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

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

· FinTech

{{{Caroline Lai and Matteo Pantalfini}}}

Ant Group has a sexy business story which primary markets love to hear: a trillion size payment market, a solid leading market share, and an impressive vision with its technology innovation. However, secondary markets investors look beyond business model and vision or mission to more fundamental financial figures. With a valuation between USD 200-300 bn, Ant Group has passed the test of investors in the stock market. In the second part of the Ant Group series, we will deep dive into the financial robustness of Ant Group to unveil its core business components and enormous payment ecosystem.

One IPO to rule them all: Ant Group’s is the largest ever

Source: Yicai Global

After years of IPO rumors, Ant Group has now decided to go public. Based on its IPO filings, the group is not the ant its name suggests, but the largest elephant the primary market has ever seen.

In the first part of the Ant Group series we outlined the conglomerate’s history and product developments. In this second part, we will probe its size and scale (also compared to PayPal), the revenue model and the financials supporting Ant Group’s colossal IPO.

The massive size and scale of the business

As per Fig. 1 below, Alipay is the core business of Ant Group, serving over 1 bn annual active users (AAUs), 711 mn monthly active users (MAUs) and counting, in total, RMB 118 tn (USD 17.2 tn) of digital payments total payment volume (TPV) in mainland China. If you take a walk in any city in China, you will see the blue sign of Alipay in restaurants, shopping centers, and even government counters. Many people joke that they can live without computer but not without Alipay. Not only in mainland China, but people in over 200 countries and regions are enjoying the services provided by Ant Group, with its widespread connections to more than 2,000 partner financial institutions (PFIs). On the B2B side, Ant Group has built a vast network with over 80 mn merchant MAUs. More recently, Ant Group expanded its footprint beyond digital payments to include technology platform solutions for credit, investment and insurance services that further consolidate its digital infrastructure foundation.

Source: Ant Group IPO filings

To provide a benchmark for Ant Group’s massive size and scale, it is insightful to compare the Chinese giant to PayPal, the online payment system better known in the West. The latest financial reports suggest four crucial differences. First, despite a comparable total revenue of almost USD 20 bn, Ant Group’s pace of growth (YoY) more than doubles PayPal’s +15%. Second, PayPal profitability, with a net margin of 13%, pales in comparison to Ant’s net margin touching 30%. Third, Ant Group can rely on a user base that PayPal can only dream of, as the latter records only 326 mn active accounts. Last but not least, statistics of the revenues reveal the grand potential for geographic diversification that Ant Group possesses, as its revenues outside of China is just USD 1 bn, while PayPal earns USD 2 bn in UK and USD 7 bn elsewhere, on top of the USD 10 bn from US.

A robust revenue model for a full-fledged digital ecosystem surviving a pandemic

As we understand from the IPO prospectus, Ant Group’s business model consists of three main sources of revenue: digital payments and merchant services, digital finance technology platform, and innovation initiatives.

Digital payments and merchant services are offered to merchants for commercial transactions (as well as for accepting payments from consumers) and to consumers for financial and personal transactions (money transfers, credit card repayments). Most of the revenue originates from transaction fees generated by platforms, based on a percentage of transaction volume from commercial transactions, mainly within China. Additional revenues are generated through merchant services.

Digital finance technology platform solutions are offered to PFIs. These solutions are leveraged by PFIs to reach a wider customer base and to provide services in consumer and small and medium-sized businesses (SMB) credit (CreditTech), investments (InvestmentTech) and insurance (InsureTech). Most of the revenues originate from technology service fees. For CreditTech solutions, these fees are based on a percentage of the interest income linked to the balance of credit generated by PFIs. For InvestmentTech solutions, technology service fees depend on a percentage of the platform-enabled AUM of PFIs. Finally, for InsureTech solutions, these fees are formed on a percentage of the platform-enabled insurance premiums of PFIs. Technology service fees rates vary by products offered by PFIs.

Innovation initiatives focus on the rapid deployment of groundbreaking technology services. Among these, AntChain was just introduced in 2019, but now it is already the largest productivity blockchain platform in China.

Consumers and consumer spending and savings eventually drive all of Ant Group’s businesses. However, not even a once-in-a-century global health crisis seems to have succeeded in derailing Ant Group’s gigantic ambitions. Rather on the contrary, it pushed the Group further. Despite overall consumption being negatively affected (e.g. by lockdowns and social distancing measures, reduction in income and uncertainty about the pandemic and the economy), MAUs increased from 659 mn in December 2019 to 711 mn in June 2020; revenues increased by 38% from RMB 52.5 bn (USD 7.7 bn) in H1 2019 to RMB 72.5 bn (USD 10.6 bn) in H1 2020; gross margin and operating margin increased from 46.4% and 8.1% in H1 2019, respectively, to 58.6% and 34.3% in H1 2020, respectively.

Appropriate financials to head towards a USD 200+ bn valuation

Ant Group’s results have shown its readiness for IPO. Fig. 2 gathers together the percentage changes for core financial data in H1 2020 vs. H1 2019 and in FY 2019 vs. FY 2018. As per Fig. 2, this ant farm shows nothing but growth. The figures for the cost of services and for all the expenses are percentage changes in absolute terms, i.e. not based on revenues, while net margin is not a percentage change from one period to another, but the percentage in itself for the period.

Percentage changes for core financial data in H1 2020 vs. H1 2019 and in FY 2019 vs. FY 2018

Source: Ant Group IPO filings

Revenues from digital payments and merchant services topped RMB 26 bn (USD 3.8 bn), mainly driven by the growth in the number of and in the engagement by users but also by the launch of merchant services. This figure was only outshined by the RMB 28.6 bn (USD 4.2 bn) of revenues from the CreditTech platform, which benefited from higher balances of credit products (i.e., Huabei, Jiebei, Mybank Loan) and more partnerships with banks to fund these products. The RMB 11.3 bn (USD 1.6 bn) of revenues from the InvestmentTech platform reflected the higher technology services fees as a percentage of AUM generated by the strong growth in the balance of mutual funds enabled by the platforms Yu’ebao and Dalicai. The InsureTech platform, whose revenues in FY 2019 boomed 107% from the previous year, contributed with RMB 6.1 bn (USD 891 mn) in H1 2020. This success was in virtue of the innovative mutual aid program, Xianghubao, and the increase in life and health insurance volume boosting the insurance premiums and contributions enabled by the platform. Finally, RMB 0.5 bn (USD 73 mn) originated from innovation initiatives, such as AntChain.

Ant Group boasted a solid operational efficiency, as revenues outgrew costs. Cost of services as a percentage of revenues amounted to RMB 30 bn (USD 4.4 bn) and its decline from 54% to 41% was driven by the boost in transaction fees catalyzed by the larger TPV. Selling and marketing expenses had to be abated to RMB 6.1 bn (USD 891 mn) to compensate for last year’s hefty investments in user and merchant acquisitions, as well as in light of the impact of COVID-19. Lastly, general and administrative expenses dropped to RMB 3.7 bn (USD 540.4 mn), while the expenses allocated to research and development lifted to RMB 5.7 bn (USD 832.5 mn), mirroring Jack Ma’s focus on technological innovation since the early days of Alipay.

Gross profit increased by 74% to RMB 42.5 bn (USD 6.2 bn) in H1 2020 compared to H1 2019, raising income tax expense to RMB 2.5 bn (USD 365.1 mn), while the finance income, net, of RMB 0.5 bn (USD 73 mn) was the result of an increase in the average balance of Ant Group’s bank deposits and a decrease in the average outstanding balance of bank borrowings.

To conclude the financial analysis, after accounting for all expenses, costs, and cash flow items, Ant Group reveals a staggering ability to turn its immense revenues into profit. Net margin, 2.5% in FY 2018 and 3.6% in H1 2019 soared, respectively, to 15% in FY 2019 and to 30.2% in H1 2020.Ant Group is most definitely ready to go public.

Timing: Financial markets send positive signals

Several reasons are attributed to the decision of listing Ant Group on both STAR Market and HKEX. First of all, the STAR Market is the new showroom for Chinese tech companies in mainland China, other than the American NASDAQ. In the beginning, the STAR Market did not allow fintech startups to apply for IPO because these entities, whose nature is in between that of a financial company and a tech company, involve tighter regulation and higher risks. However, in March 2020, the Shanghai Stock Exchange released 上海证券交易所科创板企业发行上市申报及推荐暂行规定(The temporary regulation for STAR Market IPO applications) and deliberately pointed out that "fintech companies" could now become qualified for a STAR Market IPO, making Ant Group eligible for IPO in mainland China.

The gradual recovery of mainland China's stock market from COVID-19 also sends positive signals to Ant Group. Public data has shown that until July 21st, over 5 million new investors in A-shares were recorded in China, with a 47% YoY increase and the SSE Composite Index reaching over 3,100 points, a five-years peak. Furthermore, as the central bank continues working on the Digital Yuan and foreign players increasingly are obtaining regulatory approval for entering/taking full control, competition in both, digital payment and investment offerings is heating up.

HKEX has also shown positive signals towards tech companies. The stock exchange has implemented changes from 2018, allowing multi-class share structures that provide key shareholders (such as founders) with stronger voting rights, as preferred by many tech giants. With Alibaba, Xiaomi,, and NetEase's successful dual listings in Hong Kong, Ant Group has multiple benchmarks to rely on for its valuation. Meanwhile, following the announcement of Ant´s IPO plans, the Hang Seng Index announced the introduction of the Hang Seng Tech Index by upgrading the tech affiliates of HKEX. This move is expected to bring more diversity and innovation to Hong Kong’s internationally reputable financial market.

Thus, despite the shadows of geopolitical turmoil and the cloudy condition of the global economy, Ant Group likely found a promising place and timing for its IPO.

From the early days of starting out as a third-party payment provider to support the business of Taobao until today, Ant Group successfully captured more than 50% of the digital payments markets and expanded beyond into CreditTech, InvestmentTech and InsureTech to become a full-fledged FinTech service provider. Nevertheless, it did not stop there: it emerged into other digital services, including blockchain, IoT, AI and also engaged in international business. It already matches PayPal in many of the key metrics but continues growing fast. COVID-19 exposed how much more growth there is ahead for Ant as it provides the infrastructure layer of China´s digital economy. Thus, the importance of Ant cannot be understated. With this development, Ant became an inspiration for many aspiring FinTechs and digital service providers around the world. As Ant Group aims to raise USD 30+ bn at a USD 200-300 bn valuation, it only seems fair that the company will accomplish the biggest tech IPO in history. That it picked Shanghai/Hong Kong as its destination for this historic move, shows the increasing independence of China from the US. Overall, the stars seem aligned for a successful IPO.

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

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