Tightening regulations and uncertainty over the resumption of a blockbuster IPO will likely continue to cast a shadow over Ant Group Co. Ltd., analysts say, after the flagship financial technology subsidiary of Alibaba Group Holding Ltd. posted a 40.8% year-over-year earnings growth in the three months ended Dec. 31, 2020.
Ant, the operator of China's largest online payments platform Alipay, contributed 7.18 billion yuan of profit to Alibaba in the March-end quarter, while the parent company posted a net loss of 5.48 billion yuan due to an antimonopoly fine imposed by Beijing. As Alibaba recorded earnings of its subsidiaries one quarter in arrears, Ant's earnings contribution translates to 21.76 billion yuan of profit for the subsidiary for the October-December quarter in 2020 based on Alibaba's 33% stake, compared to roughly 15.48 billion yuan a year earlier, according to Alibaba's earnings report on May 13. Alibaba did not elaborate on Ant's financial results.
"The regulatory overhaul is not all negative for Ant. The tightened regulations are targeting many fintech and microlenders. Large companies like Ant may be more resilient and can absorb potential markets left by the smaller ones that exited," said Ke Yan, Singapore-based head of research at DZT Research, adding that the recovery of China's economy also contributed to Ant's year-over-year profit growth.
Ant has been restructuring its operations, as well as its relationships with third-party vendors and customers, since its mega IPO in Shanghai and Hong Kong was called off at the eleventh hour in November 2020, when Chinese regulators and stock exchanges cited regulatory concerns. Major revamps so far include issuing a set of internal control standards that govern its lending business and financial product offerings in March.
Shortly before the suspension of the IPO, Beijing issued draft rules on online microlending that would put more restrictions on capital, licensing requirements, funding sources and business scope. Since then, the regulators have issued a slew of requirements aimed at regulating fintech companies more like banks in order to preempt systemic risk, which analysts say will likely limit earnings growth and the company's valuation.
Alibaba did not provide an update on Ant's IPO prospects May 13. But it said in its February earnings release that "Ant Group's business prospects and IPO plans are subject to substantial uncertainties."
"The outlook for Ant is still too early to say given it and its parent company, Alibaba, are undergoing reforms. The regulatory part is fairly discernible but it's the political factors that are opaque and difficult to assess the impact," said Daniel Tu, founder of Active Creation Capital, a tech and biosciences-focused venture fund.
More revamps expected
While some of the regulatory risks may have been priced in, some could be reflected in the coming quarters.
In April, for example, China's central bank asked Ant to apply for two licenses to become a financial holding company and halt cross-selling practices among its payments, lending and financial product services.
"That means customers may be able to pay by Tencent Holdings Ltd.'s WeChat Pay when they shop on Taobao. The overall impact on Ant's future earnings is hard to gauge," said Ke. Taobao is one of Alibaba's e-commerce platforms.
Nomura also said "regulatory risks related to the payment and internet finance industry" as one of the downside risks for Alibaba, saying it "could hurt Alibaba's main 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.
