I like Alibaba Group Holding Ltd. (NYSE:BABA)’s stock down here; it’s a buy.
But not everyone would agree with me, starting with the investors who wanted to buy into Ant Group’s IPO, but now must wait for who knows how long.
Ant’s botched IPO, courtesy of the financial giant’s founder Jack Ma insulting Chinese regulators days before it was about to debut, hurts Alibaba, which owns 33% of Ant Group.
Alibaba shareholders bid up shares of the e-commerce giant, China’s largest-listed company, anticipating its value would soar when shares of Ant Group started trading and skyrocketing as they were expected to do.
With the scrapped IPO and Alibaba tanking, investors are wondering if Alibaba shares will sell off more and when, or if, Ant will ever IPO.
Here are the short answers to those questions, and what it all means for you…
What Happened to Ant
Jack Ma, with his wife and junior co-founders, launched Alibaba out of his apartment in Hangzhou, China in 1999.
Alipay was created as an escrow service that held payments made on the Alibaba platform until goods were received and accepted.
That service made Alibaba the trusted, go-to platform it quickly became.
In a controversial move, Ma spun off Alipay into a separate company in 2011, renaming it Ant Financial and giving himself control of 50.1% of the company’s voting stock. The company was later renamed Ant Group.
Ant Group has been in hyperdrive ever since Ma spun it out. It’s a financial giant.
Besides facilitating commerce on Alibaba, Ant has originated loans to more than 20 million small- and medium-sized businesses in China and loaned money to more than 500 million individuals. It also runs the largest mutual fund group in China, the largest money market mutual fund in the country, and offers wealth management services and other financial products and services.
According to Chinese regulators, Alipay is used by approximately 70% of Chinese consumers. Ant says its payment products are used more than cash and credit cards in China.
Days before Ant was supposed to IPO in a joint listing on Shanghai and Hong Kong exchanges, with committed investors poised to buy the $34 billion of shares the company was offering, making Ant worth more than $300 billion, the company pulled the IPO.
No official reason was given, though exchanges said the listing was pulled to address disclosure issues.
The real reason the IPO was scrapped is because Jack Ma and his executive team were called to meet with regulators, who told them they were going to bridle the company’s business model to such a degree that the company’s disclosures would be inaccurate and its expected valuation likely knocked down.
Truth is, Jack has only himself to blame.
What to Do Now
A few days before the IPO, he publicly knocked Chinese financial regulators, declaring them an impediment to China’s technology revolution and knocking giant, state-controlled, highly regulated Chinese banks, comparing them to pawnshops.
The often-outspoken Ma had gone too far, and the government stepped into squash Ant’s coming out party.
Of course, the regulators tell another story. They say Ant is really a bank that masquerades as a payments company and doesn’t maintain reserves, as banks are required to do when they make loans, and they were changing that.
Ant, which doesn’t really lend like a bank, acts as a “matchmaker,” originating loans and passes them onto banks to underwrite.
If Jack hadn’t challenged the government, which is what he did, the IPO would have gotten off to a monumental start and Ant shares likely would have soared.
One thing regulators said they were worried about, was that banks had lent large sums to investors who were going to buy Ant shares once they started trading.
Now, regulators want Ant to pony up 30% of all loans it originates, and reserve against those outlays.
That’s a different business model than what Ant was selling to investors. So, it had to pull its IPO.
And that hit Alibaba’s shares, hard.
But it’s not over for Ant, and it’s certainly not over for Alibaba.
Ant is too big to fail, and it needs the equity capital going public will afford it. The company will fix its house and be back knocking at the exchange’s doors, probably within a few weeks, months, or maybe quarters.
But Ant is coming to market.
And to make a long story short, that means Alibaba’s stock is on sale down here. Since it owns 33% of Ant, the eventual valuation increase from liquid and rapidly rising Ant shares post IPO, will boost Alibaba’s shares too.
Now, it’s just a question of how much BABA stock I’m going to buy down here…