How much will Ant Group’s IPO debacle hurt Alibaba shares?

Ali Babaof (NYSE: BABA) the stock fell recently after Chinese regulators derailed the public debut of its fintech subsidiary Group of ants. Alibaba owns a 33% stake in Ant, which owns the digital payment platform Alipay.

Listing of Ant’s shares in Shanghai and Hong Kong was suspended after Jack Ma, co-founder of Alibaba and a major investor in Ant with an 8.8% stake, delivered a speech controversial at a government forum on October 24.

Ma criticized Chinese financial regulators, claimed that many of the country’s banks were operating as “pawnshops” with their collateral standards, and said China needed a new financial platform that would grant loans. loans to low-income clients who lacked sufficient collateral.

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Chinese regulators had previously examined the ability of Alipay and Tencentof (OTC: TCEHY) Tenpay, which holds a near-duopoly in China’s digital payments market, to disrupt the country’s mostly state-backed banking sector. Ma’s speech apparently angered those regulators, who then halted Ant’s IPO.

Ant was set to be the world’s largest IPO, with a valuation of over $ 300 billion. It was also to be a watershed moment for Chinese trading, as Ant was trading exclusively in China instead of the United States.

But now its collapse will cost its underwriters millions of dollars in fees, and a new IPO could take months to file. This is certainly bad news for Ant Group, Jack Ma, and investors looking for a share of the stock, but has Alibaba’s stock been unfairly punished for Ant’s suspended IPO?

Why were investors excited about Ant?

Ant’s revenue grew 38% year-over-year to 72.5 billion yuan ($ 10.7 billion) in the first half of 2020. Of that total, revenue from its digital finance services rose 56% to 46 billion yuan ($ 6.8 billion). Its net income rose 21% to 21.9 billion yuan ($ 3.2 billion).

At the end of June, Alipay was serving 711 million monthly active users (MAU) and its app was processing 118 trillion yuan ($ 17.4 trillion) in payments in the past 12 months. Tenpay, which includes WeChat Pay and QQ Wallet, served 940 million UAMs last year, according to a recent Ipsos survey.

These growth rates are comparable to other hot fintech companies like Square (NYSE: SQ) and Pay Pal (NASDAQ: PYPL), which attract both large institutional investors as the rise of mobile payments, unpredictable macro winds and low interest rates make traditional banks less attractive.

Square went public five years ago, and its stock has risen more than 22 times from its IPO price. PayPal is from eBay (NASDAQ: EBAY) as a separate company in 2015, and its stock has grown by approximately 460% over the past five years. Many investors probably expect Ant to generate returns similar to those of these two fintech leaders, if not better.

How much will Ant debacle hurt Alibaba?

Alibaba previously struck a deal with Ant that gave it 37.5% of the pre-tax profits of the fintech subsidiary. But last September, he traded those rights for a 33% stake in the company.

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Alibaba’s stake in Ant generated 5.32 billion yuan ($ 752 million) in investment profits, or 4% of its net profit, in fiscal 2020. It also generated gains through the previous profit-sharing agreement in the first half of 2020.

In the first six months of fiscal 2021, Alibaba’s stake in Ant generated 7.72 billion yuan ($ 1.12 billion) in investment profits, or 10% of its net profit. The value of this stake would have increased significantly after Ant’s IPO, but it also won’t decrease because the IPO was suspended.

Nonetheless, Ant’s IPO could have boosted Alibaba’s profits at a crucial time. Alibaba generates most of its revenue and profit from its core business activity – but the segment’s margins are contracting as it relies more on low-margin businesses (such as brick-and-mortar stores, cross-border markets, direct sales., and its logistics network Cainiao) to increase its total turnover.

A successful listing for Ant could have led to future spin-offs and IPOs for Cainiao, Alibaba’s media streaming platforms, its growing mobile games business, and other non-core businesses. This fallout could boost Alibaba’s profits and cash flow, but Ant’s failure could dampen the market’s appetite for future offerings.

Jack Ma no longer runs Alibaba as CEO or executive chairman, but he still owns a significant stake in the company he co-founded more than two decades ago. Therefore, any scrutiny of Ma could still have an impact on Alibaba – which is already facing potential antitrust polls regarding its leadership position in the Chinese e-commerce market.

The bottom line

Alibaba continues to grow at a steady pace, and analysts expect its revenue and profits to grow 44% and 31% respectively this year. Its Tmall and Taobao markets will continue to block Chinese buyers, and Alibaba Cloud will remain Asia’s number one cloud infrastructure platform. Alibaba’s stock is also reasonably valued at 30 times expected earnings.

Therefore, the suspension of Ant’s IPO is certainly disappointing, but it should not impact Alibaba’s near-term growth. However, investors should still see if Chinese regulators gradually tighten the screws on Alibaba and take a close look at its long-term expansion plans.