Alibaba bulls can now bet on one of its most famous subsidiaries at just 5 cents to the dollar in one of China’s biggest IPOs ever.
Over the past two years, president Trump’s administration has added dozens of Chinese companies to the dreaded Entity List, which essentially bars these companies from doing business in U.S. territory. The latest victims are video app TikTok and messaging app WeChat, though U.S. courts have been able to forestall an imminent ban of both apps.
Interestingly, Trump has not been any more successful at putting the clamps on a much bigger adversary: Alibaba Inc. (NYSE:BABA).
Alibaba already made history after becoming the second-largest ever IPO to be consummated on U.S. soil, rivalled only by Saudi Aramco’s 2019 IPO. BABA still stands out for one reason: Although Aramco’s IPO raised a record $29.4 billion that valued the company at a staggering $1.7 trillion, only 5% of the company is public whereas Alibaba is a fully public company.
But now, Alibaba is about to one-up Amazon, again. Indeed, BABA’s financial technology spinoff, Ant Group, the online payment provider for Alibaba Group, could even outdo Alibaba’s own $25B IPO as it seeks a record $35 billion when it goes public in the Hong Kong and Shanghai stock markets.
CNBC has confirmed that Ant Group has just won approval from the Chinese securities regulator for the Hong Kong leg of its upcoming IPO that could see ANT valued north of $200B.
Even more interesting: Hong Kong stockbrokers badly want this deal to happen, and are offering mom-and-pop investors ANT stock at an extremely generous 20x leverage. This essentially means that retail investors only need a 5% cash deposit in Ant’s subscription, an offer only rivalled by Bright Smart Securities & Commodities Group and UP Fintech Holding Ltd.
The Big Ant
Ant Financial’s dual listing in the Hong Kong and Shanghai stock exchanges could raise at least $35 billion, though an IPO date has yet to be finalized.
Founded by Chinese billionaire and Alibaba Group chairman Jack Ma, Ant Financial Services Group has developed into the world’s biggest fintech firm, making products that let people do things like pay for their insurance or buy groceries on their mobile phones.
Jack Ma created Alipay, a subsidiary of Ant Financial, in 2004 to give Chinese customers who lacked credit and debit cards an easy way to shop in the vast online marketplace. The platform has grown from strength to strength and now boasts 1.3B users.
As Alipay grew, Jack Ma discovered that banks were not doing nearly enough to support small businesses and began advancing them with small loans. In 2010, Alipay was carved out of Alibaba after the authorities said the platform would need a new license to operate.
By 2013, Alipay was holding customer funds worth billions of dollars in escrow. It was around that time that the company came up with the idea of investing idle customer funds in money-market funds to earn an income. The money market fund, known as Yu'e Bao for "leftover treasure”, allows customers to invest as little as 0.01 yuan ($0.0015). The fund pays interest rates several points higher than what banks pay on short-term deposits, something it’s able to do because its status allows it to invest in riskier products than what banks are allowed to tap.
A boom in asset-backed securities issued by micro-lenders that package consumer loans into securities has been fueling the company’s growth.
China’s banks, including the country’s largest, have not been happy with the turn of events, and have complained that Ant has been siphoning away their deposits, forcing them to pay higher interest rates to attract deposits and even leading to the closure of branches and ATMs.
One state-owned TV channel famously described Ant’s massive money market fund as a “vampire sucking blood from banks”.
Beijing grew wary, and has tried to put the clamps on Ant.
Last year, China’s central bank scuttled Ant’s year-long efforts to build a national credit-scoring system by barring banks and institutions making loans from using it, though it did develop a private system. Unlike the U.S., China lacks a national credit scoring system.
Meanwhile, regulators issued a slew of rules requiring money-market funds to sharply lower high-yield assets that allow them to pay high interest rates to customers. This move put pressure on Ant’s money market inflows. The authorities also designated Ant as a financial holding company and thus require it to meet bank-style capital requirements.
The Big Risk
Still, Ant’s prospective investors need to understand the underlying risks.
Leverage really is a double-edged sword and could lead to massive profits--or massive losses if ANT’s IPO goes wary. In fact, with such huge leverage, Ant stock only needs to decline 5% to wipe out your entire investment. It also threatens to wreak havoc on Hong Kong’s money markets, well known for interest rates recording wild swings even around modest share sales.
Investors should bear in mind that Hong Kong has more than 700 brokerages, with just 14 generating more than half the city’s daily stock turnover. A big part of the revenue by these brokerages hinges on margin loans--or bad bets by investors.
By Alex Kimani for Safehaven.com
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