Like its namesake in the world of entomology, Ant Group attempted to carry 50 times its own bodyweight, pricing what was to be the world’s largest initial public offering (IPO) in history at HK$80 (US$10.26) per share to be listed in Hong Kong and Shanghai. But just as it was about to do so, China’s top regulators pressed the red button declaring a no-lift.
Coming just as polling stations in the US were opening for one of the most contested presidential elections in its history, Ant Group’s now suspended IPO is living up to 2020 as the year the consequences of technological change are coming into the mainstream.
In both events, it is the unseen forces of technology that are at play. In the US elections, critics complain that Twitter, Facebook and others failed to curb the circulation of baseless claims – a reiteration of what has been a festering issue with social media, especially with the leader of the world’s largest economy being a big Twitter user.
In the case of Ant’s aborted IPO, the regulators were starting to become uneasy as the parent of China’s most successful digital payments platform, Alipay, which reaches over one billion users and 80 million merchants, seeks to expand further into consumer credit, investment and insurance.
In its announcement on November 3 – election day in the US – the group said the “proposed A Share listing on the STAR market may not meet listing qualifications or disclosure requirements due to material matters relating to the regulatory interview of our ultimate controller [Jack Ma], our executive chairman [Eric Xiandong Jing], and our chief executive officer [Simon Xiaoming Hu] by the relevant regulators and the recent changes in the fintech regulatory environment”. The concurrent H-share listing on Hong Kong’s exchange was also suspended.
For one of the year’s most anticipated IPOs that drew more than US$3 trillion in bids from retail investors in China and Hong Kong – easily the largest in both markets’ history – 23 investment banks were involved in leading the IPO into its final moments, led by Citi, JPMorgan, Morgan Stanley and CICC as joint sponsors, joint global coordinators, joint bookrunners, and joint lead managers.
A day after, as everyone resumed their nervous gaze towards the unfolding US elections as the counting got underway, one banker in the lead arranger group who spoke to The Asset could only utter two words when asked about the stalled IPO: “no comment”, followed by a nervous laugh.
The “regulatory review” was a closed-door meeting with the People’s Bank of China (PBoC), State Administration of Foreign Exchange, China Securities Regulatory Commission, and China Banking and Insurance Regulatory Commission (CBIRC). It is rare in China’s capital market history to have all the Chinese financial regulators conducting an interview with a single IPO applicant.
According to Ant, the meeting focused on the health and stability of China’s financial sector, and Ant Group’s principals agreed to follow through with the meeting’s outcome.
On November 2, CBIRC and PBoC issued draft rules for the online micro-lending business. In particular, Ant’s key lending business will be subject to Basel-like capital requirement under the draft rules. The company’s consumer and small businesses lending division generated 39.4% of its revenue in the six months ended June 30.
In a speech at The Bund Summit on October 24, Ant’s Ma said that traditional lenders were run like “pawn shops”, as banks always demand collateral before lending. Although the criticism made by Ma on China’s banking system sounded aggressive, it is highly possible that the wealthiest businessman in China already knew the details of the micro-lending draft rules, given Ma’s guanxi (关系) with regulators. Delivered in such a full-house public forum attended by China’s who’s who in finance and the regulators, Ma's comment could be seen as a last effort to challenge the upcoming rules.
Yet, as Ant becomes “too big to fail” – the latest valuation before the draft rules suggested that Ant is two times the size of ICBC, China’s biggest bank, and four times Goldman Sachs’ market cap – China’s financial regulators saw the potential systemic risk and the basis to oversee the fintech giant.
In addition, the draft rules also marked the beginning of an official regulatory framework for the fintech industry. In the past, there was no such clear and detailed regulation including for online lending. Going forward, online lenders such as Ant are subject to regular regulatory reporting and treated no different from financial institutions.
To Ant, the restriction is likely to lower its valuation significantly due to a lower profit projection from its key lending business, although still higher than the PE ratio of the banking sector, which averages 4.69 times for those Chinese banks listed in Hong Kong. However, the online micro-lending draft rules should strengthen Ant’s monopoly status in the long term, as newcomers face a higher threshold. In the end, it will become even more difficult to challenge Ant as the early mover. In other words, Ant’s market share is expected to increase under a completed regulatory framework on micro-lending.
With China having set the course for the regulation of technology-enabled financial enterprises, it will be interesting to see how regulators and policymakers in the West take additional steps to rein in the global tech titans.
In the US and Europe, and elsewhere in Asia, they have started to ask plenty of questions. Seeing how these tech titans can change the course of the US elections – or any elections for that matter – it could be a matter of time before regulators elsewhere follow in China’s footsteps.
On the other hand, Ant's Ma, who often is on the speaking circuit imparting life's lessons since he stepped down from Alibaba, can use this as a learning moment - a listing on a US exchange for Ant, especially with a new tenant in the White House, may not be such a bad advice.