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1) IPO details and timeline
2) Overview of business segments
3) Historical revenue & profit growth
4) Future growth potential
5) Valuation (P/E ratio & dividend yield)
6) Valuation versus peers
7) Sizable ETF buy flows post-IPO is supportive to the share price
8) Key risks
Appendix 1: Ant Group’s corporate milestones
Appendix 2: Post-IPO shareholding structure
The InvestQuest’s View
We find Ant Group’s valuation modestly attractive, backed by decent growth potential across its various business verticals. Valuations are in-line with other mega-cap China tech stocks and slightly cheaper than US-listed payment providers. Strong institutional and retail demand should result in a solid post-IPO performance. In addition, potential ETF buy flows on Ant Group’s H-shares is significant and will be supportive to the share price in the weeks following the IPO.
1) IPO details and timeline
Key Details of the IPO
- Number of shares offered: 1,670,706,000 H-shares + 1,670,706,000 A-shares (in total representing 11% of the company’s post-IPO shares)
- IPO price: HKD 80 per share / RMB 68.80 per share
- Total capital raise: Approximately US$34.5bn
- Stock ticker: 6688 HK (H-share) / 688688 CH (A-share)
- H-share offering tranches:
- International placement (1,628,938,000 shares or ~US$16.8bn value), offered to institutions and clients of the bookrunners
- Hong Kong public offer (41,768,000 shares or ~US$0.4bn value), offered to retail investors
- Ant Group’s total outstanding shares post-IPO (A-shares + H-shares): 30,376,487,820 (comprising 76.97% in A-shares, 23.03% in H-shares)
- Post-IPO market cap: US$314bn, based on IPO price
Do note that the above figures do not include the exercise of the over-allotment option, where up to an additional 15% of IPO shares may be issued, raising an additional ~US$5.2bn in cash proceeds.
For the purposes of this article, we will be focusing more on the H-share offering. The H-share IPO prospectus may be retrieved from this page.
Use of IPO proceeds (H-share)
Of the HKD 132bn of net proceeds raised from the H-share IPO, it is expected to be used in the following ways:
Timeline of IPO (H-share)
- Opening date and time for the Hong Kong public offer: 27 October 2020 (Tue)
- Closing date and time for the Hong Kong public offer: 30 October 2020 (Fri), 1130am
- IPO allocation results announced: 4 November 2020 (Wed)
- First day of trading on Hong Kong Stock Exchange: 5 November 2020 (Thu), 9am
2) Overview of business segments
How it all started
When e-commerce first took off, there was an inherent trust issue faced by both buyers and sellers. Buyers weren’t willing to pay before they received their goods, while sellers weren’t willing to ship out their goods without receiving payment.
That’s where Ant Group stepped in with their “Alipay” solution, holding the buyer’s cash and only releasing it to the seller once the goods have been received.
Ant Group’s business segments today
Of course, Ant Group has evolved a lot since then in terms of its service offering, as we can see in the image below.
The Ant Group of today operates two main business units, “Digital Payments & Merchant Services” and “Digital Finance Technology”.
1) Digital Payments & Merchant Services
“Digital Payments & Merchant Services” relates to digital payment services offered by the Alipay app, which generated 40% of Ant Group’s total revenue in the past year. The percentage contribution from this segment has declined from 55% in 2017, as the company has moved to diversify its income streams.
2) Digital Finance Technology
“Digital Finance Technology” relates to the company’s periphery services such as the provision of credit (loans), investments and insurance. Just to give a bit more detail on the various services shown in the above image:
- CreditTech (loan products)
- Huabei: Unsecured revolving loan product for everyday expenditure, targeted at younger individuals with no access to a credit card or have insufficient credit limits. Users enjoy a 40-day interest free period per purchase.
- Jiebei: Short-term unsecured consumer credit product for larger consumer transactions. Loan limits and interest costs are based on the creditworthiness of the specific user.
- InvestmentTech (investment products)
- Yu’ebao: Allows Alipay users to earn a yield on their money in the Alipay app through money market funds, at a minimum investment amount of RMB 1.
- Ant Fortune: Wealth management platform, of which the above-mentioned Yu’ebao is one of the products. Also offers investment solutions from approximately 100 asset managers.
- InsureTech (insurance products)
- Xianghubao: A peer-to-peer insurance service, where a group of individuals who share a similar insurance risk, contributes into a money pool. After the insurance period ends (usually a year), any balance in the pool is returned to policyholders. This is in contrast to tradition insurance, where the insurance company earns a higher profit if relatively fewer claims are made.
- Haoyibao: Health insurance product.
What it’s like on the Alipay app
In the below image, we can see how it all ties together within the Alipay app…sort of reminds me of what the Grab app is starting to look like in Singapore.
No. of active users and merchants (in millions)
As seen from the chart below, Alipay has seen a steady growth in the number of active users and merchants on the platform, with an annualized increase of 15% and 48% respectively, from 2017 till June 2020.
The chart below shows Alipay’s active users and active merchants in millions. As of June 2020, Alipay had 711 million monthly active users. Just for comparison, Wechat had 1.2 billion monthly active users.
3) Historical revenue & profit growth
Geographical split: 95% from China
Ant Group derives 95% of its revenues from China, with the remaining 5% mainly attributable to cross-border payment services.
Revenue since 2017
Revenues have been relatively steady over the past few years, growing at a compounded annual growth rate (CAGR) of 36% from 2017 till 1H2020.
As you can see from the chart above, “Digital Payments & Merchant Services” has been Ant Group’s core business, growing at a CAGR of 18.6% between 2017 to 1H2020
Meanwhile, CreditTech is growing at a much faster CAGR of 60.2% and will likely generate more revenue than Digital Payments within the year. The other bright spot is InsureTech, growing at 85.9% CAGR but off a relatively small base. Greater elaboration can be found in the table below.
Core Net Profit since 2017
The below chart shows the “core net profit” for Ant Group since 2017. “Core net profit” removes gains/losses that Ant Group does not consider to be recurring in nature, such as equity settled share-based compensation, royalty payments made to Alibaba (that has ceased since September 2019), gain on disposals or impairments to subsidiaries, joint ventures and associates.
While “core net profit” has increased at a compounded annual growth rate (CAGR) of 58% from 2017 till 1H2020, we saw a noticeable dip in 2018. This was due two reasons:
- An increase in transaction fees charged by financial institutions (upon a renewal of agreements that year). This drove up the cost of services to 47.7% in 2018 from 36.3% 2017 (based as a % of revenue).
- Significant investments for user and merchant acquisition in 2018 to 1H2019. The company undertook a range of promotional activities including various types of coupons, rewards or other benefits and incentives, incurring selling and marketing expenses of RMB 47.3 billion in 2018, representing 55.2% of revenues in 2018.
4) Future growth potential
Digital Payments
China’s digital payments transaction volume is expected to grow from RMB 201 trillion in 2019 to RMB 412 trillion in 2025, reflecting a compounded annual growth rate (CAGR) of 12.7%. This is driven by the following expectations, shown in the charts below:
- Personal disposable income in China reaching RMB 67 trillion in 2025, growing at a CAGR of 7.6% from 2019 to 2025
- Personal consumption expenditure in China reaching RMB 51 trillion in 2025, growing at a CAGR of 9.0% from 2019 to 2025
- China’s mobile Internet population reaching 1.1 billion by 2025, from 877 million in 2019
CreditTech
The consumer credit market reached RMB13 trillion in 2019, and is estimated to grow to RMB24 trillion in 2025 at a CAGR of 11.4%. This figure includes credit card balances, instalments and other unsecured credit products, but excludes personal operating loans, auto loans and mortgages. We note that 75% of China’s population do not own credit cards, hence consumer loans via Alipay addresses a key need.
The SMB credit balance for loan sizes below RMB 500,000 in China is estimated to increase from RMB6 trillion in 2019 to RMB 26 trillion in 2025, growing at a CAGR 27.2%. Small businesses (SMB) contributed to 60% of total GDP in China in 2019, but the SMB credit balance only accounted for 32% of the total corporate loan balance, indicating that there is a sizable growth opportunity.
InvestmentTech
China’s personal investable assets reached RMB 160 trillion in 2019, and estimated to grow to RMB 287 trillion at a CAGR of 10.3% by 2025. Personal investable assets refer to all investable financial assets, excluding real estate investments.
Personal investable assets other than cash and deposits represented 42% of personal investable assets at the end of 2019, compared to 88% in the United States, and this share is estimated to increase. This provides an opportunity for platforms like Alipay to match their users with asset managers to facilitate investment deployment.
InsureTech
China’s insurance premiums are expected to grow at a CAGR of 12.4%, from RMB 4.3 trillion in 2019 to RMB 8.6 trillion in 2025. These premiums include life, health and accident, and P&C.
If we look purely at China’s online insurance premiums (more relevant to Alipay), such premiums are expected to grow at a higher CAGR of 38.1%, from RMB 0.3 trillion in 2019 to RMB 1.9 trillion in 2025.
China’s insurance penetration (premiums divided by GDP) was 4% in 2019, substantially lower than that of the United States, Japan and Germany, implying that there is room to grow.
5) Valuation (P/E ratio & dividend yield)
Historical P/E and Dividend Yield
Ant Group’s market cap will be approximately RMB 2.09 trillion, based on the IPO price and assuming that the over-allotment option is not exercised.
From Jul-19 to Jun-20, Ant Group’s core net profit was RMB 44.1 billion, implying a trailing P/E of 47.4x.
Since inception, Ant Group has not declared or paid any dividends, choosing to reinvest in technology and growth instead. Note that this dividend policy may change in the future but it is unlikely in the near-term.
Forward P/E
In Section 4, we had summarized the market opportunity for Ant Group. If we conservatively assume that Ant Group grows at the same long-term market rate for the year ahead (rightmost column in below table), this would imply Ant Group’s revenues will increase by 15% for the year ahead to RMB 162.6 billion.
In reality, Ant Group’s forward growth should more likely be somewhere between the historical revenue growth (2nd column from right in table below) and the longer-term growth rates but let’s just be conservative for now.
If core net profit margins remain at 1H2020 levels of 31.4%, this would imply core net profits of RMB 51.0 billion for the year ahead and a forward P/E of 41x. Again, this errs on the conservative side, as margins should expand incrementally due to operating leverage.
Next, let’s see what Ant Group’s peers are trading at…
6) Is Ant Group expensive relative to competitors?
We have included some of the key financial data and stock information on Ant Group’s listed peers in the below table. We are keen to find out what the pace of growth has been like for these peers versus their current valuation multiples. If the average peer has had faster revenue and profit growth, while trading at a cheaper P/E multiple, it may make less sense to buy Ant Group.
Given the growth potential, we think Ant Group’s IPO price of HKD 80 is modestly attractive. The closest peers in our view would be the mega-cap China Fintech peers, US-listed Digital Payment peers and ZhongAn Online P&C Insurance, a China online-only insurer. Lufax (backed by Ping An Insurance), will be a close peer as well once it is listed in November 2020.
While valuations for the Chinese Banks are around 4-5x P/E, we believe that they do not make for a fair comparable because Ant Group only underwrites about 2% of its customers’ loan balance – so we should think of Ant Group more as a referral platform to loan providers/financial institutions.
We make the following observations for Ant Group, compared to the peer median:
- Annualized revenue growth of 35.8% has been faster than US Digital Payment peers but slower than Chinese fintech peers, which grew at 17.9% and 47.7% respectively.
- Annualized core net profit growth of 58% has been faster than US Digital Payment peers and Chinese fintech peers, which grew at 25.4% and 39.5% respectively.
- Trailing P/E multiple of 47.7x is in-line with US Digital Payment peers at 46.9x and Chinese fintech peers at 48.7x respectively.
- Forward P/E multiple of 41x is in-line with US Digital Payment peers at 42.8x and Chinese fintech peers at 37.3x respectively.
7) Sizable ETF buy flows post-IPO is supportive to the share price
In our personal view, we think it is likely for Ant Group to see a post-IPO price rally, given the strong demand across institutional and retail investors.
In addition to that, UBS has highlighted that buying pressure on Ant Group might be further intensified by passive ETFs. Assuming that the IPO over-allotment option is exercised and that Ant Group shares are ineligible for trading on the Stock Connect, UBS estimates US$73 million and US$3.2 billion of A-share and H-share purchases to be made by passive ETFs respectively (see table below for their computations).
Their estimates are driven by the following:
- MSCI expected to announce fast entry inclusion of the H-share listing between the 1st and 3rd day of trading with implementation effective after close on the 10th day of trading (Wednesday, 18 Nov’20)
- FTSE expected to grant H-share fast entry into the Global Equity Index Series as well as into the FTSE China 50 Index as of the close of the 5th day of trading (Wed, 11 Nov’20)
The above-mentioned US$3.2 billion of expected ETF buy flows into Ant Group’s H-shares is significant. This is because post-IPO, Ant Group would only have approximately US$74.8 billion of H-shares outstanding (representing ~23% of Ant Group’s shares), and the expected ETF buy flows represents 4.3% of outstanding H-shares.
8) What are the key risks?
Increase in fees to financial institutions to facilitate transactions on the Alipay platform
Transaction fees as a percentage of cost of services were 81.6%, 81.3%, 77.2% and 75.5% for the years ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020. As such, any increase in transaction fees could adversely impact the firm’s profitability.
For example, gross margins decreased to 52.3% in 2018 from 63.7% in 2017, primarily due to an increase in the overall fee rate charged by financial institutions as a result of the renewal of agreements to reflect prevailing market rates in 2018. There is no disclosure on when or if a next renewal is expected to happen.
Competition from other Fintech peers
Increased competition may result in lost sales, and potential price pressures that result in margin erosion.
For China’s Digital Payment market in 1H20, Tencent’s Weixin Pay and WeChat Pay held a 40% market share, while Alipay held a 55% market share. We note that Alipay’s market share has seen gradual erosion, as it used to be 75% in earlier years.
Separately on consumer loans, Tencent has been growing its presence in this area, while competition is heating up with JD.com and Xiaomi Corp as new entrants.
Regulatory risks
Given Alipay’s scale, the firm may be the subject anti-monopoly and unfair competition claims. In addition, insurance, investment and lending businesses are also subject to high regulatory risks and requirements. Increased scrutiny around the collection and use of personal data may also result in changes to how Alipay can operate.
The InvestQuest’s View
We find Ant Group’s valuation modestly attractive, backed by decent growth potential across its various business verticals. Valuations are in-line with other mega-cap China tech stocks and slightly cheaper than US-listed payment providers. Strong institutional and retail demand should result in a solid post-IPO performance. In addition, potential ETF buy flows on Ant Group’s H-shares is significant and will be supportive to the share price in the weeks following the IPO.
Appendix 1: Ant Group’s Corporate Milestones
Appendix 2: Post-IPO Shareholding Structure
Do note that the below assumes that the IPO over-allotment option is not exercised.
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