Ant financial ipo suspension

Clarity matters, especially during turbulent times. Almost buried in the main news this week is the world’s largest stock listing getting shut down right before its launch. Ant Group, the financial technology giant, was set to raise $34.5 billion in the Shanghai and Hong Kong stock exchange, which would have translated into a market valuation of $313 billion.

If the initial public offering (IPO) were to happen, Ant Group would have exceeded the size of JPMorgan Chase, Goldman Sachs, and Wells Fargo. But then this IPO veers off course.

Chinese authorities have cited “major issues” for halting the IPO, but major issues do not show up this late in the game. A record 19.05 trillion yuan ($2.85 trillion) worth of bids was received from retail investors for Ant’s shares on Shanghai’s Star Market, exceeding the supply of shares 870 times.

All these point to Jack Ma, the founder of Alibaba who personally controls 8.8% of Ant. He gave a talk last month in Shanghai criticizing regulators in China. “We shouldn’t use the way to manage a train station to regulate an airport,” Ma said. “We cannot regulate the future with yesterday’s means.”

Now we know who the real boss is.

Why You Need Clear Thinking Now

If you are like me, this is too much drama. There is too much information. What you and I want to know is really the future of finance. We want to know that the sort of fintech made by Ant will continue to gain traction.

If you work in the financial sector, you want to know if these innovations will still spread around the world. If you are retail investors, you want to know if the creditability of the Chinese stock market has been annihilated. Should you still diversify your pension plan with Chinese holdings or not?

In short, we have too many data points. We need clarity instead, to make decisions on things within our control.

How Future-ready Are Your Banks?

At the Center for Future Readiness at the IMD business school, we have been tracking companies’ readiness. In the financial sector, this is evaluated based on firms’ ability to leverage robo-advisory, artificial intelligence, mobile services, and blockchain. These are capabilities that CEOs have long recognized.

Here is what we have found. Those who ranked high in our study turned out to have followed a set of distinct logic. They acted less like a bank. They orchestrated ecosystems. They scaled fast.

Ranking Company Name
1 ANT GROUP
2 MASTERCARD
3 SQUARE, INC.
4 VISA INC.
5 PAYPAL HOLDINGS, INC.
6 JPMORGAN CHASE & CO.
7 PING AN INSURANCE (GROUP) CO. OF CHINA LTD
8 CREDIT SUISSE AG
9 BANK OF AMERICA CORPORATION
10 ALLIANZ SE
11 AMERICAN EXPRESS COMPANY
12 UBS AG
13 WELLS FARGO & COMPANY
14 AXA SA
15 HSBC HOLDINGS PLC
Rankings of leading financial services companies based on a “leap readiness index.” To arrive at these rankings, we relied on hard market data. This included 7 categories with 23 measurements.

Note that every financial institute—regardless of ranking—has its own digital strategy. But the top players scale digital innovation faster than others, and Ant does it to an extreme extent.

I remember visiting Ant’s headquarters in Hangzhou 18 months ago. Sitting down with a manager, I asked about staff growth. Despite the runaway growth in revenue, Ant was not on a hiring binge.

“You don’t need more people?” I asked.
“No. We automate everything once a new business stabilizes.”

“So where do those people go?” “They go to develop another new business,” the manager said.

A business is built by humans and then run by machines. Then the humans are redeployed to other ventures. It is the logical thing to do. However, only a few companies besides Ant could do it with such ferocity. You may ask, is Ant totally unique? Is this a new strategy unseen by the world?

Not really. If you were to look at Visa, Mastercard, PayPal, Square, or Ping An, they are all on the same trajectory. What that means is this: The kind of fintech revolution wrought by Ant will not stop. Ant or not, the inevitable remains the same.

Should I Invest in Ant When It’s Ready Again? There is no single authority responsible for regulating fintech products and services. The main regulatory bodies include the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), and the China Securities Regulatory Commission (CSRC). In other words, it is a diffused political system.

But since they can pause the world’s largest IPO, this also meant they share a similar viewpoint. They all want to send chills down Jack Ma’s back. His success is a story tied to the national narrative, both in substance and in form. Any deviation from it will have consequences. No one is too big to attack.

And so Ant is likely, and already is, regulated like any other banks. That means meeting the same capital requirement, auditing criteria, and compliance standard. It will be a challenge for a data-driven, AI-first enterprise like Ant. It will mean that, for the first time, software programmers at Ant need to still move fast but not break things.

Is it still a good investment opportunity? Well, depending on the revised price level. Here’s one way to look at it.

Ant has made a $3.5 billion profit in six months. Let us assume it stops growing for the next six. It will still end the year with $7 billion. Compare that with a truly mature tech company like Netflix, whose P/E ratio is around 80. Ant would still have an estimated valuation of $560 billion.

But maybe you want to use a Chinese firm as a benchmark. Let’s take Tencent, another Chinese technology giant with a fast-growing payments business. It is trading at about 40x earnings. Applying the same multiple to Ant, that would imply a $280 billion valuation. Again, it’s assuming no profit growth in the second half of the year. Such a scenario is virtually impossible. Ant’s profit for the first half exceeded the full-year total for 2019.

A $280 billion valuation is still huge. Obviously, all eyes will still be watching the IPO of the decade, delayed.

Howard Yu is the LEGO professor of management and innovation at Switzerland's IMD and is director of the advanced management program (AMP). His book Leap: How to Thrive in a World Where Everything Can Be Copied was published by PublicAffairs in 2018.
Jialu Shan is a Research Fellow at The Global Center for Digital Business Transformation–An IMD and Cisco Initiative.