Valuation in Focus as Ant Financial Creeps Toward New Funding
A new round of capital-raising taking place at Ant Financial Services Group has investors guessing where the valuation dial will end up for a company that is arguably China’s oldest financial technology (fintech) firm.
Some bulls are saying the affiliate of e-commerce giant Alibaba Group Holding Ltd. could be worth as much as $150 billion, making it the world’s largest fintech and worth about half as much as leading Chinese lender ICBC. But tougher financial regulations and intensifying competition in China suggest a bumpy road ahead for the operator of the Alipay mobile-payment service, leading more conservative observers to suggest a value closer to $100 billion.
Singaporean sovereign wealth fund Temasek Holdings and U.S.-based private equity firms Warburg Pincus and Silver Lake Partners are discussing a potential investment with Ant Financial in its latest capital-raising round, sources told Caixin. U.S. private equity firm General Atlantic is also looking to invest, according to The Wall Street Journal.
As talk of the latest funding swirls, Barclays has jacked up its estimated valuation of the company to $155 billion from $106 billion, citing rising consumer engagement across the firm’s five financial services — payments, wealth management, financing services, insurance and credit scoring. Barclays reached that conclusion using the forecast 2019 valuation multiple for Tencent Holdings Ltd., whose own electronic payment system is Alipay’s closest competitor.
But the actual figure could be closer to $100 billion, according to a Hong Kong-based analyst at a European investment bank, speaking on condition of anonymity due to the sensitive nature of the topic.
The valuation debate comes as Alipay and Tencent’s payment service connected to its popular WeChat social networking platform emerge as the two dominant players in China’s lucrative third-party payments market.
Alipay’s share of the mobile-payment market rose to 54.3% in the fourth quarter of 2017, up slightly year-on-year, according to Beijing-based research firm Analysys (link in Chinese). By comparison, Tencent’s market share rose more than 1 percentage point to 38.2%.
Banking on Alibaba
Alipay enjoys a clear advantage as the official payment platform for Alibaba, the world’s largest online retailer. The service is also a leader in payments at traditional stores thanks in part to an aggressive buying spree of such stores by Alibaba, one of Ant’s largest shareholders.
Over the last two years, Alibaba has spent about 80 billion yuan ($12.7 billion) in pursuit of a “new retail” strategy that combines its strength in e-commerce with more-traditional offline shopping. Its investments have included department store operator Intime Retail Group, and supermarket chains Sanjiang Shopping Club, Lianhua Supermarket and Sun Art Retail Group.
But Tencent has fought back with its own traditional-retail buying spree, and is gaining ground through those efforts. In just a few months starting late last year, Tencent invested more than 20 billion yuan in retailers that include supermarket chain Yonghui Superstores, French grocer Carrefour SA, mall operator Wanda Commercial, menswear company Heiland Home, and BBK Electronics. Although its stakes in the companies rarely exceeded 5%, the investments have given it access to nearly 7,000 individual retail outlets.
In March, Carrefour and BBK Electronics dropped Alipay in some regions, accepting only WeChat. Tencent also struck a deal with Walmart, in which the global giant’s stores in western China would accept only WeChat’s payment service.
In April, Tencent signed a strategic cooperation agreement with China Resources Group, which operates the largest network of retailers in China, including supermarkets, department stores and retail property.
“At the worst time two years ago, Alipay’s market share for offline payments was one-fourth of WeChat in some cities,” a person with knowledge of Ant’s operations told Caixin earlier this year.
Financial institution or technology company?
Comparisons between Ant Financial and Tencent have led many to look at the former like a financial institution, while the latter is more like a technology company. Ant Financial lacks a star technology guru in its highest ranks, and few of the company’s senior executives started out as programmers or developers.
By comparison, Tencent has gained a reputation for its tech-savvy products that are well-designed to meet user needs. Senior Executive Vice President Zhang Xiaolong is credited with developing WeChat, which now enjoys around 1 billion users, and Zhang is revered by many as the “godfather” of product development. Zhang enjoys high status within Tencent, and earns more than Tencent President Martin Lau, according to previous media reports.
By comparison, Ant Financial has focused on developing more-traditional financial services supported by its high-tech base. In addition to Alipay, Ant Financial also runs a money market fund and offers a wide range of different types of loans focused on consumers and small businesses.
Those diverse offerings have helped Ant Financial reduce its reliance on Alibaba, which now brings in less than 10% of the company’s business, Barclays said, citing management. Payment revenues accounted for 50% to 60% of the company’s total last year as other financial services ramped up, management told Barclays.
Despite its clear roots in financial services, Ant Financial leaned heavily for years on its status as a technology company to avoid tougher regulation meted out to financial firms. But that has changed over the last two years, as regulators chase Ant Financial and other fintech firms over concerns about managing systemic risk in China’s diverse financial sector.
That clampdown is showing signs of crimping growth at many of Ant Financial’s diverse businesses. One such business was Yu’e Bao, which started out as a place for Alipay users to park their spare change to earn some extra interest. But after users realized they could often get better returns in Yu’e Bao than traditional bank accounts, the service quickly snowballed into the world’s largest money market fund, worth $165 billion in last year’s first quarter.
As regulators zeroed in on the product and its potential for systemic risk due to its huge size, the fund had to start limiting its own growth.
Tianhong Asset Management Co., which manages the fund, cut its limit on individual contributions to 250,000 yuan from 1 million yuan in mid-2017. It later made further reductions, with the latest limit now set at just 20,000 yuan.
Early this year, regulators also met with Ant Financial over the high leverage ratio of its small-loans business. The company was told to either increase its capital or reduce the growth of the business, Caixin learned from people with knowledge of the matter.
Big changes are also coming for Ant Financial’s payment business. According to requirements from the central bank, third-party payment providers like Alipay will be required to link up with a new centralized online clearing platform under the central bank starting June 30. By requiring providers to route all payments through the platform, regulators hope to stop payment companies from pooling customers’ money in their own accounts for investment or other unintended purposes.
As more of Ant Financial’s businesses fall under stricter regulation, the dividends it earns from its previous risk-taking and trend-setting status are bound to diminish, observers say.
Internally, Ant Financial has also struggled with its own identity over whether it is a financial services or tech company — a debate that has significant implications for its future strategy.
Internet companies are all about scale, often gambling with a winner-take-all approach that spares no expense and often chalks up big losses in the early stages. The financial sector is more conservative, focused on setting limits and managing risk, especially in the face of tightening regulation.
Ant Financial has had the best of both worlds so far, enjoying its current status as China’s oldest and largest fintech firm — something investors haven’t missed. The company has become an investor darling, raising major fresh capital twice over the last three years. The company was valued at about $45 billion after the first of those fundings in 2016, then saw the number grow to $60 billion just a year later.
A person with direct knowledge of the matter told Caixin those early fundings may have yielded artificially low valuations because they were made at a discount to attract big state-run investors. In fact, the source added, Ant Financial’s true value at the time of the 2017 funding was probably closer to $100 billion.
Ant Financial’s largest state-owned backers include the National Social Security Fund and China Investment Corp., with 5% and 3% of the company respectively. Compared to the earlier two rounds, the latest round is more high-profile, as market watchers speculate on the size and valuation the company will get.
“They can grab shares by announcing their intention, let others know who is interested so they may invest as a consortium, or scare away potential investors with a high valuation,” a contact from a large domestic private equity firm told Caixin, commenting on the high level of chatter surrounding the latest fundraising.
An employee at a firm that participated in Ant Financial’s second funding told Caixin he had not received any internal communication suggesting his company would invest during the most recent round. “$150 billion is very expensive. I think only major overseas private equity firms can afford it,” the employee said.
Contact reporter Liu Xiao (firstname.lastname@example.org)
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