Max Pacella
Investment Analyst
29 Oct, 2020

“Today’s financial system is the legacy of the Industrial Age – We must set up a new one for the next generation and young people. We must reform the current system.”
Jack Ma, Co-Founder of Alibaba on Ant Group

In just a few days, we will witness the largest IPO in history – combining one of the largest valuations, largest oversubscriptions and largest public profile ever seen in modern investing.

Any professional investors who have followed our pieces will know that we have been long awaiting this IPO, having followed the progress of Ant for well over two years, having in the past had the opportunity to participate in its growth via an early investment in Alibaba.

For some background material, our CIO, Vincent Hua, wrote a note in 2018, detailing more granular data about the company – we’re delighted that the numbers have increased stratospherically from what he reported a few years ago. If you wish to access this article, please do not hesitate to contact me.

The numbers surrounding the deal are of a scale most of us have never seen in our careers in the financial markets – today, we look to make sense of the numbers and put the world’s largest deal into perspective.

Who is Ant Group?

Ant Group, the leading digital payment and e-commerce platform in mainland China, began in 2004 as Alipay, a spinoff from Alibaba, and is now the highest valued fintech and most valuable ‘unicorn company’ globally.

It is now poised to be the largest IPO ever conducted, with an approximate IPO size of USD 34 billion pulling far ahead of second place, Saudi Aramco at USD 29.4 billion.

With its evolving business model, Ant could be considered one of the largest consumer banks in the world, no longer just a digital payment off-shoot.

At an IPO valuation of approximately USD 280-300 billion, Ant is competing with JP Morgan Chase (USD 302 billion) and Mastercard (USD 318 billion) straight out of the gate, both of which are much older companies.

Pulling directly from the Chairman’s address in the latest H-Class Prospectus, Ant is “built on three major pillars”:

  • Digital payments
  • Digital finance
  • Digital life services

The entire Ant Group ecosystem is run via the largest non-social super-app in the world. In total, over 1 billion different users engage with the app per annum, accessing over 80 million different merchants and 2,000 financial partners.

The ecosystem of Ant Group seems to be able to connect almost every aspect of life for Chinese users:

  • Online and in-person commerce is conducted through Alipay’s digital payment capabilities.
  • Digital media distribution is handled via a team within Ant.
  • Cross-product collaboration based on collected user spending data.
  • Wealth management capabilities have been introduced in collaboration with Ant’s flagship money-market fund, Tianghong Yu’e Bao (Wall Street Journal called this the biggest money-market fund in the world in 2019).
  • Individual and small business lending via Ant’s lending arm ‘CreditTech’, which currently holds 15% share of China’s entire consumer-lending market.

The company is a true multilateral operation, and over the last half-decade, Ant has aggressively leveraged their large userbase and market share to promote cross-selling and collaboration between their variety of products and services.

Ant is also at the conflux of several macroeconomic tailwinds:

  • Anti-US sentiment continues to grow within China, so brand loyalty and state backing of the company will only strengthen with time.
  • The growing individual wealth of the Chinese population, coupled with the availability of services throughout South-East Asia, means that Ant is positioned to capture a large share of the upside from one of the fastest growing regions in the world (both from a wealth and digital-payment usage perspective).

Making sense of the numbers

Some of these numbers were covered in my Digital Payments – Part 2 note, but let’s have a brief overview to give some colour to the financials that are coming up.

Alipay (part of Ant Group) is China’s most popular digital payment services, with an estimated 730 million monthly users [New York Times] – more than double the population of the United States and double the users of PayPal (PYPL:NASDAQ).

Whilst Visa (V:NYSE) is reported to manage approximately 65,000 transactions per second [Visa], Ant handles 544,000 orders per second [The Economist] through Alipay alone.

In fact in FY2020, Ant’s total transaction volume equated to around 69.4% of China’s entire GDP, operating on a razor thin margin of 0.1% per transaction.

A recent broker report by Morgan Stanley provides a discounted cash flow (DCF) valuation of up to 50% higher than the IPO valuation by the end of 2020, with a forward P/E multiple lower than any other payment platform or mega-cap tech company.

Company Valuation (USD $Billion) P/E Multiple
Ant Group* $333-457 25-35
Mastercard $318.4 47.6
Visa $410.8 40.0
PayPal $231.4 53.6
Square $75.35 318.1
Netflix $215.7 77.8
Amazon $1,606.4 103.0
*Morgan Stanley, October 21st 2020
Data based on FactSet

The growth in Ant’s financials (pun intended) is staggering, the kind of figures you’d expect to see in a small start-up rather than a multi-billion-dollar industry leader.

If the company’s P/E multiple was to increase to an average of their industry peers (Mastercard, Visa and PayPal), then the current IPO valuation would be considered cheap in this context – this is a part of the reason for the global excitement for this deal.

Pulling from the H-Class Prospectus (released on October 23rd 2020), you start to see some of the fundamentals behind the global attention and demand for the company.

Financials 2018 2019 % Change PayPal Visa
  RMB ‘000 RMB ‘000 From annual report From annual report
Revenue 85,722,344 120,618,372 40.71% 13.3% 11.5%
Gross Profit 44,813,010 60,103,202 34.12% 15.6% 12.5%
Net Profit 2,156,119 18,071,921 738.17% 19.5% 17.2%


Financials 6 Months 2019
RMB ‘000
6 Months 2020
RMB ‘000
% Change
Revenue 52,540,056 72,528,345 38.04%
Gross Profit 24,404,077 42,484,000 74.09%
Net Profit 1,892,254 21,923,376 1,058.59%

I’ve added some additional columns to the 2018-2019 financials to compare Ant’s rate of growth to two other industry leaders – the comparison speaks volumes.

Monetizing one billion users

The path for Ant Group seems reliant on monetizing the 1 billion active annual users in the years to come. The company remains in the early stages of creating concurrent revenue opportunities from those who use their platform.

The growth in all areas of the company financials is plain to see, but this does not necessarily mean that the upside has been fully captured. Morgan Stanley notes that the more ‘consumer bank’-style services will be key drivers for the short-term outlook.

‘CreditTech’ still has 85% of the Chinese market to penetrate, partnering with more financial institutions with each day to provide them access to underserved individuals and SMBs.

Ant is uniquely placed to partner since they have the fastest access to their users’ credit scores, income patterns, spending habits and more – since a customer can link their own business, their commerce spending and their debts to Ant’s services, Ant has the most accurate and up to date information of any consumer bank in China.

On the other hand, ‘InvestmentTech’ seeks to offer a low-cost wealth management solution, incorporating new technology in robo-advisory services and A.I.-enabled discretionary advice to users.

This means that Ant can deal directly with the client, or offer services and a platform to existing asset managers, enabling multiple ways to engage directly with clients and creating a longer-term, loyal customer base.

‘InsureTech’ is a co-developed initiative with several large insurers within China to sell tailored products both within the educational and commercial markets, once again leveraging A.I. functionality to automate client onboarding and claims processing (effectively creating one of the lowest cost insurance models in the market).

These are only the obvious candidates for short-term growth. Ant is developing further initiatives to engage with merchants across South-East Asia, collaborate with overseas partners to gain greater market penetration and launch a blockchain service to tie into the possibility of a Chinese-centralised cryptocurrency.

Can we see a clear outlook?

As with any deal that attracts the amount of hype as the Ant IPO, can we see an outlook for growth, or is the market caught up in its excitement?

The runway and prospects for Ant are made very plain by the company and analysts, and the geopolitical situation seems ideal for Chinese fintechs to grow at rates otherwise unheard of in the wider market.

Though Ant may face competition from Tencent’s WeChat-Pay, we can be confident that no PayPal or Square market share will ever rear its head within mainland China in the near-term.

This means Ant has a dominant market position in one of the largest economies in the world, with a growing market share and revenue model, effectively having only a handful of legitimate threats to its seat as the pre-eminent digital payment platform in China.

As Jack Ma himself has noted, it was inconceivable even ten years ago that there would be a trillion-dollar company outside of New York. But as Ant looks to revolutionise the financial services industry within China, coupled with strong growth in existing revenue lines, the trillion-dollar company doesn’t seem so farfetched anymore. In fact, it may be an inevitability.

What will happen with the IPO?

By the time you’re reading this, the Hong Kong IPO book will have been made public, but we still have a little over a week until the shares float on exchange – which means we will speculate for a little while longer.

We know that Alibaba have purchased 20% of the book, or approximately 730 million Shanghai-listed A-shares and 1.16 billion of the Hong Kong-listed H-shares. The total demand for the IPO has exceeded USD 9 trillion, making the IPO book over 285x oversubscribed [Financial Times] without accounting for greenshoe demand.

This resulted in a shortage of Hong Kong dollars, with demand reaching the highest ever on record for the currency.

There are Hong Kong stockbrokers pitching the stock at 20x leverage and it is being sold out in a matter of hours.

What this shows is that the level of structural demand vs supply remains enormous for the stock, even after it hits the open market.

We haven’t even touched on the billions that index funds will need to pour into Ant, since they cannot touch the IPO due to weighting uncertainty.

Nothing is certain, but the hype does appear to have played into Ant’s favour in this case.

We may be staring down the barrel of a historic float, one which the entire world watches eagerly and scrambles to get hold of. With the pace that the company is moving at, we may be looking at each other next year, remembering when the first trillion-dollar Chinese company came to market.

To leave you with a closing thought – as a house, we see Ant’s journey as having just begun and are looking forward to seeing its continued success in the future.

The views expressed in this article are the views of the stated author independently of ANT Group (the Company) as at the date published and are subject to change based on markets and other conditions. Mason Stevens Limited has no authority whatsoever to give any information or make any representation or warranty on behalf of the Company, its shareholders, the advisors to the Company or sponsors or syndicate members, or any other person in connection therewith.  Opinions, estimates and projections expressed in this morning note are that of the author’s or sourced from third party research firms which the author believes to be valid as at the date of this publication, and are not given as an agent of the Company or any persons associated with the Company.  This morning note does not constitute an advertisement or an offer or an invitation or form part of any offer or invitation to subscribe for or purchase any securities, and neither this morning note nor anything contained herein shall form the basis of or be relied on in connection with or act as any inducement to enter into any contract or commitment whatsoever. Nothing in this morning note constitutes investment advice.  Please seek your own legal, investment and tax advice as you deem appropriate. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.