This week, the Communist Party’s central bank introduced a plan to overhaul Ant Group, which will be regulated similarly to banks and become a financial holding company. Some industry experts said that Ant’s rectification is stricter than expected, and the move will not only weaken Ant’s growth prospects, but also expose it to a $100 billion capital replenishment gap.
On Monday (April 12), the Communist Party’s central bank required Ant Group to apply to become a financial holding company as a whole, with all institutions engaged in financial activities regulated as such, and asked Ant Group to shrink the size of its funds, disconnect “inappropriate connections” between its microfinance and payment services, and curb monopolistic practices in the collection, control and use of consumer data. The company was required to shrink the size of its funds, disconnect “improper connections” between its microfinance and payment services, and curb monopolistic practices in the collection, control and use of consumer data.
Ant Group has built a complex financial ecosystem, with its mobile payments and lifestyle app Alipay, which has more than 1 billion users in China and draws in huge amounts of money by providing credit to users and managing investments. As of June 2020, Ant Group had revenues of $21.5 billion and profits of $5.8 billion.
The Wall Street Journal reported on April 14 that Ant Group would be subject to regulation similar to that of banks, which would weaken some of the company’s growth prospects and force it to scale back and eliminate some of its business arrangements. Those businesses are precisely where Ant has gained a huge advantage over competitors, China’s banks and traditional financial institutions in the past.
Dong Ximiao, chief researcher at the Zhongguancun Institute of Internet Finance, told Reuters that the rectification plan was more stringent than expected, meaning Ant Group would need at least 200 billion yuan in registered capital to meet capital adequacy rules for financial holding companies.
JI Shaofeng, chairman of Wood Peak Information Technology Co., Ltd. wrote that the financial control regulatory approach requires “financial holding companies to have paid-in registered capital of not less than RMB 5 billion, and not less than 50% of the total registered capital of the financial institutions they directly hold”; at the same time, commercial banks’ Internet loans and other regulations on partner contribution ratio The 30% requirement means that large financial technology companies, represented by Ant, are under pressure to replenish huge amounts of core capital and expand more cooperation channels after the establishment of the financial holding company.
According to Sun Haibo, president of the Institute of Financial Regulation, a think tank for private financial policy research in China, the core regulatory issue facing financial holding groups is the strengthening of capital requirements, which are expected to require at least 150-300 billion yuan of capital injection.
Ant’s valuation shrinks sharply
Analysts say the CCP’s overhaul will inevitably cause Ant Group’s valuation to shrink significantly.
Reuters reported that several U.S. investors and others who follow the Chinese market said the development appears to limit Ant Group’s prospects, lowering its expected profitability and valuation.
Daniel Kern, chief investment officer at TFC Financial Management in Boston, said there is still a lot of doubt about what Ant Group will look like after the overhaul.
One Hong Kong investor expects Ant’s IPO to be “a few years away.
William Huston, founder and director of institutional services at Bay Street Capital Holdings, an independent investment advisory firm, said Ant’s IPO as a bank or financial company is a completely different investment topic from that of a fintech company.
We initially took that position early on, thinking Ant would eventually do an IPO,” Huston said. We’re not in a hurry to invest in a bank.”
Huston cut the firm’s Alibaba share of its portfolio from 8 percent to less than 1 percent last year.
In March, some of Ant Group’s international investors valued the company at more than $200 billion based on its 2020 results, giving a more cautious valuation after Ant shelved its initial public offering (IPO) and was forced to restructure, people with direct knowledge of the matter said. These figures are at least a third higher than Ant Group’s valuation at the time of its 2018 fundraising, though still well below the $315 billion valuation given for its original planned IPO.
Kevin Carter, founder of the Emerging Markets Internet and E-Commerce ETF, said the new regulations now appear to have dampened Ant and its competitors.
He argues, “There’s no question that the value of all these types of businesses has been hit hard.”
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