Ant Financial IPO – Initial View

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The Ant Financial IPO is ready for viewing over here.

The skinny: Net Income of RMB 21.9 billion or USD 3.2 billion for the first 6 months of the year off total revenues of RMB 72.8 billion (USD 10.5 billion). Total assets of RMB 120.1 billion, for a Return on Asset of 36.4%. Their total reserves are about RMB 70 billion, which answers conclusively the question of their capitalization.

How does it do it?

RMB 28.5 billion of revenues are recognized through its segment called “CreditTech” where Ant originates loans which are then either a) sold as Asset Backed Securities or b) sold to financial institutions, including an affiliate called MyBank. They have over 100 credit assessment models to help them make a credit decision.

So the question really is what was the total volume of loans originated by CreditTech platform?  We are unable to get an answer, but based on an internet search, MyBank seems to indicate that the total loan size is RMB 140 billion (~$20B US).

So the key question is how can an organisation whose total net income is a fraction of JP Morgan, in a potentially credit deteriorating environment be worth US$225 billion? Perhaps, we let those who believe in this number answer the question.

An excrept:

“InsureTech, serving insurance needs. We are the largest online insurance services platform in China in terms of premiums generated through our platform, according to Oliver Wyman. Through our InsureTech services, we enable our partner insurers to offer a wide range of innovative, customized and accessible insurance products, covering life, health and P&C insurance areas. As of June 30, 2020, we worked with approximately 90 partner insurance institutions in China. …. as any risk-bearing activity may be insured against where there is sufficient high-quality data. “

Question: Of these insures, how many of them would survive a 1 in 100 year flood?

For Ant Financial, their contract liabilities was RMB 3 billion as of Jun 20, which increased from RMB 2.4 billion in Dec 2019. However, this was measured in June 2020, before the full impact of the flood which hit China.

Interestingly, the word ‘flood’ only appeared 1 in the IPO Filing. 

The key risk is really how much of those loans originated by Ant Financial through its “Einstein” like Credit Tech actually stand up to what I call Global Financial Crisis like conditions in China? If you think about it, the floods that have plagued China since June are considered a 1 in 100 year event. It is blatantly obvious that many small business have been affected – and it is a natural consequence that there will be a spike in default rates as businesses cannot generate revenue due to the disruption, let alone service their loans (avg balance is USD $4,300 in MyBank).

Baoshang bank just went under in Aug 10, 2020. Click here.

 

So if you cast your mind back to the summer of 2007, when Subprime was “cool” and looked 1 year forward, that may bring to mind the kind of default rates for borrowers who are in the areas of South and Central China, especially in Anhui, Chongqing, Sichuan and maybe even Wuhan.

China’s Minsky Moment may be due in 2020.

By the way, Internet lenders are not new. Iceland used to be the king of Internet Banking, so much so that the total banking assets of Icelandic Internet banks were several times the GDP. When the credit crisis struck and borrowers rushed for their deposits, there just wasn’t any liquidity and these banks failed. In fact, Iceland for a moment refused to honour British depositors who had banked with these Icelandic banks, leading to Gordon Brown to impose Terrorism style sanctions on Iceland. And Alibaba’s Ant Financial is not the only one in this game, WeBank by Tencent group is also in this game.

Conclusion

Given the substantial risks that have materialized in China over the past 8 weeks,  those who buy into Ant Financial must be prepared to go in with both eyes open. While Ant Financial may have been a pioneer in developing elaborate models, the lack of disclosure on the impact of the flood (it was only mentioned once), it is up to the individual investor to guess its potential impact, or lack thereof.  Our view of its valuation of $225 billion can probably be reconciled to the view one would have held of the valuation of Countrywide Financial in 2007. Both entities are involved in the originate to distribute business, an investor in 2007 in Countrywide would have known about subprime risks, and likewise an investor in Ant Financial would have also known about the massive flood affecting China.

Good luck to those investing in this.

 

 


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