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Ant Group's close ties with Alibaba to endure post-IPO

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Follow our series previewing the landmark IPO by Ant Group:

Ant Group's dual-IPO seeks to raise at least $34.4B in world's biggest offering

China payments giants may face limited risk, tweak growth plans as US mulls ban

Ant-sized transaction margins will not spoil giant IPO valuation

China's startup STAR board will still have long way to go after Ant's mega-IPO

China's Ant Group may seek clear blue skies in Southeast Asia to grow via M&A

Ant Group's lack of strong messaging platform concerns investors as IPO looms

Bank disruptors doubling down on mobile payments in China

Born in 2004 as a digital payment service to support transactions on Alibaba Group Holding Ltd.'s online marketplaces, Alipay has since grown to become Ant Group Co. Ltd., the most valuable fintech startup in the world. Ant's upcoming dual listing in Hong Kong and Shanghai, through which it could reportedly raise about $30 billion, is unlikely to change this dynamic as the tie-up will become even more important amid increasing competition across its operations, analysts say.

Spun off from Alibaba in 2011, Ant Group is 33% owned by its former parent, while Alibaba founder Jack Ma holds a 50.52% stake. The "synergy" between the two businesses is emphasized as one of Ant's strengths in its preliminary prospectus, although Alibaba accounted for just 6.2% of Ant's revenue in the first half of 2020.

"It is hard to imagine Alipay and Alibaba parting ways. A lot of the payment transactions are brought in by e-commerce," said Shawn Yang, managing director of Blue Lotus Capital.

Yang said Alibaba's overall retail system will be crucial to help Alipay retain its lead in the mobile third-party payments market turf war, a key revenue driver. Alipay's market share fell to 55.4% in the first quarter of 2020 from 82.6% in the third quarter of 2014. Tencent Holdings Ltd.'s WeChat Pay rose to 38.8% from 10.0% during the same period, according to iResearch.

Tencent is a rival to both Ant and Alibaba through investments in e-commerce companies JD.com Inc. and Pinduoduo Inc., food delivery platform Meituan Dianping and other brick-and-mortar retailers, as well as its ownership of WeChat. JD.com and Meituan Dianping have built walled gardens accepting only WeChat Pay. WeChat is also expanding into e-commerce through its "mini-programs," enabling users to access and purchase products without leaving the app.

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Ant Group said it is raising capital to tap into the digitization of the services industry. In effect, it is playing catch-up with WeChat, which has gained "super-app" status through its offering that ranges from booking a taxi to buying a movie ticket.

"Ant will need collaborations with Alibaba or it won't be able to fight Tencent and its companies, Meituan, JD.com and its mini-shops," Yang said. "After going public, it will have to expand in local services because it will be more challenging to expand overseas due to geopolitical tension," he added.

Since 2017, Alipay has rolled out Alibaba-owned food delivery service Ele.me and restaurant review site Koubei on its platform. Other localized services offered on Alipay include Alibaba-owned navigation app Amap and travel booking platform Fliggy.

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Nevertheless, Alipay is still seen as lagging behind WeChat Pay's mini-program functions. For example, WeChat users can send Starbucks Corp.. gift cards to their contacts on the platform. The arrangement with WeChat has been key in Starbucks establishing itself in the country.

"Again the trouble is with the mini-programs, anything that involves the social side of things. When you look at physical transactions, [Alipay] has done reasonably well, as has Tencent, for that matter," said Zennon Kapron, director of fintech and digital payment consultancy Kapronasia.

Even if Alipay makes more inroads into commercial transactions, it will be confined to offering services that are complementary to Alibaba's Taobao and Tmall marketplaces. This dynamic could come under scrutiny from investors once the company is listed, according to Sampath Nariyanuri, fintech analyst at S&P Global Market Intelligence.

"[If] shareholders believe that Ant's partnership with Alibaba is slowing down [its] growth, then there would be pressure on Ant to work out these agreements with Alibaba, but as of now, these two are very closely integrated," said Nariyanuri. The results of the relationship are sometimes greater than what appears on the two companies' balance sheets, he added.

One as yet uncaptured benefit of the Ant-Alibaba relationship lies in user acquisition for Alipay, especially through the popularity of Alibaba's Taobao Live livestreaming platform. However, it faces competition from Beijing Byte Dance Telecommunications Co. Ltd.'s Chinese short video app Douyin, a sister platform of TikTok. The platform has acquired digital payment service UIPay and will ban livestreamers from sharing third-party links from the likes of Taobao starting Oct. 9.

"We have seen the potential of live streaming in conversions, especially when a celebrity is behind the live broadcast. The transactions will be huge, and transaction volume on Alipay will also increase," said Ke Yan, head of research at DZT Research. "This is indirect marketing. Ant is not spending its own money, but Alibaba's to increase user traffic."

Digital payment and merchant services have gradually accounted for less of Ant Group's revenue, falling to 43% in 2019 from 54.9% in 2017. In comparison, Ant Group's credit technology business is growing in importance, contributing to 34.7% of revenue in 2019 from 24.8% in 2017.

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Alibaba's retail platforms can be advantageous to Ant in building up additional financial services such as "buy now, pay later" products and payments by installments, said Nariyanuri.

"In terms of converting digital payment users to customers of credit and insurance products, Alipay is still far ahead of WeChat," said Ke. "This is the more important aspect. We should look at the lifetime value per customer. How much value each segment can make from each customer, that is something we are still trying to figure out."