The shock suspension of the planned initial public offering (IPO) of fintech giant Ant Group's dual listing on Tuesday (November 3) has given international investors some pause, but it appears unlikely to greatly affect their interest in China-related investments – although it could make them take a closer look at any newlook listing from the company.

The deal had been set to list on the Shanghai science and technology innovation board and in Hong Kong on November 5 and raise as much as $35 billion, on the back of up to $3 trillion in demand from global investors.

Ant Group said in a Hong Kong stock exchange filing that it had been notified by the relevant regulators in the mainland that its proposed A-share listing had been suspended as the company may not meet listing qualifications or disclosure requirements due to material matters.

While the cancellation of such a large transaction was a surprise, a Hong Kong-based banker and investment industry expert told AsianInvestor there had been signs of difficulties and even hubris on the part of Ant Group in the previous weeks.

Jack Ma
 

"China Securities Regulatory Commission (CSRC) had not given approval at least two weeks ago, but Ant Group proceeded with the launch without regulatory approval and ignoring the warning signs coming from the regulator,” said the banker, who declined to be named.

"All of this has come after Jack Ma [founder of ecommerce giant Alibaba and subsidiary Ant Group] has gone out of his way to criticise banks and regulators," the banker added.

Last month at a Shanghai business forum, Ma appeared to criticise regulators for being “too heavy-handed and stifling technological innovation".

Ma was summoned to a rare joint meeting on Monday (November 2) led by the country’s central bank and three other top financial regulators, seemingly in a rebuke of his earlier statements. The cancellation a day later seems unlikely to be a coincidence.

“It’s not really clear what the reason was for the offering being suspended and whether additional regulations imposed by Beijing will address any problem they’ve identified,” added Stuart Somer, director of Complyport.

Stuart Somer, Complyport

CSRC and Ant Group did not respond to emailed questions on deal details and future timeframe.

IMPACTING INVESTMENT SENTIMENT?

Observers differed over whether the controversy would be likely to have an impact on investor assumptions, reinforcing existing views about China.

"It has confirmed all the stereotyped images that some people might have previously had [about Chinese markets and regulation]," said the banker. 

"Many people that don’t have day-to-day involvement with China – as I do – will probably thought this demonstrates that this is going to be a huge global deal for a huge company, as they’ve seen elsewhere. But in reality China has demonstrated why it is still really an emerging market."

He added that the issues might well also help to burst the bubble that has surrounded the aspiring debutant. "Ant is obviously a good business, but is it worth the $3 trillion that has been has been put up for it? Absolutely not. And the pricing will be very difficult to get right if and when the deal is rescheduled."

However, Somer argued that the deal failure would be unlikely to have a lasting impact on investor enthusiasm for China. “The world wants to invest in China; IPOs [from mainland companies] will proceed one way or the other,” he said.

His view was echoed by Eva Law, founder and general partner of consultancy CAG International.

“For institutional investors who are investing into Chinese stocks, there might be a short-term negative impact on investors sentiments for this all-of-sudden halting. While in longer term, they may still consider good quality Chinese assets for investing,” she told AsianInvestor.

Ant Group itself should be able to rely on strong institutional investor support, locally and internationally, once it manages to satisfy regulator demands and is permitted to return with its IPO.

China government-backed pension fund National Social Security Fund was reportedly one of Ant Group’s major pre-IPO investors last year, while Singaporean sovereign wealth fund GIC was also said to be seeking to invest more than $1 billion in Ant Group's IPO.

Their interest is likely to remain for a new deal, particularly given its size and operations at the heart of the appealing fintech space. 

LENDING BUSINESS DISCOMFORT

The cancellation of the transaction does underline the willingness of Beijing to intervene in fintech finance raising – especially when it comes to small loans and microfinance that affect people on the street.

Somer said fintech is increasingly an area of sensitivity in China “given its use for surveillance of citizens and that Ant Group already has in its hands lots of financial data about the spending patterns of millions of people.”

Ant Group’s lending services operations have certainly grown rapidly, in the footsteps of its original digital payment services.

Huabei and Jiebei, two main products of Ant Group’s retail credit-based loan services, serve 500 million users as of June 2020. And the overall credit/loan segment contributed almost 40% of its total revenue of Rmb120.6 billion in 2019, according to its IPO prospectus filed last month.

Ant Group Revenue Contribution (2017 to 1H2020)

Business Segment

2017

2018

2019

1H2020

Digital payment and merchant services

54.9%

51.8%

43%

35.9%

CreditTech

24.8%

26.2%

34.7%

39.4%

InvestmentTech

16%

16.2%

14.1%

15.6%

InsureTech

3.5%

5%

7.4%

8.4%

Innovation initiatives and others

0.8%

0.9%

0.8%

0.8%

Source: Ant Group IPO Prospectus

David Webb, activist investor and founder of Webb-site.com, told AsianInvestor in an email reply that the country, which controls most of the traditional banking system, has belatedly realised that Ant Group is eating into the market share of state-controlled banks, at least in terms of loan origination.

He noted that the government may be concerned that Ant Group could be originating loans without caring sufficiently about repayment; "rather like the US mortgage brokers of the meltdown of 2008. Ant eats the cream, and the banks the potential loan losses"

On November 2, one day before the blockbuster listing was suspended, the People’s Bank of China and China Banking and Insurance Regulatory Commission began soliciting comments on draft rules for online businesses offering small loans/microfinance to customers, one of Ant Group’s core business.

HONG KONG VULNERABILITY

For Hong Kong itself, the postponed IPO points to another concern: the fickleness of foreign capital flows into its very large financial industry, with a stock market capitalisation now 15.6 times that of the city's GDP as of October.

As Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis wrote in a note on Wednesday, "the queue for IPOs is a key reason for the recent capital inflows into Hong Kong, but the conditions on liquidity and the Hong Kong dollar might change radically when the tide ebbs." 

She added that the delayed listing underlines a growing vulnerability: "If the Ant Group’s IPO is not confirmed to a later date, money will not need to be parked for equity subscriptions and could leave Hong Kong ... its growing financial size for its economy will make volatility a concern well beyond the Ant Group’s final outcome."