The news of delaying of IPO of Ant Financial in Shanghai by the Chinese regulators had caused the company to pause its IPO in Hong Kong as well. The news came a day after Jack Ma, billionaire of Alibaba and Ant Financial, was summoned for supervisory interviews. Hong Kong-listed Alibaba’s share price dropped as much as 9.3% on Wednesday, which makes it the worst day for the stock since it started trading on Hong Kong Stock Exchange.
Why the suspension at the eleventh hour? During a recent speech by Jack Ma, his public criticism of the financial regulation in China, and his comments on the state-dominated banking sector might have triggered the actions taken.
Looking forward, what should we be aware of? One of the concerns of regulators was about its lending business, which had significant leverage to create substantial profit for the firm. With only RMB 36 billion of assets, the company created loans of RMB 1.8 trillion to the users of the platform. Ant Financial was using up to 60 times leverage on its own capital and capital borrowed from banks to create half of its profit. With the regulation of reducing the limit of leveraging to 16 times, its lending unit profit might be reduced for more than half. Therefore, the valuation of Ant Financial might be reduced for at least 25%. Also, as more attention is paid to its lending business, can Ant financial still be called a ‘Tech’ company? If not, how should the market value the company? The change of valuation from a ‘Tech’ valuation ratio to a ‘Financial’ valuation ratio would significantly reduce the share price.
Who would be affected as well? The Chinese and Wall Street investment banks which would help the listing of the company and underwriting the shares might see delay of fees. The uncertainty to when will the company be listed would put pressure to the stock price of the beneficiaries of the IPO until the change in stance of the Chinese regulators. Apart from that, with the valuation of Ant Financial being reconsidered, the valuation of ‘Fintech’ arm of giants like Tencent’s, and other Chinese Fintech players, might suffer and correct as their share price enjoyed the popularity of Ant Financial’s IPO subscription.
So, is it all bad? Thankfully, many of the securities firms announced that either, or both of the subscription fees and interests rate on the margin for Ant Financial would be returned to the investors.
