Ant Group, China’s fintech powerhouse, filed for what is shaping up to be a record-breaking initial public offering (IPO). The company has turned to its home markets for the IPO, with a dual listing on the Hong Kong Stock Exchange and the Shanghai Stock Exchange's science and technology-focused STAR Market. Through this dual listing, the company seeks to raise $35 billion, implying a total valuation of $250 billion.¹ That would make the offering the largest ever in history, outpacing the $29.4 billion raised by Saudi Armco’s IPO last December and the $25 billion raised by Alibaba’s US listing in 2014.²

Ant will likely qualify for KraneShares CSI China Internet ETF (KWEB)’s fast track index inclusion methodology and enter KWEB’s CSI Overseas China Internet Index ten business days after its IPO date. Thanks to this feature of the CSI index, KWEB was not only the first US-listed China ETF but also the first US-listed technology ETF to hold shares in Alibaba when the company listed publicly in the United States in 2014.³

Breaking down the Ant Group ecosystem

Ant Group’s IPO filing told the company’s story candidly. The firm grew out of Alipay, a PayPal-like payments processor for Alibaba’s E-Commerce marketplace. Following the rapid smartphone adoption in China, Ant expanded Alipay, making it into the mobile payments giant it is today. The company has since evolved into a much more expansive ecosystem, offering banking products, credit rating services, insurance, and investment products (including one of the world’s largest money market mutual funds). As stated in its filing, Ant’s mission has always been to increase trust between buyers and sellers online. Accomplishing that goal has, in turn, fueled China’s E-Commerce and fintech evolution.

Despite having cast a wider net in recent years, Ant still dominates the digital payments markets in China, controlling over half the domestic market. In just the last twelve months, an impressive $17 trillion in payments were handled through Alipay.⁴ However, compared to the company’s other business segments, margins in payments are not as wide and growth has slowed slightly.

That is, in part, why Ant is expanding beyond its original claim to fame (i.e. payments) and in recent years has been shifting its main focus toward the company’s digital finance technology platforms.

CreditTech

Ant’s “CreditTech” segment is now the largest contributor to revenue, representing 40% of total revenue, a figure that has increased over 2.5x over the last three years. At the end of June, Ant’s credit business had a balance greater than $300 billion. Consumer credit makes up around 80% of Ant’s balance sheet, and the remaining 20% consists of loans to small and medium-sized businesses (SMBs).⁵ Through its network of 100 banks, CreditTech connects individuals and businesses with lenders while taking a fee without using or risking its own “balance sheet or provide guarantees”. The main services consist of a virtual credit card Huabei, short-term loan provider Jiebei, and SMB lending solution MyBank.⁶

InvestmentTech

One of Ant’s biggest success stories comes from its “InvestmentTech” money market fund, Yu’e Bao, which is Chinese for “leftover treasure". The service offers a convenient place for customers of Alibaba’s market place to store their cash balance while earning an attractive yield. Part of the service's popularity stems from the fact that yields on money market funds and short-term cash-equivalents in China are attractive compared to the rest of the world, (see KraneShares E Fund China Commercial Paper ETF (KCNY)).

Yu’e Bao was established through a partnership between Alibaba and Tianhong Asset Management Co., which at the time was a small fund company managing only $1.9 billion in assets under management (AUM). Once launched in 2013, Yu’e Bao became a mega-hit practically overnight. In just 9 months, the fund drew in over $80 billion⁷, and in four years became the world’s largest money market fund.⁸ Although no longer ranked first in terms of assets, Yu’e Bao had approximately $178 billion in AUM and over a third of China’s population is invested in the fund.⁹

Through its Ant Fortune platform, another arm of its “InvestmentTech” business, users can invest in over 3000 funds. Integrated Artificial Intelligence (AI) technology attempts to match investors with products best tailored to their portfolio. Ant then generates revenue from fees based on transaction volume.⁵  

InsureTech

“InsureTech” only accounts for roughly 8% of revenue, yet we believe the segment has strong growth potential. Although China is now the second-largest insurance market in the world, it still falls short of other developed countries across several metrics. When it comes to insurance policies, for example, the US has 4.2 policies per capita. By comparison, China has a mere 0.6.⁵ Even with China's public healthcare program, individuals still pay, on average, a third of their medical costs out of pocket. The demand for private insurance coverage is increasing, up 30% from last year, as well as cheaper alternatives, like that of mutual aid platforms.¹⁰

During the height of the coronavirus pandemic, Ant’s blockchain-based mutual aid platform, Xiang Hu Bao, updated its coverage to include COVID-19 related claims—a move which resulted in an influx of new users. Prior to COVID-19, mutual aid platforms, a shared-economy, insurance-like service where users split bills for various medical treatments, were already gaining more traction in China. In 2019 alone, Xiang Hu Bao saw over 70 million new users.¹⁰ Beyond Xiang Hu Bao, Insurance Tech connects users with 90 insurance companies offering life, health and property, and casualty insurance, where Ant takes a slice of the commission for connecting users with the underlying insurance companies. As the industry develops further and with the COVID-19 pandemic acting as an accelerant, Ant may be well-positioned to benefit.

Collectively, Ant's digital finance technology platforms saw a 67% increase in revenue in 2019, which is mostly attributable to growth in business volume. Over that same period, revenue from digital payments was up 17%, with increased user engagement and transaction volume driving most of this growth.¹¹

The profitability advantage

Ant has reached profitability, which is an added plus for the company. Given how difficult it is to find growing companies that are actually profitable, we believe this fact, in addition to its size, sets the company apart. After growing revenues by +38% in the first half of 2020 compared to the first half of 2019, the company’s net margin for the first half of the year came in at 38.1% compared to -16.8% in 2018.¹²

Why list on the STAR Market?

Shanghai’s Science and Technology Innovation Board, or the STAR Market for short, is Mainland China’s newest major equity market, established just over a year ago. Similar to the Nasdaq, the STAR Market is designed to facilitate the fast-tracking of innovative science and technology companies to an IPO by lowering the barrier to entry with more relaxed listing requirements and a streamlined registration process.

The STAR Market's unique listing rules and notable success since launching have quickly made it an attractive option for China's sci-tech based companies. The more than 130 companies listed on the Market have raised 34% more capital than originally targeted, and the first batch of 25 companies traded at 133 times their earnings a year out from listing. Local investors, who finally have access to some of China's leading tech companies, are, in part, fueling some of this market exuberance.¹³

Additionally, with uncertain US-China relations and recent increased scrutiny of US-listed Chinese stocks, some Chinese companies are showing a stronger preference to list on domestic exchanges.

Ultimately for Ant Group, listing on both exchanges allows for ample exposure to both domestic investors who know their business best and international investors enthusiastic about its growth story.

Final thoughts

Not to be ignored, Ant Group's mega IPO underscores its influence in not just China's but the global technology sector. The company has already revolutionized large segments of China's fintech space, and future plans for greater innovation across various subsectors could further boost its overall presence and growth potential.

It is important to note that because Ant is not listing on US exchanges, many US retail investors may have difficulty investing in the company's Hong Kong or Shanghai-listed stock. Instead, investors can gain exposure to Ant through investing in US-listed funds such as KWEB, post index inclusion.

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Index Definitions:

The CSI Overseas China Internet Index: CSI Overseas China Internet Index selects overseas-listed Chinese Internet companies as the index constituents; the index is weighted by free-float market cap. The index can measure the overall performance of overseas-listed Chinese Internet companies. The Index is within the scope of the IOSCO Assurance Report as of 30 September 2018. The index was launched on September 20, 2011.

Citations:

1. Bloomberg, “Ant’s IPO Runs Low on Time to Avoid U.S. Election Turbulence”, October 9, 2020​
2. Business Insider, “Jack Ma's Ant Group raises its funding target to $35 billion, likely making it the largest IPO ever”, Sept 21, 2020.
3. CNBC, "A China Internet ETF You Should Know", June 22, 2017.
4. CNN, “How Jack Ma built China's money supermarket into a $200 billion company”, Sept. 25, 2020.
5. Tech Buzz China, 'Ep. 74: Ant Group: The Biggest IPO ... Ever?", Sept. 11, 2020.
6. Reuters, “Explainer: Ant Group's key revenue drivers as it eyes $200 billion valuation”, August 26, 2020.
7. Institutional Investor, “Alibaba Sparks a Revolution in Asset Management in China “ Oct 20, 2014
8. Quartz, “China no longer runs the world’s largest money market fund:, Jan. 28, 2020.
9. WSJ, "Investors Pull Cash From China’s Money-Market Behemoth as Yields Tumble", July 18, 2020
10. SCMP, “Technology turbocharges China’s access to health insurance amid coronavirus pandemic – for the price of a Starbucks coffee”, April 4, 2020.
11. HKEX News, "Ant Group IPO Prospectus", July 20, 2020.
12. iResearch China. “The Era of Industrial Payment: 2020 China’s Third-Party Payment Industry Report”, 2020.
13. SCMP, "Star Market, Xi Jinping’s US$376 billion baby, is poised for Ant Group boost as it turns one", July 22, 2020.
14. Equal Ocean, "Too Big to Fail 3.0: How Alibaba’s Ant Group Goes Beyond Fintech", August 15, 2020.

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