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It’s expected to raise $35bn, valuing the company in the region of $250bn and making it the biggest IPO on record, surpassing the $25.6bn Saudi Aramco raised when it debuted last December.
To put Ant Group’s IPO and valuation into perspective, as of 7 October, Paypal’s [PYPL] market cap is $227.8bn and Mastercard’s [MA] market cap is $343.9bn.
It’s not hard to see why Ant Group’s IPO has attracted such interest and a weighty valuation. In many ways, Ant Group is more like a credit card company than simply a payment solutions firm.
Historically, its digital payment and merchant services segment — namely, the app Alipay — has been the biggest driver of revenue growth, and is likely one of the biggest drivers of hype surrounding Ant Group’s IPO. Reuters reports that Alipay was the main source of revenue in 2017 and 2018, but accounted for 36% of total revenue for the first half of 2020, which totalled RMB72.5bn, up 38% from H1 2019.
Alipay dominates the payment handling landscape in mainland China, where revenue is earned by charging merchants transaction fees. The company reported handling RMB118trn through its platform in the country during the twelve months to the end of June, while RMB622bn was handled overseas. This was a far greater amount than that handled by Tencent Holdings’  WeChat, further fuelling anticipation for Ant Group’s IPO.
Although revenue earned through digital payments and merchant services slowed because of the coronavirus pandemic’s impact on consumer spending, Ant Group offset this through its digital finance technology platform, which contributed 63% of total revenue in H1 2020. The platform is split into a consumer credit business, a wealth management arm and a provider of insurance products.
Online loans to consumers accounted for 39.4% of total revenue in H1 2020. As of the end of June, Ant Group’s CreditTech business had a credit balance of RMB2.1trn, of which RMB1.7trn was consumer credit, Reuters noted.
Almost all of its credit balance is underwritten by partners and financial institutions, meaning there’s little risk to the company’s balance sheet.
Reacting to growth in Ant Group’s consumer credit business, Kevin Kwek, an analyst at Bernstein, has described the credit segment as potentially the jewel in Ant Group’s IPO crown:
“Everyone has heard of the ‘fintech model’, where data insights from online activities will be used for underwriting and everything will happen digitally (and quickly, even instantaneously),” Kwek wrote in a note to clients seen by MarketWatch.
“But to witness the growth at this scale was indeed a surprise,” he added.
Kwek explains that, while the digital payments and merchant services segment may not present profit potential, it can be a “hook product” to attract new customers, who might decide to take out a small loan with the company further down the line.
On the assumption that every one of Ant Group’s current 500 million-strong loan customer base took out just one loan in a year, Kwek has calculated that the company would be approving a new loan every 16 seconds.
Reducing debt burdens
That said, there are caveats to be considered before getting too enthusiastic about Ant Group’s IPO.
For one, the financial uncertainty caused by the pandemic could lead to asset quality worsening and household income dropping. This could potentially lead to more loan customers defaulting on repayments.
Another potential challenge facing Ant Group’s IPO is China’s recent decision to slash legal private lending interest rates, which could reduce the revenue Ant Group accrues through its consumer credit division.
The ceiling is to be lowered to an annualised rate of around 15.4%, although it hasn’t been confirmed to what extent this would apply to fintech firms. The country’s government has taken this step to stop borrowers from being burdened with debt and to stop companies from using aggressive tactics to chase said debts. It’s hoped that this could stimulate economic growth.
In the near-term, though, all eyes will be on Ant Group’s IPO, to see whether the company can live up to the hype.
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