It would have been the largest IPO in history, raising over US$34 billion and surpassing the amounts raised by Saudi Aramco in 2019 and Alibaba itself in 2014. Ant Financial was valued at over US$300 billion, making it the third biggest financial company in the world (after Berkshire Hathaway and Visa), bigger than JPMorgan Chase and Bank of America whose histories date back 100 years. This is remarkable considering Ant was ranked the 14th largest financial company only two years earlier according to Bloomberg.

Ant Financial was created out of Alipay, a third-party payment processor for Alibaba’s online marketplace. Through the rise of mobile payments, Alipay succeeded in accumulating a userbase of 1.3 billion and controlling over half of China’s digital payment market. However, today Ant Financial is much more than just Alipay, which accounts for approximately a third of its revenue. The company has massively expanded its ecosystem including wealth management, lending, credit scoring and insurance. Its wealth management tool Yu'e Bao (“leftover treasure”) allows even the smallest customers to invest leftover funds and offers on average 2% greater returns than traditional bank interest. On the lending side, the size of its credit balance is comparable to some of the global franchises as shown in the chart below.

Shortly before the Ant was due to list, the Chinese banking regulator issued draft rules that sought to raise standards for online lending and limit the amount available for borrowing. Ant Financial management was invited to a discussion with regulators, and the next day, the Shanghai Stock Exchange suspended the Ant IPO, citing the meeting and a “change in the financial regulatory environment”.

This was followed by new antitrust rules, brought in to curb anti-competitive behaviour among online commerce platforms such as forcing merchants to sell exclusively on one platform. Having initially weathered the debacle around the Ant IPO, this time Alibaba’s share price collapsed along with other internet companies such as Tencent and Meituan. The prices have recovered somewhat since then as they continue to deliver revenue growth, but it is clear the tone of regulation is unhelpful to these companies. Just a few days ago both Tencent and Alibaba were fined for comparatively minor regulatory transgressions, some dating back several years. The sums involved were trivial but it reinforces the unhelpful tone.

The regulatory move by the Chinese government is in sympathy with scrutiny on technology companies including Amazon, Facebook and Google by global authorities. Recent news from the US is putting Facebook into the spotlight, with calls to divest itself from WhatsApp and Instagram. Whilst the Chinese rules are still at the consultation stage with not much detail, the consensus view among our managers is that they are actually positive for the sector’s long-term development. Antitrust regulations will hobble the large players and introduce more competition. This is no doubt negative for those large incumbents in the near term, but these companies are well versed in dealing with competition, and smaller players with innovative ideas can now come through.

Take the success of Pinduiduo (PDD) as an example. Alibaba and JD.com had a combined market share of over 70% in e-commerce and were thought to be unassailable until PDD showed up. Over the past three years, PDD’s active buyers increased from 68 million to 628 million and are now very close to Alibaba’s 730 million. This was followed by the rise of a new phenomenon called “social e-commerce” over the past 18 months. These are purchases made on social media platforms like WeChat, where social interactions and user contributions assist online buying. It might be thought of like “going to the shops with friends” online. Total transaction value on WeChat’s Mini Programs grew by 160% in 2019 and 115% in the first eight months of 2020, bringing it to about 15% of Alibaba’s more traditional gross merchandise value.

However, this does not mean that Alibaba is losing out. Their core e-commerce business was still able to grow at above 20% in the past quarters despite the increased competition. This shows how vast the Chinese market is. There is enough room for many players to coexist and thrive. For this reason, many of our managers have not reduced their exposure to the large internet stocks and are in fact looking for the opportunity to add if share prices continue to fall. This is clearly one of the benefits of having a huge and connected population.