Ant Group – Crushed by the state.

A very different fate to that of Alibaba. 

• The censure dealt to Ant Group is the exact opposite of that given to Alibaba (see here) that will destroy its proposition, ensure that it no longer threatens the banking sector and also supplies all of its data to the state.
• Tencent can expect the same treatment.
• Some commentators will see this impacting the investment case for Alibaba but I have always assumed that Ant Group’s worth to be a tiny fraction of the mooted $300bn IPO valuation.
• Furthermore, because Ant Group is not consolidated into Alibaba, there will be no hit to the headline numbers or multiples unlike what is now likely to happen to Tencent.
• With the sanctions that the Chinese regulator has announced, Ant Group as it once existed will be no more which I think is a huge boost to the state-owned and controlled legacy banking sector.
• These measures are:
  • First, Improper connections: Ant Group must “cut off” the “improper connections” between its financial products and the Alipay payment system.
  • In practice, this is a massive and potentially fatal blow to the Ant Group proposition.
  • Alipay and consumer lending go perfectly hand in hand because payments are an excellent way to assess creditworthiness and also greatly facilitate repayment.
  • Driving a wedge between these two activities will completely destroy these benefits and render the lending part of Ant Group to being just another bank.
  • 64% of Ant Group’s revenues come from financial products that have grown out of the Alipay payment system and there is now very little reason for Ant Group to hold onto them.
  • These revenues come mainly from Jiebei which offers small unsecured loans and Huabei which is somewhat like a credit card whose future is now very much in doubt.
  • This order is likely to return Ant Group to being merely a payment platform, thereby destroying the vast value that had been created by leveraging Alipay.
  • Second, Credit reporting licence: The regulator will also require Ant Group to obtain a personal credit reporting license.
  • This is a strange ruling to make as there are only two of these in existence in China which are both held by government-backed agencies.
  • None of the other lending banks have a license of this nature and so it is not obvious why the regulator would require Ant Group to apply for one.
  • One possibility is that by refusing Ant Group a licence, the regulator could force Ant to share its payment data with one of the other two government agencies in order to continue lending.
  • This has been a major bone of contention between the government and Ant Group which has had very little to gain through the pooling of loan and payment data.
  • This move may force it into compliance in order to keep lending, thereby ending the data advantage that Ant has had historically.
• I think that these actions will be devastating to Ant Group’s business, its outlook and its valuation.
• In one fell swoop, the regulator has wiped out Ant Group’s core differentiator which made it so valuable and forced it to hand over its crown jewels to the state-owned banks.
• Tencent should be crashing on this news.
• Fintech is 27% of Tencent’s 2020 revenue having grown from nothing in recent years and is supposed to be one of the biggest drivers of growth over the next 10 years as digital ecosystem growth slows.
• Just like Alibaba, this business had grown directly out of the WeChat Pay payment system and as such represents the same threat to the state-owned banking system that Ant Group did.
• Consequently, when the eye of the regular turns onto Tencent, it can expect pretty much the same treatment.
• This is because customers who denied the ease and simplicity of Ant Group financial services will naturally turn to Tencent meaning that this avenue must now also be cut off to protect the state-owned banks.
• Hence, I don’t think that Tencent escapes and because Tencent fully owns and consolidates its fintech revenues, the hit is going to be much bigger and harder.
• If I owned Tencent, Naspers or Prosus, I would be selling them immediately and buying the badly beaten and very cheap Chinese banks or Alibaba (which I already own).