The downfall of the Ant Group and what exactly is happening
By Chloe Chan, Research Analyst at King's Global Markets
Many might have already heard of the Chinese tech giant Ant Group’s IPO; it was initially rumoured to be the world’s most valuable IPO, potentially setting a record of $35 billion.
Ant Group is an affiliate company of the Chinese Alibaba Group. The group owns the digital payment platform and service Alipay, which is the largest in China, serving nearly 1 billion users and over 80 million merchants. Alipay was rebranded as Ant Group Services in October 2014. Its initial funding was from instructional investors, such as China Investment Corp, CCB Trust, China Development Bank Capital etc. As of Q2 of 2016, Credit Suisse estimated that nearly 58% of China’s online transactions were undertaken by Alipay. In 2018, the company experienced a failed attempt to acquire MoneyGram International, as the Committee on Foreign Investment in the United States rejected the deal due to national security concerns. Simultaneously, Ant Group was reprimanded by the Cyberspace Administration of China, stating that they failed to meet China’s personal data protection standards.
Ant Group’s IPO would be a duo-listing in the Asian financial hubs, i.e. Hong Kong and Shanghai. This has been considered an interesting proposition for Chinese companies to increase their exposure in Asian equities markets and also to open up China’s on-shore IPO market. This would be nearly 17% higher than the current record of Saudi Aramco’s $29.4 billion IPO in 2019. The IPO was initially filed in August 2020, where the company planned to raise $30 billion. Following the reported net profit of $2.6 billion in 2019, the IPO price rose to a total of $34.5 billion. At that point in time, Ant Group’s valuation has risen even further per its previous valuation, which marked it as the most valuable tech startup of all time, up to $313 billion.
In both stock exchanges, prior to the scheduled IPO date, there were reports of a possible equity shortage for the stock, with both markets reaching a retail demand of nearly 3 trillion USD. The Ant stock seemed to be extremely popular amongst both retail and institutional investors. In Shanghai, the IPO rounded nearly 19 trillion RMB of bids from retail investors alone, which was more than 870 times the number of shares set aside for this leg of the duo-listing. In Hong Kong, the stock also experienced an over-subscription of nearly 390 times, with a total of 1.3 trillion HKD. Given the nature of Ant Group being an e-commerce platform which utilises blockchain technology, this phenomenon was expected by most analysts and shows that the future would be quite reliant on these services as the world becomes increasingly globalised. The IPO was scheduled to happen in Q4 of 2020.
However, just 5 days before the scheduled listing date on 5 November 2020, the company released a statement announcing the suspension of the IPO in Shanghai and Hong Kong. Following this, banks that were underwriting its equities and facilitating the subscription process announced that they will give back or “refund” to all retailers involved. The Wall Street Journal reported that the Chinese Communist Party Chairman Xi Jinping personally made the decision to suspend the IPO. On 26 December 2020, the Ant Group was reportedly ordered by the central bank of China – People’s Bank of China – to rectify its business model and formulate a timetable for its future course of action and implementation of short-term plan. The central bank has also summoned executives from the company, raising issues that Ant Group “lacked a sound governance mechanism, defied regulatory compliance requirements and engaged in regulatory arbitrage”.
The world seemed to be quite shocked following the suspension announcement, and many have begun speculating the causes of the IPO suspension. There are a vast number of explanations, yet most seem to point towards the direction of anti-monopoly concerns. Simply put, the Chinese regulatory bodies and other relevant authorities are concerned with the dominance of Ant Group in the e-commerce and online payments industry, and hope to promote competition and allow other firms to enter the market. Based on the People’s Bank of China’s statement, Ant Group was heavily criticised for utilising its market position to actively exclude rivals and to harm its consumers' rights and interests. The official reason for the IPO suspension is the anticipation of regulatory changes, which was followed by the launch of anti-monopoly investigations into Chinese e-commerce firm Alibaba Group, that holds more than 33% stake in Ant Group.
Currently, Ant Group has been instructed to establish a separate financial holding company with sufficient inventory of capital. The central bank has advised Ant Group to return to its original services, i.e. being a payment platform, and to improve transparency around transactions which would subsequently promote fair competition. Most importantly, Ant Group has to improve its corporate governance model that complies with the regulatory requirements. Ant Group has stated that it “appreciates the financial regulators’ guidance and help” and has set up an investigation group to help with compliance and enhance risk management and control. The company sees this as an opportunity to strengthen the foundation of its business, “to grow with full compliance, and to continue focusing on innovating for social good and serving small businesses.”
However, one believes the optimism might not stand in this situation. The IPO suspension as a result of change in regulatory measures is due to the Chinese central government and the CCP’s increased scrutiny in the country's internet sector. It is a known fact that China’s “hypercapitalist model” involves a high degree of government intervention and any business is considered to pose a threat if it captures too much market share. The new orders from authorities would mean that Ant Group’s expansion and its lucrative finance business would have to be restructured. Its expansion into being an insurance and credit provider and various investment products would also be under heavier scrutiny. It is likely to be an alteration — specifically, a decrease — in the company’s record-breaking valuation.
In terms of the wider implication towards the entire economy in general, the draft rules released in November state that the government is concerned with the prevalent anti-competitive practices within the e-commerce industry. There has been a decreasing tolerance towards firms that sign exclusive agreements with chosen merchants and use subsidies to force competitors to exit the market. It is also concerned with the increasing dominance of certain internet companies and their ability to utilise exclusive contracts, predatory pricing and various tactics to promote unfair competition. Despite the validity of such concerns, one sees this as a possible setback to China’s growing internet and e-commerce platforms. It is likely to hinder the growth of the industry — not only on a national level, but also globally — especially when the services that these firms provide allow for cross-border transactions. Finally, this also poses other issues, including data protection, the control of data and privacy.
At the moment, Ant Group has not announced any plans on another attempt at a stock listing. However, industry experts have speculated the possibility of the IPO to happen at the earliest, in 2022.
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