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If not now, when? If not me, who? Ant Group is ready for the largest IPO in history (1/2)

The stars are aligned, as Ant Group aims for largest IPO in history

· general

{{{Caroline Lai and Matteo Pantalfini}}}

Source: cnbc

“If not now, when? If not me, who?” has always meant more than a tagline in Alibaba’s first job advertisement. It is a call of duty. Jack Ma’s proverb epitomizes the sense of ownership that each employee must possess. In hindsight, no other words can better depict the tech behemoth’s momentum: Ant Group is one of the most fascinating Chinese technology companies, controlling over 50% of China’s digital payment industry by processing RMB 118 tn (USD 17+ tn) last year. With this dominating position in China´s digital economy, the company´s upcoming IPO is expected to be the largest tech IPO in history.

As the potentially largest startup IPO for 2020 and one of the only private financial service companies amongst all banks, Ant Group attracts much attention around the world. According to Bloomberg, the money expected to be raised for Ant Group IPO is up to USD 30 bn at an USD 200-300 bn valuation, surpassing the USD 25 bn that Alibaba Group raised when it filed for IPO in 2014. It is a curious subject to explore the rise of the 蚂蚁集团 Ant Group, the digital technology arm of Alibaba Group. Founded in 2004 as Alipay, the earliest player in the back-then nascent digital payment industry in China, Ant Group now enjoys a 50% leading market share, only followed by a 40% market share of WeChat Wallet, the payment service of Tencent.

Among all household tech firms' names covered by tech news, Ant Group’s July 20th announcement certainly wins the cover page for July, if not for the whole year. The tech giant is approaching a dual listing on both Shanghai STAR Market and Hong Kong HKEX with a target valuation of USD 200+ bn. Although COVID-19 has brought an economic downturn, interestingly, it has only had a limited impact on many Chinese tech companies' IPO plans. 2020 owns the largest number of IPOs as Chinese companies have filed 174 IPOs, a 47% increase from 2019. When combined, the stock exchanges in Hong Kong, Shanghai, and Shenzhen already overtook the Nasdaq and NYSE in USD bn of IPO proceeds in H1 2020. Much earlier than expected, China became the global prime destination for tech IPOs, at least for the time being. In June alone, JD.com and NetEase have successfully filed for homecomings on HKEX, the most popular platform for Chinese tech companies to file an IPO/secondary listing in Greater China. HKEX’s popularity stems from its relatively free capital flow, its international financial regulation, and Hong Kong’s reputation as a global financial hub on a par with London and New York.

In this first part of the Ant Group series, we walk you through the zigzag growth of Ant Group since the very first stage in 2004. We will realize that the path undertaken by Ant Group was not a bed of roses, but an odyssey.

Ant Group: A short history of building the digital infrastructure for financial services

Source: Finance Sina

In its IPO Filings, Ant Group describes its grand vision, “To build the future digital infrastructure of services, and thereby bring about constant and incremental changes that are beneficial to the world.” However, when it was first established back in 2004, it only served as the tool to enable payments on Taobao. In this section, we will analyze the history of Ant Group to figure out how it arrived at such a grand vision.

Third-party payment pioneer shaping regulation

Ant Group’s origins date back to 2004 when Alipay was created in the days of the nascent e-commerce industry to solve the trust issue between buyers and sellers in online transactions. Back then, PayPal was the only example of an online financial transaction platform with linking credit cards for payment. However, Taobao's user base then made it impossible for massive Chinese buyers and sellers to associate accounts with their bank accounts. Trust became the biggest challenge to attract customers. As a result, the leader of Taobao, Tongyu Sun, found that both buyers and sellers were afraid of losing their money in transactions, and that inspired him to initiate Alibaba's first third-party payment system with a secured transaction function. Taobao started to offer the third-party payment-secured-transactions option, where Taobao wired money to sellers once buyers confirmed they had received the product. Around 70% of stores on Taobao chose this secured transaction service, and Alibaba began to grow this service offering, that nowadays is known worldwide as Alipay (支付宝).

However, the third-party payment system was illegal back then. Between 2003 and 2005, mainly state-owned banks ran the Chinese financial system, including all money transactions. Alibaba and Alipay had no legal authorization to initiate direct online payments. To process online payments on Alipay, customers had to jump to the banking payment website page first, which caused multiple charges, false authorization and therefore, bad user experience. The rate of successful payments remained below 50% and became the most significant obstacle in keeping customers loyal to Alipay and Alibaba. There were two options for Alipay to choose from: if Alipay could not provide direct payment, it was going to lose users; if it were to keep insisting to launch its payment system, it might have faced legal problems.

Alipay fell into the dilemma: it could either give up its payment service to comply with the regulation or play with the wolves to test the grey area – as we know now, Alibaba chose the latter one. Alipay started to hire people from the banking industry to soften the relationship between Alipay and banks and ask for smoother payment authorization from them. Some local banks began to work with Alipay, but that was only a temporary solution. As long as Alipay still did not receive a payment license from the Chinese government, it was in danger. In June 2010, to keep up with industry developments and after years of lobbying, eventually the central bank released 非金融机构支付服务管理办法 (The regulation policy for non-financial payment service) to legalize the third-party payment service. One year later, the Chinese government started to issue Payment Licenses. Alipay was among the first batch to receive the license, securing its position in the online financial payment industry. Back then, Softbank and Yahoo were major shareholders of Alibaba. Yet, the payment license could only be issued to an entity fully controlled by China Mainland shareholders. As a result, Alibaba decided to spin off Alipay from Alibaba, thus for practical matters rather than business logic.

Once the license was issued, four major Chinese banks started to cooperate with Alipay, allowing customers to make the direct payment on Alipay without going through the complicated verification process of the bank in a separate pop-up. Alipay’s bank card registrations increased to 1 million overnights, and the rate of successfully completed payments increased to 90%.

Other financial products around an e-commerce ecosystem

With the hyper-growth of transaction volume on Taobao, it was almost a natural next step for Alipay to build products to serve the whole life cycle of customers. In 2013, Alipay developed a new financial savings product with a minimum deposit amount of just 1 RMB (0.15 USD). Many Taobao users realized they could park some of their savings on Alipay to pocket some extra money, rather than onto bank accounts with low interest rates. At the peak time, many 余额宝 YuE Bao customers gained more than 6% in annual returns.

Source: Visual China Group

The low minimum deposit (starting at 1 RMB), smooth user experience (same as online shopping on Alibaba), high interest rate (around 6%), and flexibility (daily withdrawal) meant that 余额宝 attracted 180,000 users in a matter of just a few minutes, millions of users in the first six days, and over RMB 100 mn (USD 14.6 mn) AUM after one year. In April 2015, Alipay launched 花呗 and 借呗, a virtual credit card for customers on Taobao to buy now and pay later and with a lower credit benchmark. By then, it became obvious where Ant Group could collect credit, rather than traditional banking credit system: with all purchasing and transaction information on Alibaba, customers could quickly get an individual credit score called Zhima Credit (芝麻信用), as shown below, to be eligible for certain loans from Alipay.

Source: Sina

The nature of every platform, including Ant’s, is building connections between two or multiple sides. After gaining traffic and revenue from the customers' side, Ant Group continued to expand into the business side by issuing SME loans. With all the transaction information of one store’s selling data and user review data, Ant Group realized it could precisely identify business loan needs that banks were usually unwilling to satisfy. Ant started to provide loans to e-commerce stores with higher risk. In August 2015, Ant Group launched its e-commerce loan service 网商银行 to give a smaller amount of loan to SMEs (micro loans). By doing that, both sides of an e-commerce transaction and the whole life cycle management process were conducted on Ant Group's platform end-to-end.

In the following years, by aiming to become more than a mere financial payment service provider, Ant Group closely analyzed emerging scenarios that happened in the sphere of Alibaba's ecosystem and devised innovative solutions. For example, Ant Group launched its service for "shipping insurance" to ensure on-time delivery. For all customers with Alipay accounts, Ant Group not only allows to pay living expenses on the Alipay app but also provides 芝麻信用 Sesame score, the above-mentioned service for individuals to assess their creditworthiness. Until now, Ant Group has covered almost all aspects of one's financial needs and established its market-leading position in the online financial service market.

Beyond financial services: The digital life platform

During COVID-19’s peak in March, Ant Group announced its most crucial strategic change in the past 15 years: Ant Group would upgrade itself from a financial payment platform to a future digital life open platform as the next growth horizon. Ant Group aims to help more than 40 million offline stores in China to advance the digitalization process with the support of Ant Group's 50,000 service providers ecosystem. The grand ambition of Ant Group is more than evident.

Source: Ant Group Media

Meanwhile, Ant Group continued developing new financial products to diversify 余额宝's market share and target audience. In March 2020, Ant Group started a collaboration with the world's biggest mutual fund, Vanguard, to develop a health insurance product for cancer. On July 13th, Ant Group released the "Golden Choice" section on Alipay to bring multiple and more sophisticated monetary products for Alipay users to choose from. In the stock market upswing during COVID-19, many retail investors participated through Ant´s platform.

Furthermore, Ant Group is never slow in technology innovation. Intelligence Technology is one of the four pillars of Ant Group besides Mobile Payment, Digital Finance, and Globalization. On July 24th, 2020, the Ant Group blockchain brand upgraded to 蚂蚁链"Ant Chain", and already more than 100 million blockchain transactions have been registered by Ant Group in one single day.

From 2015 to 2018, after the spin-off, Ant Group received multiple rounds of external financing, including from four leading insurance companies (i.e., China Life Insurance Company, Xinhua Insurance, Renmin Insurance, Pacific Insurance), as well as from foreign investors such as Temasek Holdings, Silver Lake, and Warburg Pincus. These investments serve more than capital injection but more robust supplier systems and more solid product development and are thus strategic in nature.

Ant Group is also taking concrete steps towards globalization. Ant Group publicly announced its ambition towards the global market in 2007 but did not establish an international business unit until 2012. Since 2016, Ant Group has invested in many local payment companies across the world. Now, Ant Group has offices in 14 countries, reached some sort of collaboration with 25 countries, connects with 54 countries and regions' offline stores, and 35 countries' airports to provide direct tax refund services. It has developed nine local versions of the app in most Southeast Asian and Middle East markets, including TrueMoney in Thailand, GCahs in Philippine, TnGD(Touch'n GoDigital) in Malaysia, DANA in Indonesia, Paytm in India, Easypaisa in Pakistan, bKash in Bangladesh, KakaoPay in South Korea and Alipay in Hong Kong.

From the Taobao affiliated ant-sized payment function to a global leading fintech giant, it took Ant Group 16 years to become the foundation of Digital China. Looking back at the history, it becomes clear that Ant was an early pioneer in China Digital and emerged with the overall ecosystem and user/business demands. Unlike many other unicorns who rush to secondary market for hot money, Ant Group achieved profitability for years and waited for the right moment to go public. With the largest Tech IPO in history coming up, Ant Group is expected to fire up the Shanghai/Hong Kong stock markets.

In the next part, we will zoom in to Ant Group’s financial performance and analyze the specifics around the IPO itself.

All opinions expressed in this article do reflect our personal views only.

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