Beijing Wants to Treat Ant Like a Bank and Its Value Hangs in the Balance


(WSJ) The sudden halt to Ant Group Co.’s giant initial public offering left investors hanging, employees shellshocked and shareholders trying to come to grips with why China pulled the plug on the record-breaking deal when it was so close to the finish line.


A growing regulatory assault on Ant and co-founder Jack Ma is forcing a reassessment of how much the financial-technology giant is worth and whether the company’s growth and profitability will be severely crimped by Beijing in the years ahead.


On Wednesday, some investors who had been allocated shares in Ant’s heavily oversubscribed dual IPOs—which had been on track to raise at least $34.4 billion—were informed that their orders were canceled, and those that had already sent in money would be refunded. Others were waiting for updates on how they would get their funds back.


There was some confusion over whether the stock sales were completely off the table in the near term. Ant said it “will maintain close communication” with the Shanghai and Hong Kong exchanges and regulators and wait for further notice from them on its IPO developments and listing process.


Many market participants expect Ant to file new listing documents with revised disclosures to investors and go public at a later date.


The Shanghai Stock Exchange on Tuesday suspended Ant’s plans to list on Nov. 5, saying a meeting called by Chinese regulators and changes in the financial technology regulatory environment meant Ant might not be in compliance with listing rules.


Some of the writing was on the wall earlier. While Ant was gearing up to launch its IPO, regulators had begun taking aim at the company’s fast-growing microloan business, which provides short-term credit to hundreds of millions of individuals and scores of small businesses.


On Sept. 14, China’s banking and insurance regulator issued a private notice to some commercial banks warning them about the risks of making loans in partnership with third-party institutions, according to a copy of the notice seen by The Wall Street Journal. It said banks should not be outsourcing their loan underwriting and risk controls.


When Ant partners with banks to make loans, the lenders provide the funding and bear the risk of defaults, while Ant collects fees for facilitating the transactions.


Two days later, the regulator published a guideline that placed caps on the volume of asset-backed securities that could be issued by micro lenders. Two subsidiaries of Ant have bundled many loans into securities and sold them to raise funds for lending operations.


Investors clamoring for a piece of Ant’s dual IPOs in Shanghai and Hong Kong were unperturbed by the regulator’s moves. Demand for Ant’s shares from domestic and global investors was so high that the company was able to sell its shares very quickly.


The company limited how many analysts and investors could attend some of its marketing roadshows and told them they had to submit questions they wanted to ask in advance of the events, according to a person familiar with the matter. Ant also told brokerages that their internet and technology analysts should cover the company, instead of analysts who covered financial institutions, the person added.


In Hong Kong, Ant took the unconventional step of fixing a price for its offering from the get-go, rather than giving investors a price range and letting their demand and orders determine a final price per share for the IPO. The prices Ant set in Shanghai and Hong Kong valued the company at $313 billion, making it worth more than most American and Chinese banks.


The frenzy culminated on Oct. 28,  when Ant closed the books on its institutional share sale one day ahead of schedule due to overwhelming investor demand.


Five days later, the tables turned.


On Monday, Mr. Ma, who is Ant’s controlling shareholder, Executive Chairman Eric Jing and Chief Executive Simon Hu were summoned to a rare joint meeting with four Chinese regulators. Ant said that evening that the group discussed the “health and stability of the financial sector.”


On the same day, China’s banking regulator released draft regulations that will likely force Ant to come up with $30 for every $100 in consumer and business loans it originates in conjunction with banks. That would require the company to use significantly more capital to support its lending unit.


“The government’s goal is to remind the company who is in charge of the financial system, not to put it out of business,” said Andrew Batson, director of China research in Gavekal Research.


He said Ant will almost certainly return to list in Shanghai and Hong Kong, but the company may have to make substantial changes to its internal organization and business model to comply with new regulatory requirements. It would also have to change disclosures and risk factors listed in its listing prospectuses.


Inside Ant, the mood among employees was somber after the IPO was suspended. On Tuesday night, Messrs. Jing and Hu called a virtual town hall with more than a thousand mid-to-senior staff for a morale boost, according to people familiar with the matter.


The company’s two top executives repeated a guideline that was communicated to them in Monday’s regulatory meeting, telling employees that Ant will follow the principles of “stable innovation; embrace of regulation; service to the real economy; and win-win cooperation.” Staff were also discouraged from discussing the IPO suspension and told to focus on their work, the people said.


A commentary published by several state-owned media outlets including People’s Daily, the Communist Party’s official mouthpiece, said Ant’s listing was suspended to “safeguard the rights and interests of financial consumers and investors, and for the long-term healthy development of the financial market.”


For Ant, it added, “the overriding imperative” is to “conscientiously rectify” its businesses in accordance with the regulatory requirements.


Kevin Kwek, a Sanford C. Bernstein analyst, said investors could start to view Ant less as a technology company and more like a financial firm, which could affect its valuation and growth assumptions. “We don’t think Ant’s model is fundamentally broken, but there are now clear challenges to be addressed,” he said in a research note.


The listing suspension was a huge disappointment to the hordes of individual investors who were hoping to make a windfall from Ant’s trading debut.


Huang Xiaohu, a 35-year-old tech entrepreneur in Shenzhen, said he earlier placed an order of HK$12 million, equivalent to $1.5 million, for Ant’s shares by borrowing 95% of the sum from brokers and putting down HK$600,000.


Mr. Huang said he would now incur a small loss from the margin loans he took out. “I’m very upset,” he said.


For some others, however, the suspension came as a relief. “It’s better late than never,” said Conrad Saldanha, a senior portfolio manager at Neuberger Berman Group. He said an emerging-markets stock fund he managed had earlier placed an order for Ant’s shares in Hong Kong.


He said regulatory constraints on Ant could lower the company’s valuation and earnings potential, and it was better to know that before investing. Mr. Saldanha said the firm still plans to take part in an eventual Ant IPO.


Source: Wall Street Journal by Jing Yang, Xie Yu and Joanne Chiu

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