Is Ant Financial still worth $150 billion?

A monster IPO.
A monster IPO.
Image: Reuters/Bobby Yip
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It has been more than a year since Chinese fintech giant Ant Financial’s record fundraising of $14 billion—the most ever for a private company—which valued it at $150 billion. The transaction made Ant the world’s most valuable fintech, at a valuation double that of Goldman Sachs.

However, a lot has changed since then. The China-US trade war has escalated and tariffs worth more than $600 billion have been slapped on goods. In China, tech startups have seen fundraising dry up, while investors outside of Asia have also turned bearish after dramatic declines in the valuations of some leading technology players like Uber and WeWork, both of which share SoftBank as an investor. (SoftBank is an investor in Alibaba, which owns 33% of Ant.)

All in all, the environment looks more difficult even for a poster child like Ant. “To be clear, Ant and WeWork are not comparable, but the WeWork fiasco may have caused a paradigm shift in large unicorn private company valuation,” said Matthew Graham, CEO of investment firm Sino Global Capital. “Ant Financial would also be impacted by this perception shift.”

Despite the challenges facing the company, many believe that Ant’s valuation may not have fallen much—and it may even have increased in spite of the headwinds. There has never been a company quite like Ant, which has developed far beyond its roots as a payments service. The company’s ability to generate profits from its many other services, its shift of focus to being a technology provider, and its expansion overseas could help it to maintain or grow its monster valuation, say analysts.

How could Ant Financial justify its valuation?

Ant, which got its name because of its aim to serve “little guys”, was established in 2014 as an entity under the control of Jack Ma, a co-founder and former CEO of e-commerce behemoth Alibaba. Ant was created to host Alipay, Alibaba’s default online payments system which then had around 300 million users, a figure that has since grown to around 900 million users in China and 1.2 billion globally. Over the past nine years, the company has evolved from mainly offering online payments services to providing things like consumer loans, insurance, online banking credit assessment service, and the world’s largest money market fund.

More recently its focus has shifted again, and Ant is reportedly planning to increase technology services, such as online banking infrastructure and risk management, to around two-thirds of its revenue in a few years. By doing so, it could hope to avoid some of the increasing pressure from Chinese regulators, who have been cracking down on systematic financial risks, such as peer-to-peer lending.

“The transformation of Ant towards offering more tech services has allowed the company to grow in a direction that might be different from what they had planned in the very beginning, but enabled them to maintain the company’s valuation and continue to have an impact in the market,” said Zennon Kapron, founder and director of Kapronasia, a Singapore-based fintech consultancy.

Steady profits are one reason why investors have faith in Ant’s current valuation. The company generates around 65% of its revenue from payments and financial services, while the rest from technology services it provides to other institutions, according to Reuters. As Ant does not reveal its full financials, the usual approach to calculating its profits makes use of the royalty and technology service fees Alibaba used to receive from Ant. This amounted to 37.5% of the latter’s pre-tax profits. This agreement started in 2014 and stopped in September, when Alibaba snagged a 33% stake in Ant, a move deemed to pave the way for an IPO.

Using this approach, Ant is estimated to have made 10.2 billion yuan ($1.5 billion) in pre-tax profits in just the first two quarters of Alibaba’s fiscal year 2020 (the six months between April and September), already surpassing the 1.2 billion yuan for 2019 and 9.2 billion yuan for 2018, according to Alibaba’s filing. “Ant Financial has done something that western unicorns have not: make a consistent profit,” said Graham. “Ant’s strategy is clear—use the payment and consumer finance platform as the core, actively acquire companies to add to the ecosystem, and expand globally.”

Its profitability is also likely to get a boost from the termination of the royalty fee agreement, helping the firm to improve its revenues and thus have a “healthier” balance sheet, said Musheer Ahmed, managing director of FinStep Asia, a Hong Kong-based fintech advisory firm.

Ant’s foray into other markets outside China, through either investments or partnerships with other companies, is also seen as an important growth driver. “Ant had made several acquisitions both locally and internationally. Some of these investments have already shown a relative increase in value. Besides the return on equity investments, it provides Ant increased access to a global customer base,” said Ahmed. Last month, Ant and SoftBank injected a further $1 billion into Indian mobile payment player Paytm, on top of their existing investments. Ant is also raising $1 billion for a fund dedicated to tech companies in southeast Asia and India, according to trade publication Deal Street Asia.

What are the possible challenges?

Despite these tailwinds, an uncertain regulatory environment in China is still the company’s worst enemy. Beijing, which appears to feel increasingly insecure about changes in the economy and has vowed to tighten its control, could also roll out more damaging measures against the fintech industry—something it feels is still not quite within its grasp. “A lack of clarity on how satisfied Beijing is about regulations at the moment is what’s keeping people awake at night,” said Kapron.

Meanwhile, in its home market, Ant still has to hold off arch-rival Tencent, whose WeChat payment function is a formidable competitor. The two have divided up China’s mobile payments market, and for either to grab share from the other would require heavy spending on marketing. Ant’s sharp drop in pre-tax profit in 2019, for instance, is due to the company’s “strategic investments to expand its user base significantly,” according to Alibaba. And both companies have opened their payment services to visitors in China since November, expanding the battle for users beyond Chinese customers.

Eventually, however, a long-delayed IPO could be Ant’s judgment day, when the world gets a look at its real valuation.