Extra Buzz #19: Ant Group: The Biggest IPO That Wasn’t
Dear Tech Buzzers,
I’ve spent one entire week on the Ant Group IPO halt (partly also to avoid giving myself a heart attack following the US election) so that’s what this issue is about! I also wrote about the company for another publication (check out UK’s Tortoise Media, they’re cool!) but that was more for a general interest audience, and not tech nerds like you! I’ve probably read every single Western and Chinese media’s account of the story, and am aware of quite a few independent writers penning something on it as well, but I’d like to think that this is still additive to the pile that has been compiled.
Before I go into today’s newsletter, I do want to announce that we’re doing our first live call with BigOne Data, the alternative data firm that we featured on Tech Buzz Ep 71! They’ve kindly agreed to repackage some of the detailed data they collect on Chinese internet platforms, which is usually only available to paying clients and affiliates, for our Tech Buzz audience. It will be on Tuesday, December 1 at 4-5PM PST or Wednesday 8-9AM Asia time. Sign up here! This is a fast growing space in China and with covid-accelerated digitization, it’s clear that it’s going to be even more important. So join us! It’s free, but we do ask that you register.
Best,
Rui
ANT GROUP: THE BIGGEST IPO THAT WASN’T
Ant Group headquarters in Hangzhou, China. Source: CNBC.
TIMELINE
Aug. 25, 2020 - Ant files for IPO on the HKSE in the world’s largest expected offering. Dual listing expected on the Shanghai exchange.
Oct. 24, 2020 - Jack Ma gives speech at Bund Summit; Ant IPO pricing is determined.
Nov. 2, 2020 - Jack Ma and Ant management summoned for meeting with regulators; new draft regulations on microlending released
Nov. 3, 2020 - Ant IPO halted on both HKSE and SSE.
THE PRODUCT
If you need a refresher when it comes to Ant, may I suggest our Tech Buzz Ep. 74 on the company, which I dare say provides pretty good context into the history of the company, and why it has created the product lines that it has: CreditTech (39%), Payments (36%), InvestmentTech (16%) and InsureTech (8%). The names are self-explanatory, but you can always read the draft prospectus and / or our podcast transcript if you are uncertain. Of these, we can neglect the Investment and Insure segments for now, because they are small and because they don’t pose a much of a “risk” problem. (They still can, as we saw in the case of Yu‘E Bao imposing deposit and withdrawal limits so as to maintain stability and manage liquidity, but that was not an indictment of the product logic itself, more of a testament to Alipay’s distribution power, and unlikely to be on the level of “taking the entire economy down with it.”) The important thing is that the revenue split of the business went from primarily payments (55%) to more CreditTech in the span of three years, while growing at a clip of 30% per year on the overall business, which is on track to be more than $20Bn this year. Just over half of that growth has been contributed by the now largest CreditTech business, which more than tripled in the last three years.
The CreditTech business consists of two main products: Huabei and Jiebei, which mean “just spend” and “just borrow” respectively, are Ant’s versions of the credit card, and the small loan. Huabei is already the largest consumer credit line product in China, and it offers an annualized interest rate of a bit over 15%, the max under new rules by the Chinese government to cut down “usurious loans.” Jiebei is the same. Together, they served over 500 million users in the last twelve months. Let that sink in for a second. Since these products are only available to Alipay users, which has annual active users of a billion, this means that half of all Alipay users used some kind of Ant credit or debt product in just the last year, but it also means that half of all internet users in China, period, used Huabei or Jiebei in the last year.
THE CONTEXT
Now, of course Huabei is a short term credit product with an average outstanding balance of $300, so even if we’re looking at all 500 million people using it, so what, you say? Well, it’s not a problem until you look at the real distribution of Chinese incomes. As all of you long term Tech Buzz listeners know, there are (at least) two Chinas, and the urban globe-trotting, latte-sipping luxury-goods-addicted population gets disproportionate air time in the West. But most people (read: something like 1 billion people) have annual household incomes of less than $15,000. In fact, the average real disposable income is less than $300 per month for two-thirds of Chinese provinces as of 2015. Sure, the population is mostly concentrated among the ten or so coastal provinces and municipalities directly under central government control a la Shanghai and Beijing, but you see the problem here. Even a measly $300 of credit is a lot for many parts of China. There is real concern that Ant’s products are reaching beyond the “creditworthy” and going well into the “subprime.”
When I say concern, I’m not talking about the business-level impact -- which let's assume Ant’s excellent finance and legal teams can manage -- but the social backlash against such products in general. There’s a reason why the Ant IPO halt was mostly applauded by netizens in China. Most people considered these digital credit products a form of “predatory lending.” They were increasingly uncomfortable with the way these products were being advertised and “force-fed” to everyone, especially the most vulnerable. Ant was not the only or worst offender. It was the entire industry.
There's a few background points you should understand about the consumer finance space in China. Credit cards are very new (less than 500K existed in 2002) and grew quickly, but still only one-fifth of the population has one. In fact, as of 2015, 60%* of Huabei’s customers have never used a credit card. And while there’s been a lot done to foster inclusion, there’s still the fact that credit can be difficult to come by for many, especially those just starting out. Which is why Ant’s assertion in its prospectus that “a typical Huabei customer is young and Internet savvy but has unmet consumption demand due to the lack of a credit card or insufficient credit limits” is a double-edged sword. Of course more credit, especially when made available at the point-of-sale as Ant’s products often are, is both a great growth hack and welcomed by consumers for the convenience factor. And let's suppose for a moment we don’t believe that there is any problem with the way Ant assesses credit risk. There is still the problem that that’s not how the Chinese public sees it. Maybe it’s because they’re new to debt, but a great number of Chinese people see the issue to be more and more young people spending themselves into ever deeper debt and ruining their future. It’s a popular viewpoint that’s not just confined to millennials and older.
THE PRECEDENTS
This is because pretty consistently over the past few years, there’s been a whole spate of issues when it comes to unregulated (or not well-regulated) lending businesses in China. Two episodes have been especially traumatic. One is the P2P lending fiasco we talked about in Episode 76 where a lot of people lost a lot of money (estimate: $115Bn) to dishonest or inexperienced operators. The government finally shut the whole thing down late last year, after repeatedly trying to regulate the industry and failing. Of course, it didn’t help that some contained state-backed funds, and were presumed to be “safe” by folks such as this lady, who killed herself out of despair after losing all her savings. The second are the university lending scandals which resulted in students committing suicide when they could not deal with the mounting levels of debt they had accumulated, often compounded by the inhumane way in which collectors were blackmailing them, i.e. threatening to make public nude photos that the female students sent in as collateral. To many people, these crises, both of which took several years to resolve and are still fresh wounds, shattered their confidence in the ability of lenders or lending platforms to rein in their greed, even at the expense of real lives lost.
This was corroborated by the platforms’ own actions. As the P2P fiasco showed, wherever there is opportunity, thousands will swarm in. Ecommerce players such as JD had long followed Ant’s lead (last month I wrote about how JD Digits filed for IPO soon after Ant), and of course Baidu and Tencent are among the leading players. But Meituan, Didi, and even Weibo have jumped in head first. Sina Weibo even had a promotion where it was advertised that folks who borrowed money on the platform would get their likes counted multiple times. That wasn’t strictly true but it got people furious* at the platform for targeting young fans who were often part of communities that already spent too much money and time trying to get their favorite celebrities trending (another extremely controversial activity I’ve written about on Extra Buzz). And now they were going to go into debt for it! And that’s a huge difference between P2P and microlending. P2P, for the most part, was not taken on seriously by the internet giants in China. Their vast distribution networks were primarily being leveraged for advertising purposes, not actual lending. Not so for microlending. To the people, it was as if, instead of here in the US where Google has moved to ban payday loan ads, Google decided to sell payday loans themselves. The internet giants, each with a few hundred million DAU, were going after the lending business under the guise of being a big data provider, and doing so with very little oversight.
Meituan’s microlending function. For all your local service needs! Source: Technode.
THE BACKLASH
If you were on the ground in China, this would’ve been obvious. Ads were plastered everywhere. “Even on bus station terminals,” was a common complaint I read online and heard firsthand, implying that they didn’t think bus-takers could afford to live with debt. There were lots of spam phone calls and texts. If you open up any short video platform this year, you’ll be bombarded with ads or sponsored content that basically tells you you’re an idiot if you don’t borrow as much as you can*. In early October, when one Huabei commercial* implied that a working class father should use his credit advance to give his daughter a “presentable birthday,” the internet erupted in fury. Three weeks ago, Xueqin Li, a female standup comedienne phenom, made a viral joke* where she planned to buy the entirety of Alibaba for Single’s Day by borrowing funds on Huabei. Obviously, this makes no actual sense, but its popularity is just one more indication that the public had thought debt-fueled consumerism was getting out of control to the point of utter absurdity.
The offending Huabei ad that showed a father using credit to give his daughter a presentable birthday. Source: Baidu.
Of course, this is not to say that there weren’t folks who were on Ant’s side. As we covered on Tech Buzz, there is indeed a dearth of financing opportunities available to some very deserving borrowers, especially small businesses, a problem that has been highlighted for years. Jack Ma was not wrong that many parts of the Chinese banking system, with their “pawnshop mentality,” were not equipped to deal with them. But the 20 million small businesses borrowers only make up a minority (20%) of Ant’s loans outstanding. And there was middle ground -- you could criticize the banks and appreciate Ant’s existence but still believe it needed to be reined in … there is a balance. And I think this is exactly what happened.
THE SPEECH
Let’s go back to Jack Ma’s ill-fated speech at the Bund Summit on October 24, the gist of which I translated here. Effectively, he crucified regulators for being too old-fashioned and adhering to rules that were made for the post-WWII industrialized West, and specifically blasted the Basel Accords, a set of rules setting out capital reserve requirements for financial institutions, as medicine that is not appropriate for today’s China. He described the banks as having a “pawnshop” mentality and the regulators as being too academic, too far away from the market. I used the word “audacious” to describe his words, but I was being diplomatic, which he was most definitely not. The public’s reaction was more negative than positive, although it hadn’t quite reached fever pitch. Jack Ma is famously controversial and is no stranger to getting slammed by public opinion, especially when he espouses views that are clearly “pro capitalist,” such as when he came out in defense of 996 overwork culture, so no one really thought it was a harbinger of things to come. It was just your usual “Jack being Jack.” As more information came out and people realized how much Ant’s CreditTech business relied on leverage, especially after watching hyperbolic videos such as this one*, their views would sour further.
Jack Ma at Bund Summit 2020. Source: Caixin.
The Bund Summit wasn’t any old conference. Jack Ma was one of the least important people there on the day he spoke (the first full day). The opening remarks were given by Wang Qishan, China’s Vice President, so you can imagine the caliber of attendees. Every current and ex-central banker of note was there, and select top-level international guests joined virtually, including the noted China bull, Mr. Ray Dalio. Jack Ma was not introduced in his businessman capacity as co-founder of Alibaba and Ant, but instead as Co-chair of the UN High-Level Panel on Digital Cooperation and United Nations SDG Advocate. Ant’s Chairman, Eric Jing, by the way, spoke on the second day*, and his presentation was on Ant and its achievements, particularly its partnerships with traditional banks. No other fintech competitor was invited. So if you’re thinking Ant doesn’t have the sector’s best government relationships and recognition from regulators … think again.
So I’m inclined to believe that Jack et al. were very much in the know about the proposed regulations coming down the pipeline. I mean, it is well known that he was prepared to go to jail when he started Alipay, even telling his team that they need to have a list of who else would go after him, should his presence be insufficient, and so on and so on. Even if somehow he began to feel that Ant was too big to touch (which it really wasn’t), the P2P and university loan scandals would’ve been seen as warning signs, as would have been the various antitrust investigations earlier this summer (edit: they were pushed out with greater force today). Ant should be interfacing with the regulators constantly, since they are such an important stakeholder and because they have so many other issues under negotiation with the government -- 1) the transactional data they collect, for one, which is still proprietary; and 2) credit data, which is seems still to be incompletely incorporated into China’s personal credit system (we talk a little about how difficult it has been in the episode on Ant). That and how many ex-PBoC staffers they’ve hired, as any smart company would do. It would also explain how pointedly Jack’s speech seems to have been aimed towards cutting down those regulations that were announced on the same day he was called in “for tea” (the colloquial term for an official dressing down). In fact, we also know that just this August, Ant secured a “consumer finance” license for $600mm*. Not the most flexible license and mostly held by a handful of banks and retailers, it was a curious piece of news that was mostly buried in the IPO hype.
THE NEW RULES
But what were the regulations that were announced? Well, they are draft rules, and they are here*. For Ant, the proposals of concern are: 1) limiting loan amounts to $45K per individual, or the average of their last 3 year’s income, and $150K per business; 2) the microlender must put up 30% of the capital. The loan amount limits do not affect Ant much, as its business currently stays within these limits (Jiebei, the loan product, maxes out at $45K), but could be construed to limit future growth. The capital requirement is the real killer: in the case of Ant, Huabei and Jiebei are each microlending companies registered in the city of Chongqing, and neither have put up remotely close to 30% of the capital.
Huabei and Jiebei are registered in Chongqing, a city in Western China directly reporting to the central government (one of four, alongside Beijing, Shanghai, and Tianjin). Jack couldn’t get a license from anyone else back in 2014. According to the former mayor of Chongqing, Huang Qifan (who spoke immediately after Eric Jing at the Bund Summit, and is a finance VIP in China), he approved it because as long as Jack wasn’t doing P2P, which he hated, he didn’t see a problem. Not only Ant*, but all of Ant’s competitors quickly established microlending companies there. Right after Jack’s speech, folks quickly dug out Huang’s other speeches, including this one originally from June* (and republished Oct. 28) where he explained in detail how Ant was able to get to such a high effective leverage using so little capital. TL;DR: the 3 regulatory bodies were not equipped to deal with internet-based micro-lending and while their rules regarding capital requirements were indeed observed, because the rules were made under the assumption that it would take months to deploy any capital raised / borrowed, not mere days, it actually allowed for the 100x expansion that Ant was initially able to achieve. By the time the regulatory agencies were in agreement about what to do, Ant had already lent out tens of billions of dollars in debt, and most of that -- 98% is the most current measure -- were sold to banks and other financial institutions in the form of ABS (asset-backed securities). Obviously, this needed to be halted. Huang’s account seems to indicate that Ant voluntarily took down its leverage to 3x (it was offered 4x), again providing evidence that it is very much working in tandem with regulators, and not against. In Ant’s prospectus, it is noted that this took place sometime in 2018. This would match up with what has been reported in Chinese media this week*, which is that Ant only had sought $12Bn worth of ABS this year, with $8Bn already approved. (Of course, the implication is that they may be pulled as well, given the new regulations.) So … remember that the outrageous “100x leverage” has not, in fact, been available since 2018. It would explain why it was not part of the new draft regulations. That part had already been resolved.
A colorful video from Huang explains it thusly:
Ant had about 400mm in capital, which it took to the bank, and borrowed $8-900mm against, which is allowed, since banks can lend at a ratio of 1 : 2+. And now it has about $1.2Bn, which it went to the market and sold as ABS. But because there was no limit on how many times you could go to the ABS market, you could do this as fast as you could get loan it out, which for Ant, was a matter of days. That $1.2Bn became an ABS 40 times, which is how Ant was able to get $50Bn+ of loans with just $400mm in starting capital.
However, this doesn’t mean that Ant had filled in the gaping capital hole that it had created. The accepted leverage by the PBoC is 10x, and this had clearly exceeded that. Depending on how the new rules are implemented, Ant is looking at a capital shortfall of at least $20Bn*, as laid out per Chinese analysts. That’s substantial, even for what would have been the world’s biggest IPO at $35Bn. With these new rules, it also makes sense that the market would have to seriously reconsider valuing Ant as a financial services company instead of a tech one, a fact it was pushing hard against during the IPO roadshow, despite already having been designated by the government as a financial holding company in September.
THE REGULATORS
I know there were some investors who were paying close attention and were already doubting the viability of the IPO in mid-October, privately voicing their doubts. But the speech brought it to the forefront. It required a response. In the week following, a series of three extremely articulate and pro-regulation op eds appeared in the state-owned media for the financial industry. They were signed with pseudonyms but believed to be the work of Zhou Xiaochuan (ex-PBoC, essay here*), Zhang Tao (IMF), and Chen Yulu (PBoC, essay here*). (There’re more too, non-anonymous ones from Guo Wuping of the CBIRC, for example, that call out* Huabei and Jiebei by name as infringing on consumer rights.) I do not follow the work of these gentlemen and do not have an opinion one way or the other, but the essays’ contents make it clear: there are many deficiencies of the current Chinese financial system, but that does not mean “BigTech” (the piece* believed to be written by Zhang uses this English word extensively) gets to do what it wants, even if we can acknowledge their contributions to society. TL;DR: we like innovation, but let’s not overhype the magic of “big data,” and anyway, you’re still operating in financial services, and so that’s how you’re going to be regulated, like it or not. That’s because if we the regulators don’t step in, and something goes wrong, who will pay the price? Society will, the citizens will. Don’t you guys remember the Great Financial Crisis of 2008? A few parties won, yes, but all the rest of us? We lost. We were all set back. That’s not happening again, not on our watch!
And that is the chord that struck with the citizens. China has “beat covid,” yes, for the most part, but it’s not like there’s euphoria. Most people are thinking: “it could be much, much worse.” Things feel fragile and there is little willingness to tolerate any risk that would precipitate an economic crisis, especially one that could have been prevented by the regulators. Whether or not this is the actual right step to take -- do these rules really do anything other than rein in fintech, and do they possibly push the country towards more shadow banking, among other risks -- is not top of mind for the average citizen. It must have been, however, for the regulators. Ultimately, however, it seems that they decided that more regulation was better than less.
BUT WHY NOW?
And now we come to the biggest riddle of this all. I hope I’ve given you enough context on why the regulators wanted to step in, and why the citizens were in support. But that still doesn’t explain why the IPO was halted literally two days before the listing. As Reuters reported, there are folks with knowledge of the deal who say that it was due to outrage at Jack Ma’s comments. The regulators were personally offended. I can believe that. Jack wasn’t kind. More importantly, as I quoted in my article for Tortoise, Western experts thought this was an indication of the government’s capriciousness and unreliability. China doesn’t know what it’s doing, as one oped columnist wrote, in the provocatively titled “Ant’s Suspended IPO Turns Jack Ma Into Ray Dalio’s Worst Nightmare.” (Ray Dalio, by the way, responded .. nope.)
But was that how it was actually perceived on the ground in China and by those seeking to do business in China? I turned to the many China-focused investors I’ve now come to know as part of doing Tech Buzz, as well as some old friends from venture, and asked them if they felt the same. Nope. Hmmm, interesting, I thought. How about Chinese entrepreneurs and engineers? Normal everyday folk? Nope. No matter who I asked, no one thought it was to upstage Jack Ma specifically, and everyone thought this was a good move. Many thought his speech was made out of desperation, a last ditch attempt to sway public opinion which failed. No one gets to Jack’s level in China without having some major cunning, they explained. The regulators would be people he knew well, not ones he was still feeling out. The hotheadedness isn’t indiscriminate … it was strategic. If it put him in the line of fire, that was because he knew which buttons he was pressing. A few even believed this was a stunt, fully coordinated* by Jack and the regulators in order to legitimize Ant while crushing the rest of industry. (That seems too “5D chess” for me.) Either way, it didn’t matter, because there was every reason the government should step in, to stop the greed. On the part of Ant, and on the part of everyone in that microlending business. “Thank goodness the government did so before the public bore the losses,” they said, pretty uniformly. Kind of true. Even if you weren’t planning to buy Ant shares, you could’ve been an indirect shareholder of sorts -- as Chairman Eric Jing noted at the beginning of the Bund Summit speech, “hello to our big shareholder, the Social Security Fund, sitting in the audience.” Furthermore, every single Chinese person said, why would the government need to go to such lengths to punish Jack Ma? Couldn’t they just say he had an issue with his taxes or do whatever it is they do? As for why the last-minute halt, that’s simple enough -- there are so many competing and conflicting interests among these agencies -- it’s embarrassing that it got down to the wire as it did, but better to have reversed course than to have the public holding the bag for the sake of saving face and trying to get the Biggest IPO in the bag. Isn’t that interesting? You could use the concept of “saving face” in these two directly opposing ways, and explain the situation to your satisfaction.
It wasn’t surprising to have the public support the eleventh-hour halt. But it was surprising to me how many investors and finance professionals whose livelihoods depend on a well-functioning capital market thought the same. But as someone pointed out on Twitter, this could be one of those reflexivity things, a self-fulfilling prophecy. If the people putting money into the market and actively participating in it believed the regulators to be acting for their good, for the good of the market, for the good of society -- then does it really matter what anyone else thinks?
LAST BITS
Versus trying to figure out what exactly happened at Ant, whose valuation will almost certainly be discounted, maybe even halved, most folks I know have already moved on. After all, the IPO, if it is revived, is not likely for another 6 months at least. There are many more immediate problems at hand. What’s the impact to Alibaba and other ecommerce, all of whom benefitted from the spigot of easy consumer credit? Other retail players? What about all the advertising-based platforms who were raking in the dough from all the microlending marketing campaigns? And so on and so on.
And there are so many other “risks” coming too. The regulators are clearly just getting started getting down and dirty with BigTech, as a set of antitrust draft laws came out today. They’re now explicitly forbidden from all sorts of anticompetitive behavior that all the platforms have been engaging in for years, such as exclusivity or outright banning, and of course all manner of crazy subsidies. It was something I didn't think was ever going to change. But what do you know, they’re here, and if there’s anything I learned from this Ant IPO halt? It’s that I’m not going to assume that I know how all the stakeholders are going to feel about it, not just based on what makes sense to me.