Ant Group’s stalled IPO could cut its value in half

China’s move to halt Ant Group’s massive stock debut could reduce the fintech giant’s value by as much as US$140-billion (R2.2-trillion), according to analysts’ revised estimates.

New regulations that could force Ant to raise more capital to back lending and seek national licences to operate across the country may reduce the firm’s valuation by about half, according to estimates from Morningstar and other firms. The regulatory details are preliminary and could be subject to change.

If Ant’s $280-billion pre-IPO valuation is halved, it would essentially mean the company is worth less than what it was two years ago when it raised money from some of the world’s largest funds including Warburg Pincus, Silver Lake Management and Temasek Holdings.

The reduced valuation also means potentially lower fees for investment banks like China International Capital that were counting on a windfall from Ant’s record-setting IPO. And it gives billionaire Jack Ma’s firm less heft to carry out acquisitions as it looks to expand beyond its Chinese base and take the fight domestically to Tencent.

In a drastic turn of events, China put the brakes last week on Ant’s $35-billion share sale just days before the fintech juggernaut was due to go public in Shanghai and Hong Kong. The move upends what had been one of China’s biggest business success stories, as well as what was to be a pivotal step in the development of the nation’s fast-growing capital markets.

Downside

Iris Tan, an analyst at Morningstar, said that Ant could face a 25-50% downside in valuation, if its pre-IPO price-to-book ratio drops to around the level of top global banks. That means its valuation could be slashed by about $140-billion. Currently Ant’s stock price is valued at 4.4 times of its book value, versus two times at those banks, she added.

Sanjay Jain, Singapore-based head of financials at Aletheia Capital, estimates that Ant’s price to earnings ratio could drop to about 10 times its lending profits, half of the previous target it had assigned to the company. The new price would put the fintech giant more in line with valuations of some of the better quality banks.

Citigroup is trading at about eight times forward 12-month earnings, while DBS Group of Singapore is trading at about 12.6 times. China Merchants Bank, among the country’s biggest retail lenders, trades at about 10 times.

A representative for Ant declined to comment.

Ma was summoned by China regulators for “supervisory interviews” days before Ant’s proposed trading debut and authorities announced that they had belatedly discovered an array of shortcomings that, by some accounts, might require Ant to be overhauled.

Under the proposed new rules, the company would need additional capital to meet more stringent regulatory demands. Online lending companies like Ant could be required to provide at least 30% of funding for loans, according to draft rules proposed by banking regulators in November. Currently only about 2% of loans sit on Ant’s balance sheet, with the bulk of funding coming from bank partners.

If those rules are passed, to support its nearly 1.8-trillion yuan of loans outstanding, Ant needs to underwrite 540-billion yuan of credit on its own, according to Morningstar. Based on how small-loan companies can only leverage as much as five times, Ant’s credit units Huabei and Jiebei could be needing at least 54-billion yuan, it said.

“When it returns, investors will likely look at Ant a bit less like a tech company than before given it will be less asset-light, and growth assumptions may be lower,” said Kevin Kwek, a Singapore-based analyst with Bernstein. “A discount on previous valuations might set in given the regulatory overhang.”  — (c) 2020 Bloomberg LP