion in net profit, on revenue of US$10.5 billion. That implies a remarkable net profit margin of around 30 per cent. Facebook's net profit margin was about 2 per cent when it was listed in 2012. It only grew to around 40 per cent by 2018.
With all these numbers, if you compare Ant with Facebook, a US$200 billion valuation looks almost conservative.
But how can Ant be so profitable as a young company? Why won't all its income go to fund projects as the company grows rapidly?
WHERE'S THE MONEY FROM?
At the heart of Ant is a product called Alipay. Alibaba created Alipay back in 2004 as a payment tool for its online marketplaces.
At the time, Internet retail was nascent. Logistics were spotty. There was little trust between buyers and sellers on the online platform.
Alipay did something new. It held the payments shoppers made when they ordered. Then it released the money to merchants, but only after shoppers confirmed they were happy with the goods they received. This way, Alipay had deterred scams and prevented fraud.
This "trust" angle resonates well. In February 2015, Alipay launched a campaign dubbed "You dare to pay, I dare to compensate". If a user suffered a loss due to online fraud while using Alipay, he or she was compensated in full.
Like all things in China, Alipay's growth was epic. It was able to capture a large group of first users. By 2019, the value of mobile payments in China reached US$49.7 trillion. Alipay accounted for 55.1 per cent of that market.
But it was collaborations with China's largest commercial banks, and Jack Ma's magic touch with regulators, that made Alipay, now part of Ant Financial, one of the world's most profitable startups. Ant's diversifications have turned it into the king of all fintech disruptors.
More than half of Ant's 2019 revenue came from financial services such as lending, wealth management, and insurance. These were all offered through Alipay. What Ant didn't do was mimic a traditional bank or insurance company. Had it done so, it wouldn't be as profitable and as scalable as it is.
Instead, Ant has focused on integrating third-party providers into its platform. With over 700 million users on Alipay, financial service companies have been eager to collaborate.
When a Chinese consumer gets online credit cards through Huabei, a business loan from MYbank, or their personal wealth management through Yu'ebao, it's all done with Alipay.
Ant then charges access fees to these providers. Then there are the proprietary offerings like Ant Insurance or Ant Fortune. The latter is now one of the largest money market funds in the world.
WHERE WILL ANT GO?
I remember visiting Ant's headquarters in Hangzhou 18 months ago. Sitting down with a manager, I asked about staff growth. Despite the runaway growth in revenue, Ant wasn't on a hiring binge.
"You don't need more people?" I asked.
"No. We automate everything once a new business stabilises."
"So where do those people go?"
"They go to develop another new business," the manager said.
A business is built by humans, then run by machines. Then the humans are redeployed to other ventures. It's a logical thing to do. But few companies besides Ant could do it with such ferocity.
Ant now has an extraordinary amount of data and world-class analytics. It can make instant risk and credit profiles of any consumer or business. And there is no doubt about Ant's international ambitions.
In 2018, it broke off talks to buy the American money transfer company MoneyGram after the deal failed to win the blessing of a Washington committee that scrutinises investment transactions for national security risks.
EYEING UNDERBANKED MARKETS
The dual listing - not unusual for Chinese companies - suggests that access to international financial markets remains on Ant's mind. American index funds can still include Ant's H-share, listed in Hong Kong.
The IPO might be a passive-aggressive escalation of China-US tensions, with Ant snubbing Wall Street. It's clear that Ant will focus on "nearby" foreign markets, like Southeast Asia or India. These are markets where consumers and businesses are underbanked, just like in China.
But this time Ant won't build those businesses itself. It will instead provide technologies and operational expertise to other mobile startups in those markets. This "coexistence strategy" already serves Ant well.
So is US$200 billion a cheap buy? Ant has made a US$3 billion profit in six months. Let's assume it stops growing for the next six. It'll still end the year with US$6 billion. Compare that to a truly mature tech company like Netflix, whose P/E ratio is around 80. It will still give Ant an estimated valuation of US$480 billion.
Obviously, all eyes are watching the IPO of the decade.
- The writer is LEGO Professor of Management and Innovation at IMD Business School in Switzerland and Singapore. Mark Greeven, Professor of Innovation and Strategy at IMD, and Jialu Shan, Research Fellow at Global Center for Digital Business Transformation, IMD, also contributed to the article.
Clarification note: The article has been edited to clarify that the US$200 billion market valuation came from media reports, and was not announced by Ant. It has also been edited to reflect that Ant Financial is now known as Ant Group.