Ant Financial will snub NYC for Shanghai listing
- Ant Financial has a closed private placement which now values it at $40m
- US Investors don't always understand listed US Chinese companies
- Wary of accounting issues, investors apply ‘China discount’ to Chinese firms
By Neil Flynn
Alibaba’s financial arm Ant Financial has announced that it has closed a private placement, which now values the firm at $40 billion. This private placement saw the state-run National Social Security Fund take a 5% stake in the company.
Ant Financial operates China’s biggest online payment business Alipay, and will launch the Internet bank MyBank next week. This will see the firm offering small loans to individuals and SMEs, with a credit score that is calculated by payment history on Alipay.
I have been bullish on the launch of MyBank, and along with Tencent’s WeBank, China’s banking system will receive the technological innovations it needs. China’s state-owned banks have been slow to adopt mobile and internet banking, and only tend to offer loans to large corporations, as the risk of default is much lower.
This has meant that it has been very difficult for individuals and SMEs to access capital through normal sources, and has sparked the growth in the shadow banking industry. However, MyBank and WeBank are set to change this, and make loans available to this underserved demographic.
Ant Financial has already been integrated into Alibaba’s ecommerce platforms, as consumers are able to spend interest-free credit through Taobao and Tmall, so long as it is paid back within the specified time limit.
This essentially acts as a credit card that can only be used on Alibaba’s platforms, and has helped to boost consumption. The service was only launched at the start of the year, but investors should expect this to have a huge effect on Single’s Day spending on November 11.
The lure of a Shanghai IPO
Jack Ma has stated that it is likely that when Ant Financial goes public in 2016 or 2017, it will be done on an Asian market, which suggests that it will be either Hong Kong or Shanghai.
However, it would be very surprising if it isn’t Shanghai, as the capital inflow liberalisation and government backed rally have made it a much more attractive place to list. The domestic equity market rally in Shanghai has not gone unnoticed, as its 133% rally over 12 months has coincided with the government easing restrictions on foreign capital investing in the mainland.
The lures of a domestic IPO have been enough for several firms to delist from overseas markets in order to raise capital in the mainland. Focus Media de-listed in New York in order to re-list on China’s secondary equity market in Shenzhen.
Chinese companies: Photo: iStock
The proposed $7.4 billion IPO is double the cost that management paid to take the company private in 2013. As I discussed yesterday, Qihoo has received a management-led buyout bid to take the company private, which values the firm at $10bn.
It is a perpetually undervalued company, but it is estimated that if it were listed in Shanghai, its valuation would be $60bn. The 12 month projected P/E ratio in Shanghai is 18x, compared to the five-year average of 10.3x.
The problem for Chinese companies that are listed in the US is that investors don’t particularly understand their business model, because the firms are predominantly focused on the Chinese market.
In addition, there have been numerous Chinese firms that have had accounting irregularities over the past decade, and this has caused investors to apply a ‘China discount’ to all Chinese firms, which accounts for the risk that there are accounting issues.
Whilst valuations are sky high, investors would assume that Alibaba would follow the lead of smaller firms, and list in Shanghai as soon as possible. Most analysts expect that Shanghai will see a correction in the second half of the year, but the reality is that it is such a difficult market to forecast.
West is institutional, East is retail
In the West, 80% of trading volume is done by institutional investors, whereas 80% of trading volume in China is done by retail investors. This difference is important because in the West, the majority of trading is done by well-informed professionals, which in theory should keep valuations reasonable.
In China, this isn’t the case, because retail investors, with a limited knowledge of finance and valuation, and are known for their penchant for gambling, do the vast majority of trading. Over the past few weeks, there has been a disturbing increase in new stories about people who have quit their jobs, maxed out their margin trading accounts, borrowed money from loan sharks in order to invest as much as possible into equities, under the assumption that ‘the stock market will continue to rally’.
When this plan inevitably backfires, they commit suicide because it is impossible for them to repay that huge amount of money. From a personal perspective, I’ve noticed a change in the attitudes of friends and colleagues towards the stockmarket, as most now believe that the rally is coming to an end.
When MSCI invests in domestic equity markets, this will lead to a huge increase in capital inflows from overseas, not just from MSCI, but from the numerous institutional investors that will aim to replicate and beat the emerging markets fund.
With 2016 being the earliest that investors can expect to see the Ant Financial IPO, the MSCI-related capital inflows should help to increase domestic equity valuations, and most importantly, give a boost to investor enthusiasm, and this will help Ant Financial to raise as much capital as possible.
-- Edited by Adam Courtenay
Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.