Ant Group – Off the naughty step

Ant Group’s nightmare is finally over.

• Ant Group is buying back some of its shares in a move that indicates that the evisceration inflicted upon it as a result of Jack Ma’s transgressions is over and the company can get back to business.
• Ant Group is proposing to buy back 7.8% of every shareholder’s position at a valuation of $78.5bn some 70% lower than the $280bn valuation at which it was expected to float in 2020.
• Ant Group was also fined $1bn on Friday in a sign that the crackdown is over, and Ant Group get down from the naughty step and rejoin the economy.
• Needless to say, Ant meekly accepted its punishment and promised that it would be a good corporate citizen in future.
• The problem is that Ant’s future is very greatly diminished from the digital financial powerhouse that Jack Ma built.
• Ant’s value was all about the data as it could use what it learned from AliPay transactions to offer tailor-made loans and other financial products with excellent returns due to better risk management.
• Unfortunately, the regulator has completely carved the company up and prevented it from effectively competing with the legacy state-owned banks.
• Hence, even without the collapse in technology valuations that were witnessed in 2022, this company would still be worth a tiny fraction of what it was in 2022.
• If one takes into consideration both the decimation of its business and the collapse in valuations, it is not hard to argue that Ant buying back shares at $78.5bn is extremely generous.
• Given that the ratio of ownership will remain unchanged, the best way to look at this unusual transaction is that it is a special dividend.
• This represents a total dividend of $6bn of which Alibaba will receive around $2bn and it will still own around 1/3^rd of the company.
• The good news here is that this is another definite sign that the crackdown is drawing to a close and that business can now get back to normal.
• Furthermore, Jack Ma’s behind-the-scenes return to Alibaba (see here) is yet another sign that the Chinese state realises that it needs its technology sector to compete with the USA.
• This is badly needed as China’s technology sector is still really struggling to recover both from Covid Zero and the regulatory crackdown making it one of the least popular places to invest anywhere in the world (except perhaps Russia).
• There is the possibility that the long-delayed IPO process will now begin again but in this climate, I suspect that a valuation of $78.5bn will be a stretch.
• If Ant Group can pay a $6bn dividend, it clearly does not need to raise money and so there is no pressure to go public meaning that I think that it will wait for better times.
• While things are getting better on the regulatory front, the economic outlook remains far more depressing than I was hoping for.
• Hence, I think that the China technology recovery theme for 2023 could take much longer than expected.
• Chinese technology stocks are some of the cheapest in the world but with the current outlook, they look like value traps rather than short-term opportunities.
• I still hold Alibaba, but I have the luxury of being able to sit on it indefinitely, and I remain confident that a recovery will come at some point.