Hobbled Ant faces treacherous march ahead

Lufax Holding

10/07/2023 04:08

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, July 10 (Reuters Breakingviews) - In Aesop's
fable about the grasshopper and the ant, hard work throughout
the summer helps the latter weather a harsh winter.
Unfortunately, the same cannot be said for Ant, China's
erstwhile financial technology star founded by Jack Ma.
    On Saturday, the payments-to-consumer credit group said it
is offering to buy back up to 7.6% of each of its shareholders'
equity interest at a quarter of the group's $300 billion-plus
valuation in 2020. It's a thin olive branch for long-suffering
backers like General Atlantic and Carlyle  CG.O , which have
been stuck with Ant shares since Chinese regulators derailed the
company's planned initial public offering three years ago and
forced it to undergo a radical business overhaul. 
    The good news may be that Ant's painful restructuring
appears to be finally over: just a day before the buyback
announcement, China's main banking watchdog unveiled a near-$1
billion penalty on Ant, signalling an end to the years-long
regulatory crackdown on the company as well as the broader
fintech sector.   
    Ant is now set to become a licensed financial holding
company. That will probably put it under the scrutiny of a
recently created, powerful watchdog, the National Financial
Regulatory Administration. Capital constraints and other rules
mean Ant's once-booming credit unit, which at its peak in June
2020 boasted a loan balance of a whopping 2.1 trillion yuan
($291 billion), has been drastically curtailed. In the year to
March, Ant's profit plunged 57% to roughly $4.5 billion,
according to 33%-shareholder Alibaba's  9988.HK   BABA.N 
financial results.
    Even with regulatory woes behind it, Ant still faces a
treacherous march ahead. China's post-pandemic economic recovery
has disappointed, with demand for industrial and consumer
products stalling. Factory gate prices in June fell for a ninth
consecutive month, down 5.4% from a year earlier - the steepest
decrease in seven-and-a-half years - while consumer price
inflation has flat-lined. With large-scale stimulus unlikely and
urban youth unemployment at 20%, consumer confidence is
deteriorating fast. That will further constrain growth for Ant,
which has yet to navigate an economic downturn or a spike in
defaults.
    Assuming Ant's earnings stays roughly the same this fiscal
year - a big if - then its $79 billion valuation implies a
price-to-earnings multiple of over 17 times. That's well above
Alibaba and smaller fintech rival Lufax's  LU.N  11 and 5.5
times respectively, per Refinitiv. Ant may be further cut down
to size. 

    Follow @mak_robyn on Twitter 
    
    CONTEXT NEWS
    China's Ant Group on July 8 said it had proposed to all of
its shareholders to buy back up to 7.6% of its equity interest
at a price that values the company at 567.1 billion yuan ($78.5
billion). The offer will provide “a liquidity option” for
investors, and any repurchased shares will be transferred into
the company's employee incentive plans, according to the
statement.
    Ant's major shareholders, Hangzhou Junhan Equity Investment
Partnership and Hangzhou Junao Equity Investment Partnership,
have decided not to participate in the repurchase, the company
added.
    On July 7, the People's Bank of China announced it had fined
Ant 7.12 billion yuan  for violating laws concerning consumer
protection and corporate governance, among other things. Other
companies were also fined, including Tencent's payments unit,
Tenpay, Postal Savings Bank, Ping An Bank and PICC Property
Casualty.

 (Editing by Antony Currie and Thomas Shum)
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