- Dual listing in Shanghai and Hong Kong could value Ant Group at $280bn
- Float material for holdings of several UK-listed investment trusts
- Concerns around speed of approval and control of information by Chinese firm.
On Monday, regulators gave the green light for the Hong Kong part of Chinese payments giant Ant Group’s initial public offering (IPO), a source told CNBC News. Following on from this announcement, the stock exchange gave its stamp of approval on Wednesday. The listing will aim to raise a world-record equivalent of $35bn (£27bn) on the Hong Kong and Shanghai markets.
In early Wednesday morning trading, Reuters reported that the cost of borrowing in Hong Kong dollars has risen, along with forward rates for cash as traders anticipate a rush for cash ahead of the float.
Meanwhile, Bloomberg reported that, due to strong investor demand Ant Group (formerly Ant Financial) has upped its post-raise valuation target from $250bn to $280bn, meaning equity investors would own around 12.5 per cent of the business.
Renowned as the world’s largest financial technology (fintech) unicorn, Ant Group is the Hangzhou-based holding company that owns Alipay, the Chinese mobile payments system with over 1bn users. Nine years ago, Alipay was spun out of China’s number-one e-commerce site Alibaba (which itself raised $25bn when it went public in 2014).
The appeal for investors may seem obvious. In the first half of 2020 Ant Group, which has licences for payments (Alipay), online banking, insurance and micro-lending, made a profit of 21.9bn yuan (equivalent to around US$3.2bn when reported) on revenues of 72.5bn yuan.
Ant Group’s controlling shareholder is Jack Ma, executive chairman of Alibaba (HKG:9988) before he stepped down last year, although Alibaba retains 32.65 per cent. This formalised share of ownership replaced an agreement from the time of the spin-off whereby Alibaba was entitled to 37 per cent of Alipay revenues.
The IPO is material for several UK-listed investment trusts that count Alibaba among their top holdings, including JPMorgan Emerging Markets (JMG), Schroder Asian Total Returns (ATR) and Scottish Mortgage (SMT). Scottish Mortgage also has a direct holding in Ant Group, which at roughly 2.5 per cent of net asset value (NAV) is its most significant stake in a private company.
Tell Sid, but don’t tell him everything
Effectively, the equity raise is an issuance of two separate securities – ‘H’-shares on the Hong Kong stock exchange and ‘A’-shares in Shanghai. The Shanghai listing is being made on its Science and Technology Innovation Board. Commonly known as the STAR market, this Nasdaq-style bourse is subject to strict regulation to discourage speculation by inexperienced private investors.
Restrictions prevent individual Chinese investors buying shares in IPOs if they don’t have a minimum 500,000 yuan in their brokerage accounts and at least two years of trading experience. Eligibility for China-domiciled mutual funds that will partake in the IPO is more widespread. Adverts at bus-stops and other outdoor spaces have been reminiscent of the UK’s “Tell Sid!” campaign when privatised British Telecom shares were sold in the 1980s.
Alipay’s vast user-base is a true 21st-century marketing channel, however. Jing Yang and Xie Yu reported in The Wall Street Journal (WSJ) that five new mutual funds raised 60bn yuan (US$8.96bn) via Alipay in early October. The funds can hold up to 10 per cent of their NAV in Ant Group and have wider investing mandates in accordance with concentration rules. Investors must commit to holding the funds for at least 18 months.
A limit of 6bn yuan applies to how much the funds can invest in Ant’s IPO, but the WSJ was unable to garner how much of the deal they expected to be allocated proportionately. Reluctance to give much information away about the raise has been a feature of the lead up to this listing, whether that’s Ant Group, Alibaba, the Chinese government, the stock exchanges, underwriters, asset managers – or even fund managers who hold Alibaba or might invest in Ant Group.
Banks involved in underwriting IPOs often sign non-disclosure agreements, but Reuters has reported that individual employees have been asked to do so in this instance, too. Chinese investment banks are leading the Shanghai listing, but western companies are getting involved in the Hong Kong sale, where Citigroup, JPMorgan Chase & Co. and Morgan Stanley are sponsors alongside China International Capital Corp.
Western banks have been desperate to get in on the float, but there are concerns that corners are being cut. Ant Group filed its prospectus in late August, yet approvals have already been granted, when the average on Chinese exchanges is typically four months. This could mean important governance issues are overlooked, especially with information seemingly being rationed to western partners.
At the very least there are quirks that haven’t been well scrutinised, which may not be good for investors. For example, the Hong Kong listing is to be made without cornerstone investors who commit to holding stock for some time to limit initial volatility. Furthermore, Reuters were told some banks had been unclear on the type of allocations they had before marketing sales to clients.
Raising such a vast sum of capital in Hong Kong and Shanghai is deeply symbolic in China’s ongoing challenge to America. Capital markets are an integral part of the strategy both in terms of attracting foreign investment and expanding the reach of China’s most important industries.
Despite potential headwinds from the Trump administration (Reuters reported that Washington wants to make moves towards placing Ant Group onto America's 'Entity List') and legitimate concerns about secrecy and information rationing, the Ant listing is a milestone in harnessing the power of financial markets for China.
