HONG KONG -- Ant Group, an Alibaba affiliate and the world's most valuable fintech, is putting the final touches on what is shaping up to be the world's largest initial public offering.
Aiming for a valuation of over $250 billion, the company hopes to raise $35 billion in a dual listing split equally between Hong Kong and Shanghai, according to people familiar with the matter. That would smash Saudi Aramco's $29.4 billion offering last year.
Started in 2004 as Alibaba's online payment service Alipay, the company has now has evolved into a virtual financial services mall for everything from loans to mutual funds, insurance policies and travel bookings.
Here are five things to know about Ant, the listing and the challenges that await the Hangzhou-based company.
Who is the 'Alibaba of Chinese finance'?
Ant Group -- known until this year as Ant Financial -- was established in its current form in 2014, after originally being set up as the payment unit of Alibaba Group Holding. Ant made a name for itself with its hugely popular mobile wallet, Alipay, which has over a 1 billion users and a 55% share of China's $29 trillion digital payments market.
Today, Ant is much more than just a payments facilitator. It is China's biggest provider of online consumer loans, and its platform generates billions of yuan in sales from investment and insurance products.
The shift has been profitable: Ant's digital financial technology platform accounted for 63.4% of its revenues for the six months through June, up from 44.3% for all of 2017, according to the company's preliminary prospectus. Its net profit margin was 30.2% -- twice the peak rate recorded in 2019 -- on overall earnings of 21.92 billion yuan ($3.17 billion).
The decision to focus on financial products was fueled in part by a desire to claw back customers from Tencent Holding, whose WeChat app has broadened out from a messaging service to an online platform for services of all sorts -- including mobile payments.
About 90% of Alipay's 1 billion users now access the app for more than just payments. The share paying for at least five financial services on Alipay reached 40% in 2019, up from 10% in 2017, according to Bernstein Research.
Who controls Ant?
Alibaba founder Jack Ma controls 50.5% of Ant through his control of the general partner of two investment partnerships-- Hangzhou Junhan and Hangzhou Junao.
Though he has no official role at the company, Ma does have veto power over any major decision it makes.
Alibaba, through its subsidiaries Hangzhou Alibaba and Taobao Holding, owns 33% of Ant. It acquired the shares last year in return for ending a profit-sharing agreement reached when Ant was spun off of Alibaba in 2011. Under that agreement, Ant was handing over 37.5% of its pretax profit to the Chinese e-commerce kingpin.
Other shareholders include Singapore's Temasek Holdings, GIC, Warburg Pincus, China Investment Corp. and China's national social security fund, according to information portal Crunchbase. The company has raised nearly $20 billion in three equity funding rounds since 2015. In its last round in 2018, the company raised $14 billion at a valuation of about $150 billion.
Who are its competitors?
The list is long. At the top are Shenzhen-based entertainment heavyweight Tencent Holdings, Chinese insurance conglomerate Ping An, and the country's second-largest ecommerce operator JD.com, as well as high-flying fintech startups like Yeepay.
Competition is fierce in China's digital payments market, which logged more than 53.4 trillion yuan ($7.64 trillion) in transactions in the first quarter of this year, according to market research firm Analysys.
While Ant remains the market leader it has been steadily losing ground, primarily to Tencent, whose market share has gone from 23% to 38.9% in recent years.
In other areas, Ant is very comfortably ahead. In wealth management, loans and insurance, Ant is at least twice as big as Tencent, according to calculations by Bernstein analyst David Dai.
The company in its prospectus also warned of risks from China's push to launch a digital yuan.
"We do not have sufficient visibility as to the impact of the DC/EP on consumers' payment behavior and the payment industry," Ant said, referring to the digital currency electronic payment project.
In August, the Ministry of Commerce said the DC/EP trial will be expanded across the nation's three leading urban clusters, centered on Beijing, Shanghai and the southern cities of Guangzhou, Shenzhen and Hong Kong.
How long before the IPO?
The wait is almost over, according to several people familiar with the preparations.
Subject to receiving the greenlight from the Hong Kong stock exchange, pre-marketing could begin as early as next week, with the offer opening for subscriptions by mid-October and a listing before the end of the month. Shanghai's Nasdaq-style STAR market granted approval in mid-September for the IPO to go ahead within a month of filing the company filing its application.
While the Hong Kong exchange is still going over Ant's paperwork, the company is hopeful it will be able to meet with the listing committee within days, sources say.
For Hong Kong IPOs of over $1 billion this year, the average time between filing the application and opening for subscriptions has been four months, according to stock exchange data. In 2019, it typically took at least three months to take orders. Ant filed its application on Aug. 25.
What are the regulatory risks ahead?
Ant has been at the receiving end of a barrage of rules aimed at de-risking China's $40 trillion financial sector.
Chinese authorities have announced that nonfinancial companies with businesses across at least two financial sectors, as well as those deemed to be financial holding companies, will have to apply for a license by next November. Those denied a license will have to sell or give up control of their financial operations.
Authorities also plan to cap the interest rates that companies can charge on quick consumer loans following a ruling by the country's Supreme People's Court in August. When the move was announced, the court exempted licensed financial institutions, but did not specify whether fintech companies like Ant would be affected.
Ant's unsecured loans carry annual rates of about 15%, and its 20 million small-business borrowers on average pay about 11%, more than double the rate charged by mainstream banks, though the latter tend to shy away from lending to small, private companies.
Yet another new rule limits the use of asset-backed securities to fund certain consumer loans. Under this rule, funding from securitization is capped at four times a financial company's net assets. Ant's multiple now stands at 4.7 times, which means the company could be forced to switch to costlier sources of capital, according to analysts.
Ant plans to absorb some of the impact from the new rules by applying for a financial holding license through its Zhejiang Finance Credit Network Technology unit, analysts said. These units will hold some financial businesses and cushion the capital and funding impact of the new requirements.
Ant is also facing challenges from Beijing-Washington tensions. After the Trump administration moved to curtail transactions with Chinese tech companies, including Huawei Technologies, ByteDance, Tencent Holdings and Hikvision, Ant warned in its prospectus that it, too, could become a target and lose access to technologies or the U.S. market.
Bloomberg reported on Thursday that U.S. officials were exploring ways to restrict Ant, as well as Tencent, over concerns that their payment systems are a threat to national security.