Ant Group’s IPO debut fiasco is set to cut the wings and dimple value

China’s surprise suspension of the Ant Group’s record listing of $ 37 billion (around Rs.275.100 billion) is likely to delay rather than destroy its prospects for a public debut, although the financial tech giant’s valuation and growth prospects will take a blow.

The Chinese regulators’ short-term ambush was viewed by analysts and investors as an attempt to downsize Ant founder Jack Ma and his financial services empire, but they expected it to eventually be listed in Hong Kong and Shanghai as planned.

“Ant’s business will likely be constrained by new financial regulations. As a result, the restarted IPO price will most likely be lowered,” said Andrew Collier, chief executive officer of Orient Capital Research.

Ant has tried to present itself as a tech company rather than a financial giant, and its valuation so far has benefited from its technical focus.

However, Chinese regulators are uncomfortable with parts of their sprawling empire, namely their lucrative online lending business, which accounted for nearly 40 percent of its total revenue in the first half of the year.

According to the draft regulations published on Monday, online lenders in China would have to raise more equity capital for loans, which is likely to affect Ant’s business model. Ants co-lending subsidiaries Huabei and Jiebei are also likely to stop selling wealth management products, according to analysts.

The China Securities Regulatory Commission (CSRC) said Wednesday that the latest regulatory changes could have a “big impact” on Ant’s business structure and profit model.

The suspension of the IPO is a responsible step for both investors and markets.

Collision course

The suspension was seen as a staggering rebuke for billionaire Ma, a former English teacher who built e-commerce giant Alibaba and its daughter Ant in two of China’s greatest success stories.

Ma’s net worth almost doubled to $ 59 billion (approximately Rs.4.38.650 billion) following its IPO, based on the valuation of Ant shares. Instead, his estimated net worth fell $ 3 billion (roughly Rs 22,300) after shares in Alibaba, in which he holds a 4.8 percent stake, fell 8.1 percent on Tuesday in New York.

Alibaba’s shares, which owns a third of Ant, fell 7.5 percent on Wednesday in Hong Kong and traded nearly 3 percent higher in New York.

The Shanghai Stock Exchange’s decision to suspend its IPO on Tuesday followed a meeting between China’s financial regulators and Ant executives, including Ma, who were told that the company’s online lending business would be under scrutiny, sources told Reuters.

The exact nature of the regulator’s concern and how long a suspension could last is unknown. The Shanghai Stock Exchange described the meeting as a major event that could result in Ant being banned from listing.

Ant said in a filing on Wednesday it would maintain close communication with regulators and the Hong Kong and Shanghai stock exchanges on the progress of its initial public offering and listing, and disclose information in a timely manner.

Ma’s public criticism of financial regulation last month as a stifling innovation had put him on a collision course with regulators in China, analysts said.

In the public interest

However, regulators also feel uncomfortable with banks increasingly using micro-lenders or third-party technology platforms like Ant to draw loans, amid fears that defaults could rise and loan quality deteriorate in an economy hit by the coronavirus pandemic.

Speaking at a regular press conference in Beijing, Wang Wenbin, a spokesman for China’s Foreign Ministry, said, “(The suspension) is a decision made to better protect the stability of the capital market and the rights and interests of investors.”

Mom and pop investors bidding $ 3 trillion (roughly Rs billion) in Ant, the UK’s annual economic output, were stunned after regulators saw the world’s largest stock had abruptly suspended market debut.

The IPO stop hurt not only Ant but also listed bank China International Capital Corporation (CICC) as it is likely to miss a high payday and a jump in global investment banking rankings.

Chinese state media described the move on Wednesday as necessary and in the public interest.

“The main message of the Chinese regulators’ intervention in Ant’s IPO is that this risk reduction agenda remains a top priority. No innovation is critical enough to create financial instability,” said Andrew Batson of Gavekal Research.

Batson said Ant will almost certainly return to the market but may need to make significant changes to its internal organization and business model to meet regulatory requirements.

Lower rating

Analysts pointed to a consultation paper issued Monday by the People’s Bank of China and the Chinese Banking and Insurance Regulatory Authority, which recommended tightening regulations for online micro-credit companies in anticipation of regulators’ move against Ant.

“It’s disappointing as all parties have done a lot of work, and we are still surprised that this new rule was not addressed sooner,” said a Hong Kong-based fund manager who bought shares in the IPO.

“The IPO will come back, but the timing is the question. And the rating will certainly be lower,” said the fund manager, who refused to be named because he was not authorized to speak to the media.

Iris Tan, a senior equity analyst at Morningstar, said regulators are aiming to improve the playing field for fintech players and traditional financial institutions, and that she expects Ant to need more registered capital for its consumer lending business.

Chinese bank stocks rose on Wednesday, reflecting the possibility of a level playing field. The CSI300 banking index rose 1.7 percent.

But few people were willing to guess how long the delay might be, or how far Ant’s rating might fall.

Ant had set the company’s listing at $ 315 billion (around Rs.23.41.600 billion). That would make it the fifth most important company in Asia and worth more than the Industrial and Commercial Bank of China, the world’s largest bank by assets.

© Thomson Reuters 2020

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