Regulation and IPO prospects continue to overshadow Ant Group after profit growth

Tighter regulations and uncertainty surrounding the resumption of a successful IPO will likely continue to cast a shadow over Ant Group Co. Ltd., analysts say, after the flagship fintech subsidiary of Alibaba Group Holding ltd. earnings growth in the three months ended December 31, 2020.

Ant, the operator of China’s largest online payment platform Alipay, brought 7.18 billion yuan in profit to Alibaba in the quarter to the end of March, while the parent company posted a loss net of 5.48 billion yuan due to an antimonopoly fine imposed by Beijing. While Alibaba posted profits for its subsidiaries a quarter behind, Ant’s profit contribution translates to a profit of 21.76 billion yuan for the subsidiary for the October-December 2020 quarter on the base of Alibaba’s 33% stake, up from about 15.48 billion yuan a year earlier, according to Alibaba’s earnings report on May 13. Alibaba did not provide details on Ant’s financial results.

“The regulatory overhaul is not entirely negative for Ant. The tightened regulations target many fintech and microlenders. Larger companies like Ant can be more resilient and can absorb potential markets left behind by smaller ones that have exited,” said Singapore-based Ke Yan. research manager at DZT Research, adding that the recovery of the Chinese economy has also contributed to Ant’s year-over-year earnings growth.

Ant has restructured its operations, as well as its relationships with third-party vendors and customers, since its mega IPO in Shanghai and Hong Kong was canceled at the eleventh hour in November 2020, when Chinese regulators and exchanges warned. raised regulatory concerns. Major overhauls so far include issuing a set of internal control standards that govern its lending activities and financial product offerings in March.

Shortly before the IPO was suspended, Beijing released draft online microcredit rules that would impose more restrictions on capital, licensing requirements, funding sources and scope of activity. Since then, regulators have issued a series of requirements aimed at further regulating fintech firms like banks to pre-empt systemic risk, which analysts say will likely limit earnings growth and valuation. ‘business.

Alibaba did not provide an update on Ant’s May 13 IPO prospects. But it said in its February earnings statement that “Ant Group’s business outlook and IPO plans are subject to significant uncertainties.”

“Ant’s outlook is still too early to tell given that it and its parent company, Alibaba, are undergoing reforms. The regulatory part is quite noticeable but it is the political factors that are opaque and difficult to assess. impact,” said Daniel Tu, founder of Active Creation Capital, a venture capital fund focused on technology and biosciences.

More renovations expected

While some of the regulatory risks may have been factored in, some may be reflected in future quarters.

In April, for example, China’s central bank asked Ant to apply for two licenses to become a financial holding company and end cross-selling practices between its payment, lending and financial product services.

“This means that customers may be able to pay through Tencent Holdings Ltd.’s WeChat Pay when shopping on Taobao. The overall impact on Ant’s future revenue is difficult to assess,” Ke said. Taobao is one of Alibaba’s e-commerce platforms.

Nomura also said “regulatory risks related to the internet payments and finance industry” was one of the downside risks for Alibaba, saying it “could harm Alibaba’s core business and its value in Ant Group”. The company valued Ant at $216 billion, according to its May 14 report.

As of May 13, US$1 was equivalent to 6.45 Chinese yuan.