Ant Financial has raised another $10 billion from global investors valuing the company at around $150 billion, a price-tag that appears high considering brewing risks but broadly in line with its publicly traded peer group.
This fundraiser was an invitation-only event, attended by some of the world’s best-known investors such as Singaporean state funds Temasek and GIC, private equity firms Warburg Pincus and Carlyle, as well as the Canada Pension Plan Investment Board, according to a person involved in the offering.
Was that invite akin to a golden ticket to invest in the cream of China’s digital economy? Some might be sceptical given the speed at which Ant’s valuation has risen. The $150 billion valuation is more than double that of just two years ago, when Ant raised $4.5 billion of fresh capital. Ant, which was spun out of ecommerce giant Alibaba in 2011, is now the world’s most costly unlisted company.
Investors have found it hard to put a price on China’s flood of young and innovative companies partly due to their limited earnings history, China’s evolving regulatory regime and the companies’ typically large research and development expenditures.
“In these circumstances, traditional valuation methods such as discounted cash flow, valuation multiples or comparable transactions will either not work or yield unrealistic results,” noted valuation experts Duff & Phelps in a note to clients.
One veteran fundraiser in China said these difficulties resulted in a herd mentality among investors, who crowd into the largest companies and fundraising rounds under the illusion of safety in numbers.
“There are too many amateurs that invest with the brands,” Bao Fan, founder of China Renaissance, a boutique investment bank advising on Chinese technology companies, told FinanceAsia. He did not single out any particular company.
This concentration of capital in a handful of companies makes sound analysis of the fundamentals even more important to avoid the kind of sharp, large shocks and big portfolio loses that dent confidence in similar companies for a long while to come.
Goldman Sachs equity analysts stuck their necks out and valued Ant at $113 billion on a sum-of-its-parts basis, in a report to investors dated May 2.
Substantially more bullish, Barclays analysts raised their valuation on Ant to $155 billion from $106 billion on April 2, after a meeting with Ant’s management. Barclays puts Ant's enterprise value at a whopping 28 times its estimate of Ant’s 2019 net operating profit, less adjusted taxes, of $5.5 billion.
However, that multiple does not look stretched compared with Shenzhen-headquartered Tencent, which was trading on a 2019 P/E multiple of 28.99 times as of Monday.
Tencent is a useful yardstick by which to measure Ant even though its internet empire is much broader. Tencent’s popular messaging service WeChat has an integrated payments service, WeChat Pay, which is a formidable competitor to Ant’s core payments business, Alipay.
However, harder to plug into models are such risks contained in Ant’s bitter rivalry with WeChat Pay, China’s evolving regulatory framework for financial institutions and Ant’s acquisition strategy.
EXECUTION RISK
No doubt Ant is growing. The Hangzhou-headquartered company is using its payments service, Alipay, as is its gateway to into the lives of people around the world.
Goldman said it expected Alipay’s customer base of about 630 million people to expand to over 800 million by the end of its fiscal year ending March 2022. Goldman sees Ant’s annual active users growing from 520 million in 2017 to 885 million in 2023.
Ant had 870 million annual active users globally as of March 2018, together with its affiliates such as Indian ecommerce payment system Paytm.
Ant is busy signing up new merchants to add to its own platform, but is also buying promising fintech startups.
There is usually very little public disclosure about Ant’s acquisitions, such as the exact size of Ant’s stake nor the price paid. In a rare clarification Ant’s management told equity analysts in March the firm takes an equity stake of 20% to 40% in local partners, but that is still pretty vague.
“What should investors make of this deal mania?" asked analysts at Bernstein—rhetorically—about Alibaba, Ant and Tencent.
“Reconciliation seems an apt word, as Alibaba and Tencent are unlikely to take their foot off this pedal. We can at best hope that the money will be well spent and drive a strengthening of existing moats and the opening of new growth opportunities. As with flight, trusting the pilots is the only option at hand,” Bernstein analysts advised their investor clients.
But this can be a risky strategy. Take, for example, Alibaba’s Rmb18.1 billion ($2.8 billion) impairment charge for Alibaba Pictures. Booked in the financial quarter ended December 31, this underlined that there are meaningful risks of misallocation of capital.
Goldman values Alipay at 30 times 2019 earnings estimates. Visa is trading at a 2019 P/E multiple of 37.5 times while Mastercard is trading at 24.8 times.
ARCH NEMESIS
While Ant is growing rapidly, Tencent has the same idea. Tencent is unwilling to concede the field in offline retail payments which are also a gateway into Tencent’s digital marketplace. In the third quarter of 2017, Ant’s market share in total mobile payment volume in China was 53.7% while Tencent’s was 39.4%, according to Barclays and consultancy Analysys.
Both Ant and Tencent have built “walled gardens” within which they hoover up data from users of their payment apps so their merchants can tailor advertisements to sell goods within these ecosystems.
As Tencent said in its March earnings release, WeChat Pay is helping it to upsell more financial products, including wealth management services, consumer loans, and insurance.
While in this competition to lock-off market share, Ant is willing to tolerate zero-margin growth in payments to widen its funnel for opportunities to cross-sell more profitable products later. Margins in financial product areas outside of payments, are a fat 60% to 70% rates, said analysts.
Ant and Tencent’s subsidy war could, Bernstein analysts estimate, cost Ant $2 billion to $4 billion during its next fiscal year ending March 31, 2019. In its fourth quarter ended March 31, 2018, Ant booked a net loss as a result of aggressive offline promotions for payments in areas such as dining, transport, beauty and convenience stores via QR code scanning.
Bernstein analysts said on April 6 they had lowered their estimates of how much Alibaba would book from Ant from a quarterly profit of Rmb1 billion to a quarterly loss of Rmb1 billion for the next five quarters—partly due to the rivalry with Tencent.
WITHIN THE WALLED GARDEN
As Ant’s cross-selling gathers steam, its revenue mix will change. Long-term investors in Ant should be aware they will be holding a stake in a very different company within five to 10 years.
Users of all five of Ant’s main businesses — payments, wealth management, financing services, insurance and credit scoring — hit 60 million in March last year. Barclays estimated that measurement of Ant’s ability to cross-sell rose to over 100 million in March this year.
Ant is also looking to sell other financial companies’ products on its platform, creating a digital marketplace of financial services apps, APIs and analytics.
In May Ant said it had signed deals with Shanghai Pudong Development, Huaxia Bank and China Everbright Bank to help them become more digital in areas such as online risk management, artificial intelligence, supply chain finance, biometric identification and risk management.
Ant’s management told equity analysts in March that 50% to 60% of its revenues came from payments in 2017. Barclays estimates this proportion will shrink to one third of revenues in 2021.
Behind this drive is Ant’s ambition to become more of a technology services company than a bank, according to people familiar with Ant management’s thinking.
REGULATION
This shift would handily curtail the need for any punitive regulatory oversight that banks are subject to around the world.
China is mulling regulating large financial institutions that don’t neatly fit the label bank but might pose a systemic threat as ‘financial holding groups’. Such regulation could restrict intergroup transactions and introduce capital controls.
A pilot programme started at the beginning of this year, according to a report from Shanghai-based Yicai Media Group. Under the programme, Ant, China Merchants Group, and Suning Commerce Group are regulated as financial holding companies
So far, the experiment is in its early days, but it is likely only the parts of Ant that hold users’ capital, such as MYBank, would face stiff regulation, according to a person close to the company.
Ant has a 30% stake in MYBank which lends to Alibaba’s small to medium-sized merchants, while Ant also lends to consumers.
Goldman’s valuation of its lending businesses looks particularly ambitious here given the regulatory risks associated with Ant’s size, it has factored into its sum-of-the-parts valuation an earnings multiple of 20 times 2019 earnings, a premium to its Chinese online lending peers of around seven to 10 times.
This represents a risk to the large institutional investors that committed capital during the latest round of about $10 billion.
The fundraiser was the first time Ant included overseas investors, according to the person close to the company. In previous fundraisers Ant had only opened up to Chinese investors which made up 23.6% of the company prior to this latest fund raise, 15% of these were state-backed investors such as sovereign wealth fund CIC.
It will likely be Ant’s last round of funding ahead of launching a widely anticipated initial public offering, when investors at large will be able to buy into Ant.
It's time for a wider array of investors to become more familiar with Ant’s business profile—along with its risks and rewards.
