According to analysts' updated estimates, China's decision to halt Ant Group Co.'s massive stock debut could reduce the valuation of the fintech giant by as much as $140 billion.
According to estimates from Morningstar Inc. and other companies, new legislation that may require Ant to raise more capital to fund lending and obtain national licenses to operate around the country could reduce the company's value by about half. The regulatory information is provisional and may be subject to change.
If Ant's pre-IPO value of $280 billion is halved, it would basically suggest that the business is worth less than it was two years ago when it raised capital from some of the largest funds in the world, including Warburg Pincus LLC, Silver Lake Management LLC, and Temasek Holdings Pte.
The reduced valuation also implies potentially lower fees for investment banks that were relying on a windfall from Ant's record-setting IPO, such as China International Capital Corp. And it gives the company of billionaire Jack Ma less power to carry out acquisitions as it looks to grow beyond its Chinese base and take the fight to Tencent Holdings Ltd. domestically.
In a dramatic turn of events, just days before the Fintech juggernaut was due to go public in Shanghai and Hong Kong, China put the brakes on Ant's $35 billion share sale last week. The transition updates what was one of the largest business success storeys in China, as well as what was to be a key phase in the growth of the fast-growing capital markets of the country.
Iris Tan, Morningstar's analyst, said that if its pre-IPO price-to - book ratio fell to about the level of top global banks, Ant could face a 25 percent -50 percent downside in valuation. That means it will cut its value by around $140 billion. Currently, she said, the stock price of Ant is priced at 4.4 times its book value, compared with 2 times at those banks.
Sanjay Jain, Aletheia Capital's Singapore-based head of financials, estimates that the price-to-earnings ratio of Ant will drop to around 10 times its lending income, half of the company's previous target. The new price would place the Fintech giant more in line with some of the better quality banks' valuations.
Citigroup Inc. is trading on 12-month earnings at about eight times forward, while DBS Group Holdings Ltd. of Singapore is trading at about 12.6 times forward. China Merchants Bank Co., one of the largest retail lenders in the world, trades 10 or so times.
Summoned to Pekin
Days before Ant 's proposed trading debut, Ma was summoned by China regulators for "supervisory interviews," and authorities revealed that they had delayed discovering a number of shortcomings that might require Ant to be overhauled by certain accounts.
The business will need additional resources to satisfy more stringent regulatory criteria under the proposed new regulations. According to draught rules proposed by banking regulators in November, online lending companies such as Ant will be expected to provide at least 30 percent of loan funding. Only about 2 percent of loans currently sit on the balance sheet of Ant, with the majority of funding coming from bank regulators in November.
According to Morningstar, if these laws are passed, Ant needs to underwrite 540 billion yuan of credit on its own to fund its approximately 1.8 trillion yuan of outstanding loans. According to Morningstar, Ant 's credit units Huabei and Jiebei will require at least 54 billion yuan, based on how small loan companies can only leverage as much as 5 times.
Kevin Kwek, a Singapore-based analyst with Bernstein, said: "When it returns, investors will probably look at Ant a little less like a tech firm than before, given that it will be less asset-light, and growth assumptions might be lower." "Given the regulatory overhang, a discount on previous valuations may be set."
Aid from Alibaba
As of the end of June, Ant was sitting on around 80 billion yuan of cash. A three-year grace period is also supposed to be the capital requirement.
Leon Qi, a Hong Kong-based analyst with Daiwa Capital Markets, said that one of the more practical options will be for affiliate Alibaba Group Holding Ltd. to inject 20 billion to 40 billion yuan in order for Ant to satisfy some of the regulatory requirements.
That said, there are still preliminary estimates for valuations and capital requirements. If final regulations are less strict, Ant could take less of a hit. Bernstein's Kwek says that while he expects Ant to achieve a lower valuation, he is more confident that the valuation of the company will not drop to bank-type multiples given its credit technology and its strong payment app that sits on a billion phone payments app.
If Ant is able to demonstrate that it will be subject to less national service strain, "or if it can better assess risk, Aletheia Capital's Jain could argue for higher multiples."
