Portfolio Manager Equity - ACTIAM
Last week has not just been the week of the US elections, but also the week of Ant Group's scheduled IPO for Alipay – set up in 2004 (as part of the Chinese Alibaba Group). It was supposed to have been the largest IPO ever; even larger than the one for Saudi Aramco in December 2019 that drew in over $25 billion. The plan was for investors to subscribe $34.5 billion for Ant Group. This would place the valuation of the entire business at $315 billion, equivalent to the value of JP Morgan. However, the Chinese government threw a spanner in the works.
There was considerable enthusiasm among both private and institutional investors. Ant Group is a business with a lot of potential and , under the leadership of Jack Ma, focuses on a range of financial services: asset management ($173 billion under management), loans ($290 billion of loans issued to consumers), online payments ($17 trillion) and insurances (107 million policy holders).
"The timing of this proposed bill in the same week as the IPO, was highly coincidental.”
Just as with Alibaba, Jack Ma has set up Ant Group as a business focussing on the internal Chinese market, and he has done this really well. Investors saw opportunities to get hold of shares relatively inexpensively as part of the IPO listing, which they could then sell on after a few years at a considerable mark-up. This was also clear from the subscriptions by institutional investors: the IPO was 284 times over-subscribed (i.e. the demand was a lot more than the supply).
The scheduled IPO on 5 November was prevented by the Chinese government. The reason given was changes to regulations on financial technology, which might have led to the business no longer complying with the conditions for the issue of shares or for a listing on the Chinese stock exchange. The background was a proposed bill on micro-financing that was presented on the Monday of the week of the IPO. Whether this is the real reason, is doubtful. The timing of this proposed bill in the same week as the IPO was highly coincidental.
It had surely nothing to do with the fact that Ma expressed criticism in October about the major state banks stating they were persisting in their 'pawnshop mentality' (letting consumers take out excessive loans using their house as security) and that there was not enough innovation.
It remains to be seen whether the IPO will still go ahead. But the consequences could be major. More than 20% of the Hong Kong population had registered for the IPO. In many cases via their brokers, using margin loans at hefty interest rates. Now that the IPO is not going ahead, they're still going to have to pay up the interest, but they'll never receive the shares. If you then consider that no less than $3 trillions' worth of registrations were made by private investors, that translates into a whole swathe of victims. It has since been announced that Ant Group will recompensate these investors for the costs incurred. For the institutional investors, the Chinese government's blockage of the IPO may turn out to be a blessing in disguise. It's not costing them anything, which it would have done if the Chinese government had waited till after the IPO to sharpen the rules and create problems for Ant Group.
Things will remain tense over the coming days and weeks: is it really a question of compliance with these (technical) rules or is it an ego issue for the Chinese government that has derailed the IPO?
What I'm wondering just now, Ruud, is what you think of this situation? What are your views on the Ant Group business? And what are your views on the Chinese government's response from the sustainability perspective and how we should actually be dealing with investments in China?