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This is the second in a series of four articles analysing the Hong Kong and mainland stock markets, delving into the reforms, emergence of the Star Market as a solid fundraising venue, upcoming technology champions and the way forward. You can read part one here.
When Starbucks was looking to boost its digital traffic in China to help sales recover from store closures prompted by the coronavirus pandemic, it turned to Alipay.
The Chinese mobile app with 900 million users scattered across the nation integrated a pre-order and pickup feature for Starbucks into its popular app last month, a service that was previously only available on Starbucks' own mainland mobile app. The Seattle-headquartered chain of coffeehouses said on July 28 that it sees its China sales substantially recovering by the end of September, boosted by such digital initiatives.
Ant Group, the operator of Alipay, is preparing an initial public offering in Hong Kong and Shanghai later this year. Part of its sales pitch to investors is its burgeoning fees from turbocharging the digital traffic of companies like Starbucks in the world's second-largest economy.
"The potential listing of Ant can further unlock its value as a public company," said Jefferies analyst Thomas Chong.
Starbucks turned to Alipay to boost its digital traffic in China. Photo: Handout alt=Starbucks turned to Alipay to boost its digital traffic in China. Photo: Handout
Its challenge will be to help investors understand the fast-evolving firm. Ant's roots date back to 2004 as the payments processing arm of China's largest e-commerce platform, Alibaba. Since then it has morphed into a service and technology provider.
Ant made the bulk of its revenue from selling services in wealth management, micro-financing and insurance companies in its financial year ended March. Its plan for the next three years is to double down on opening up its platform to boost traffic to a broader range of businesses digitise from hoteliers to medical advisers.
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NYSE-listed Alibaba Group Holding, the owner of this newspaper, still owns a third of Ant and analysts see the synergies between them only multiplying as Ant broadens its remit.
"Alipay's upgraded offering will further extend the reach of Alibaba's ecosystem," said Goldman Sachs analyst Piyush Mubayi in a report.
The Hangzhou-headquartered firm is seeking a valuation well over US$200 billion, according to people familiar with its thinking and its market debut is likely to be the largest ever globally. Success will depend on international investors buying into its transformation from a low-profit margin payments app to a high-margin technology provider.
Ant could become the poster boy for China's plan to attract fast-growing technology champions to list on its domestic markets so that its citizens can easily reap the benefits of rising share prices in the wake of red-hot IPOs.
In Ant, Hong Kong and Shanghai's stock exchanges have snagged the world's most valuable unicorn, and China's bureaucrats will be keen to see it thrive so that others follow. Home-grown internet giant ByteDance and ride-hailing app Didi Chuxing have yet to choose a listing venue; in the past, most of China's biggest start-ups have plumped for the world's largest financial markets in the US.
A citizen buys drugs through Alipay face-scanning service in Zhengzhou, Henan Province. Photo: Xinhua alt=A citizen buys drugs through Alipay face-scanning service in Zhengzhou, Henan Province. Photo: Xinhua
Perhaps more importantly, at stake is funding for a platform that is accelerating the digitisation of the plethora of Chinese businesses, and by doing so, helping the economy recover from a trough caused by the coronavirus pandemic.
China's service industry represented 59.4 per cent of GDP growth last year, according to China's National Bureau of Statistics, and mostly still relies heavily on traditional bricks-and-mortar business models.
"You're buying China if you buy into Ant ... They will grow at a slight multiple to the nation's consumer economy," said Rob Jesudason, founding partner and chief investment officer at financial services principal investment firm Serendipity Capital and former CFO of Commonwealth Bank.
Alibaba sold control of its payments platform, called Alipay in 2011 so that it could apply for a mainland China payment business licence. Alibaba then launched Ant to house Alipay and other budding financial services in 2014. It has grown rapidly since.
Ant is planning to list on Star Market, Shanghai's Nasdaq-style tech board. Photo: Reuters alt=Ant is planning to list on Star Market, Shanghai's Nasdaq-style tech board. Photo: Reuters
Alipay and its partners have amassed 1.3 billion annual active users globally. In China, Alipay has created a duopoly in payments, alongside arch-rival Tencent Holdings that owns social media network WeChat and its integrated payments provider WeChat Pay.
WeChat Pay also has around 1 billion users, while Palo Alto-based payments firm PayPal has about 346 million users globally and a market capitalisation of US$226 billion as of Thursday.
"An American consumer is probably more profitable right now than a Chinese consumer, but that might not be the case [in] 20 years' time," said Jesudason.
Growth is also tempering after an explosive run in 2016 and 2017. Online payment transaction value steadied in China to around a 20 per cent annual increase last year, according to data from the People's Bank of China and Analysys.
SCMP Graphics alt=SCMP Graphics
The hunt for higher-margin business and growth as the number of online payment users reaches saturation point has prompted Ant to diversify. Regulators have given it another push to change its business model, according to researchers.
Payments companies in China used to make money from interest income on users' reserve funds. However, in January last year China's central bank ruled that these reserves should be managed in a central account and no interest could be claimed by the service providers.
"It has become more important for third-party payment companies to source revenue from alternative channels," said Mizuho Securities analyst Ben Huang citing the change in rules.
Ant has leveraged the data generated by Alipay users to develop other products. Ant's major businesses include payments, consumer lending, SME lending and wealth management.
Among Ant's users, eight out of 10 people used over three services last year, up from seven out of 10 in 2018. Growing loyalty among its users has meant Ant has been able to reduce cash subsidies to merchants.
"Payment is the gateway to acquiring new customers which is key to providing data insights in future product development," said Jefferies' Chong.
For instance, Ant's Yu'e Bao, which translates into "leftover treasure", launched in 2013 allowing Alipay users to invest their spare cash for short periods of time easily. Ant's majority-owned Tianhong Yu'e Bao Money Market Fund grew into the world's largest money market fund by 2017 in terms of assets under management.
"The points of friction in the wealth management space in China meant that these products were inaccessible to the masses," said Zennon Kapron, a director at Kapronasia, which focuses on financial services.
Its dramatic success stirred concern among regulators who thought Yu'e Bao might pose a systemic risk to China's financial system, according to analysts. Gradually assets shrank.
"The Ant footprint within the financial system was getting larger and larger, and in our view, the regulators started to see them as systemically important ... whether overtly or not, the regulators put pressure on them to transform their business and move away from being a financial provider to become a technology provider," said Kapron.
Ant's partner Tianhong Asset Management said it capped inflows into the Tianhong Yu'e Bao Money Market Fund voluntarily in 2017 to help improve performance. Around that time, regulators tightened regulations on money market funds. The Chinese money market fund industry was concentrated with Yu'e Bao alone accounting for 25 per cent of the market as of September 2017, according to credit ratings firm Fitch's calculations.
Yu'e Bao opened up to third-party asset managers in 2018 and charges them a fee for access. There are now around 23 external firms on the platform.
MYbank's headquarters in Hangzhou, Zhejiang province. Photo: Reuters alt=MYbank's headquarters in Hangzhou, Zhejiang province. Photo: Reuters
Ant also studied the banking landscape. Commercial banks in China tended to lend to larger, state-owned enterprises, which meant SMEs struggled to secure financing for growth.
So in 2015, Ant launched Zhima Credit, which in Chineses means Sesame Credit, a private credit-scoring service, and online bank MYbank. Ant is able to make lending decisions based on the data it collects across its ecosystem. Ant owns 30 per cent of MYbank. As of June, MYbank and its partners have served 29 million SMEs in China with an average loan size of 36,000 yuan (US$5,000), and 80 per cent of them had previously never received business loans from a bank.
Ant also began working with traditional banks to help them originate loans and put their deposits to work by syndicating out requests to borrow capital from individuals and small businesses and making a recommendation on their creditworthiness for a fee.
"It's been a symbiotic relationship and one of the examples where fintech is not creating disruption but cooperation within the financial industry," said Kapron.
Ant has been swiftly opening up its platform to other service providers in other areas too. In 2015 it launched Ant Fortune which allows financial institutions to list their products and services on the platform. As of March 31, Ant Fortune facilitated 4 trillion yuan of assets under management for its partners. Meanwhile, insurance premiums facilitated by Ant more than doubled for the 12 months ended March 31, compared with the same period in the prior year.
Ant has also been selling its technology to other institutions for them to white-label, including blockchain, artificial intelligence, security and internet-of-things. For example, Ant's blockchain technology has been applied to a wide range of commercial use cases, such as supply-chain financing, product provenance, as well as electronic bill issuance and circulations.
Ant claims the largest productivity blockchain platform in China, with the ability to process and support one billion user accounts and one billion transactions every day.
Ant contributed 5.1 billion yuan to Alibaba for the three months ending March, up from 500 million yuan a year earlier, implying Ant made a net profit of 15.3 billion yuan (US$2.18 billion) in the final three months of last year, calculated JP Morgan analyst Alex Yao in a May report, who partly attributed the jump to its growing market share in online lending.
This is only a rough measure of Ant's profits as Alibaba uses the equity-method accounting rule, proportional to its 33 per cent ownership stake, so the contribution also includes profits made on investments and other potential one-off payments. Ant declined to give its exact net profit or revenue figures because it is in a "quiet period" ahead of its IPO.
Simon Hu, chief executive of Ant, unveils the three-year plan to open up the Alipay platform on March 10. Photo: Handout alt=Simon Hu, chief executive of Ant, unveils the three-year plan to open up the Alipay platform on March 10. Photo: Handout
On March 10, Alipay said it would diversify further from a platform that provides financial services and technology into an open lifestyle ecosystem.
CEO of Ant, Simon Hu released a three-year plan to open up Alipay as an online platform, working with 50,000 independent software vendors to digitally upgrade 40 million merchants.
The company aims to grow its services fee from over half of its revenues now, to 80 per cent within five years. The contribution from Ant's self-operated services direct to consumers will shrink further as a result.
"They have to continue to diversify; otherwise Tencent might dominate new markets," said Jesudason.
One month before Alipay integrated Starbucks' pickup feature into its app, the coffee chain launched a WeChat mini program that allowed WeChat users to order coffee deliveries. To accelerate its transformation in the face of such fierce competition, Ant made a symbolic move.
Ant won permission from China's State Administration for Market Regulation in May to change its registered name from Ant Financial Services Group to Ant Group, showing its clear intention to keep its metamorphosis going into a technology champion.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.