Ant Group’s name supposedly represents a metaphor. On its own, a single digital transaction is like an ant; tiny, insignificant, barely noticeable.
But if billions of them are packed together, they form a huge colony.
That colony was set to get a lot bigger on November 5 when the financial services firm was due to go public on the Hong Kong and Shanghai exchanges with a flotation set to raise a world record $34.4billion.
The listing was just suspended by Chinese regulators though who cited ‘significant changes in the financial technology regulatory environment’ among other issues as reasons for the delay.
Ant Group’s flotation was set to raise a record $34.4billion before it was suspended
Investors will therefore miss out on a fantastic opportunity (at least for now) to make a big buck on one of the world’s most exciting companies.
Ant Group operates Alipay, a digital payments platform with an estimated 1.3 billion users, which also provides services like wealth management, lending and insurance.
It was set up and later spun off by the e-commerce leviathan Alibaba, who retain a one-third stake in the firm, and whose founder Jack Ma – China’s second richest man – has a controlling share.
Alibaba itself had the then world’s largest IPO in 2014. It was a monumental achievement, however any investors who put their money into the company on the first day would have seen their shares drop 29 per cent in value if they held onto them for a year.
If they had decided to stay the course and keep hold of the shares for another four years though, they would have pulled off a 96.9 per cent return.
A similar pattern happened for three other businesses which have been among the ten biggest IPOs in history, according to new analysis from broker eToro.
It found that ‘day one’ investors in General Motors, Visa and Facebook who sold their shares after one year made a loss, but if they kept them for five years, they made a profit, including a 162.1 per cent and 286.2 per cent profit in Visa and Facebook’s case, respectively.
Alipay is a Chinese digital payments platform with an estimated 1.3 billion users
‘Firms usually find their share prices can be volatile after they IPO, meaning investors who only hold onto their shares short-term can often lose money,’ writes eToro.
‘However,’ it adds, ‘the data shows that those investors who held their shares for five years would have made a profit 90 per cent of the time, while 80 per cent of those still holding their shares would be up today.’
Only one of the ten highest IPO companies made a loss after five years for ‘day one’ investors – Italian energy group Enel – and they still only made a 3.5 per cent loss.
Does this mean that investors who initially lose money from IPOs should stick it out in the hopes there will be a rainy day just over the horizon?
Only one of the ten highest IPO companies made a loss after five years for ‘day one’ investors
Analyst Adam Vettese, who contributed to the eToro research, said: ‘If you’re investing in the very start of that journey, then it should be with a long-term outlook. It takes time to build market share, expand into new regions and develop new products.’
At the same time, he warns that investors should follow certain precautions: never invest more than you can afford to lose; know what you’re investing in and make a decision that feels right to you.
‘If you have concerns over the future of the company, then holding it for the long-term likely isn’t the right choice for you,’ he observes.
IG Group’s chief market analyst Chris Beauchamp says investors have not got a crystal ball to draw on, so it essential they always review their investment and treat it like any other stock.
China’s richest man Jack Ma owns a 50 per cent stake in Ant Group while Alibaba Group owns a third of the firm. Alibaba itself had the largest IPO in history when it went public in 2014
Just because a company is massive does not mean it will be more successful either. Many undergo huge hype prior to going public only to end up being a damp squib when reality strikes.
One of the great British IPO disasters has been Aston Martin. The luxury auto maker has dramatically failed to live up to expectations, and has seen its shares plummet from £19 at its October 2018 launch to less than 60p two years on.
And as Richard Hunter, a market analyst at Interactive Investor writes: ‘Even pre-pandemic, challenging trading conditions had continued into the peak delivery period of December 2019, resulting in lower sales, higher selling costs and weakening margins. Car sales in China also collapsed in early 2020.’
Businesses need to continue performing well after an IPO in order to give investors a decent return. Solid earnings growth, good management and healthy finances all help boost companies’ stock prices, as does its relative market position.
Aston Martin has dramatically failed to live up to the expectations of its IPO, and has seen its shares plummet from £19 at its October 2018 launch to less than 60p two years on
Certain technology stocks are doing very well right now – mainly as a consequence of the pandemic – and fattening the already bulky wallets of CEOs like Twitter’s Jack Dorsey and Apple’s Tim Cook in the process.
For example, Facebook was deeply overvalued when it went public, yet it has kept on attracting hundreds of millions of new users and improving its website’s monetisation, and becoming one of the most valued S&P 500 stocks.
Where does this leave Ant Group? Well, it has many metrics in its favour.
Last year, it made over $2.6billion in profits on revenues of $17.5billion. But its first-half profits this year were $3.2billion while its revenues from January to September were $200million more than it banked in the entirety of 2019.
Ant Group made over $2.6billion in profits on revenues of $17.5billion last year. But its first-half profits in 2020 were $3.2billion while its revenues from January to September were $17.7billion
Meanwhile, its Alipay user numbers shot up ninefold to 900 million from 2013 to 2018, making it bigger than its rival WeChat. The payments processor is also expanding globally, having made partnerships with ten Asian e-wallet enterprises, and one with Barclaycard in the UK last year.
A Brookings Institution report in April stated that in the future, Western companies ‘serving Chinese retail customers will likely have to adopt Chinese payment platforms.
‘Possible partnerships between western financial institutions and Alipay and WeChat may make that transition easier,’ it asserted, and despite the possible setbacks, ‘Chinese payment systems will increasingly be integrated into global payments.’
Yet even with such inexorable growth, Ant Group has significant vulnerabilities that could hinder its development.
Like its compatriot Huawei, the US government is growing nervous of Ant Group. If it blacklists the firm, this could deter Western firms from dealing with Ant Group, just like with Huawei
Like its compatriot Huawei, the US government is growing nervous of Ant Group. A recent Reuters report claimed the State Department has proposed blacklisting it due to concerns the Chinese government could access sensitive banking data.
Some analysts believe such a move would be merely symbolic, but it could end up deterring Western companies and countries from dealing with Ant Group, just like with Huawei, who Samsung recently surpassed as the world’s biggest smartphone seller.
Ant Group may have to worry more about the Chinese government though, which is designing its own virtual currency that could become a significant rival to AliPay and WeChat and enable it to better monitor its citizens’ digital transactions.
In addition, regulators in China have imposed tighter regulations on the digital payments industry. Ant Group has had to put caps on investments in money market funds and will soon be subject to higher capital requirements.
Its international revenues are also tiny in comparison to its Chinese market business, where it attained 95 per cent of its earnings in the last financial year. An unexpected domestic shock, therefore, could cause profound damage.
All these factors will have some effect on its performance, and it is ultimately how well the company performs after it eventually goes public that will determine whether it soars or flops.
If history is anything to go by, the fintech giant and its ex-parent company Alibaba have fostered a unique ability to transform markets and adapt to new realities.
Jack Ma once complained about the difficulty of small businesses getting loans. ‘If the banks don’t change, we’ll change the banks,’ he warned back in 2008.
His words were very prophetic. Today, Ant Group and Alibaba have revolutionised how Chinese consumers pay for goods and services, becoming some of China’s great capitalist success stories as a consequence.
And even as the pandemic knocked the global economy off course, they have still grown, and their dominance will likely endure for many years to come, probably to nobody’s greater pleasure than investors in it for the long haul.
How can UK investors get involved?
1) Scottish Mortgage Investment Trust – Baillie Gifford’s flagship investment trust has Ant Group as one of its largest unlisted holdings. It has further exposure through Alibaba, which accounts for 5.8 per cent of the fund.
2) Fidelity China Special Situations – The London fund is a long-time backer of Alibaba and had 9.2 per cent of its assets invested in the e-commerce firm.
3) JPMorgan Emerging Markets – The trust has Alibaba as its second-largest holding and comprises eight per cent of its total fund, just ahead of Tencent.
4) Schroder Asian Total Return – Alibaba is also its second-largest holding, although it makes up a slightly smaller total share of its fund – 7.2 per cent.