Aliwhaat?
Ant Group (owner of Alipay) just dropped its filing document this week for its upcoming IPO – and it’s a monster. For those of you who spend a lot of your time in the Chinese market, this may not come as a surprise, but for us, going through the filing was an eye-opening experience due to the sheer scale of the company. So below we’re going to go through what we thought were the most interesting parts of the filing, so you don’t have to. It goes without saying, the below is not investment advice, and as our clients will tell you, we stay away from recommending single stock investments in China as it is far outside our circle of competence. But this policy doesn’t stop us from being curious – so strap in and let’s get into it.
(Do note we’ve mostly relied just on the filing document for the data below, if you want to read it yourself you can find it here. It’s nearly 700 pages long. Have fun!)
What is the Ant Group?:
The Ant Group is an affiliate of Alibaba. It owns a number of businesses, but the most important is Alipay which is China’s largest digital payment platform. Now there are several intricacies related to the share-holding and structure of the group, but we’re not going to really get into that, choosing to focus on the business for this post. Alipay’s earliest iteration was created in 2004 to help facilitate payments for Alibaba, during a time when online payments were unreliable and fraught with fraud. As Alipay grew it was eventually spun off and is now housed under the Ant Group (previously Ant Financial). The company is called Ant because, according to the filing, “because we believe that small is beautiful, small is powerful” but as you will see this company is anything but small.
The company plans to do a dual-listing in both Hong Kong and Shanghai and is likely to IPO sometime in September. News reports state, that according to insiders, the company may issue up to US$30 billion worth of stock, making it the biggest IPO in history. Valuations are yet to be finalized but the media has said the value of the Ant Group is somewhere around ~US$225 billion[1] – but we think considering the market euphoria right now it will probably be priced quite a bit higher.
The sheer scale of it all:
Now – onto the fun stuff. When going through the filing document the sheer size of the company was mind-boggling to us. Luckily the nice people at Alipay have provided us with a visual to help put this into some context.
Let’s take a look at a few of these figures. Now, the first thing that catches our eye is that Alipay has 1000+ million users. Some quick math tells us that’s over a billion users. A further reading illustrates that this is just in China.[2] Now China has a population of 1.44 billion – so we’re talking about a 70% penetration rate! Considering that China’s internet using population is around 1 billion, it seems like everyone in China who uses the internet would have an Alipay account, and over 70% are active on a monthly basis (based on MAUs of 711 million). Moving on we see that the company has over 80 million monthly active merchants on its platform, to put this size into perspective, Paypal only has 26 million[3]. It has RMB 4.1 Trillion (US$600 billion) in Investment Assets – which on its own makes it a top 50 global asset manager.
But the most astonishing figure has to be its total payment volumes which come in at a whopping RMB 118 trillion. Yes that’s trillion with a T. This is the USD equivalent of 17 trillion. To give you a sense of how big this number is, check this out:
The US nominal GDP is ~$21 trillion, which means each year, the equivalent of 80% of the US economy is transacted through Alipay (an app, on your phone!).
Visa and Mastercard combined only processed $15 trillion in 2019
On a per-capita basis, $17 trillion is $12K+ per Chinese resident (which is actually equivalent to the median annual income in China) and $17K per Alipay annual active user.
The filing breakdown where all the payments go (this isn’t just for Alipay, but you get a sense of the rough breakup):
Personal Payments are the largest segment and includes credit card repayments, money transfers, red packets etc.
Consumption payments: Primarily consist of e-commerce and online services payments, and offline consumption payments through e-wallets, etc (expected to grow at a 17.4% CAGR through 2025)
Financial Payments: Online purchases of investment products and insurance policies, repayments of loans and others (expected to grow at a 25% CAGR through 2025)
Key Businesses:
We’ve already talked about the digital payment part of Alipay, but it also has 3 additional business:
CreditTech – Largest online consumer and SME credit provider in China. Alipay originates loans which are then fulfilled by one of their 100+ partners.
InvestmentTech – Largest online investment service platform in China by AUM. Use AI to suggest investments from their 170 asset manager partners.
InsureTech – Largest online insurance service platform in China. Product’s span life, medical, and P&C insurance and Alipay partners with 90 insurance companies and takes a fee based on the premium.
It’s important to note that CreditTech, InvestmentTech, and InsureTech actually make up a larger percentage of revenues than payments despite smaller volumes. This is driven by much higher take rates which can be seen below. This shows the strength of the business model, with customers initially coming into the funnel for the low-value but high-usage payment business, but the company ends up making most of its money from high-value but lower-usage verticals.
Now, as people who have never used Alipay (told you Chinese companies are way outside our circle of competence), we were fascinated to see how the App really distributes these services, and the filing document provides us with a fascinating image to help us visualize it.
This image only scratches the surface of the Apps scale. According to the filing doc there are over 1,000 daily life services and over two million mini-app programs (apps within apps) that provide mobility services, local services, and municipal services.
The below shows the user interface and how the app provides a one-stop shop experience.
You can see the intelligence of the interface; with the main usage function on the very top (remember this is the top-of-the-funnel function) which initially attracts users, and then we see the interface from lower-value high-usage to higher-value lower-usage applications and functions. If we take a dive into one of these higher-value and lower-usage applications (digital finance, see image below) we get a nice insight into how one would transact on the app. As long-term investors, we shudder at the daily return indicator – but also understand that this helps gamify this portion of the app and can lead to more engagement.
Other Interesting Tid-bits:
To give you another sense of how much volume is transacted on Alipay - example, during the 11.11 global shopping festival in 2019, the peak number of payment transactions was 459,000… PER SECOND
Alipay also has a robust cross-border business which allows their users to Alipay users to make online purchases of goods and services from over 200 countries and regions. They also allow for payment facilitation from overseers orders into China as well as allows off-line merchants internationally to engage Alipay users (to take advantage of the boom of Chinese international tourism)
It can make consumer loans to users as low as RMB 20 (USD $3). Delinquency rates are around 1.56% as of 2019, and though they have been rising over the last few years (they hit a peak of 3% during Covid), Alipay protects itself by not actually offering the credit and allowing partners to do it for them.
Ownership:
The below diagram shows the ownership of the Ant Group. We won’t comment on this too much, and leave it to you, dear reader, to find out more if you’re curious (especially about the many related transactions). But it’s fun to note that around 19 owners will become billionaires many times over through the IPO (if they weren’t already)[4]
Valuations:
We obviously can’t resist taking a look at valuations at least on a very high-level, but do note this is very rough, and just for reference rather than any sort of data you should/could use for making an investment decision.
If we assume that the company is valued at US$225 billion and has around US$11 billion in net cash, we’re looking at an Enterprise Value (EV) of ~$214 billion. If we annualize revenue from the first six months of the year we get a run-rate of US$21 billion, which implies the company is priced at ~10x sales. For a company growing on average of ~40% yoy (2018 to 2019 and H12019 to H12020) this valuation is not unreasonable. Profits for the year (annualized from H1) would roughly be around US$6.37 billion which would imply an EV/Profit multiple of ~33x, which again given the environment is not entirely crazy.
Now obviously this will matter little, as it’s quite likely that the first time readers of this blog will be able to get their hands on shares is after it goes IPO, during which the price run-up is likely to be fast. So these valuations are just a rough gauge to think about pricing.
Conclusion:
Hopefully we’ve given you a sense of the mammoth that is Alipay and how much of China’s economy filters through and relies on it. While we really have no strong opinion on if this is a company worth owning or not we can’t help but be in awe of the scale they have achieved.
Thanks for reading, and as usual happy investing!
[1] https://www.techinasia.com/ant-group-reportedly-eyes-225b-valuation-dual-ipo
[2] Page 42 of Filing document “As our Alipay AAUs exceeded one billion in China, growing our existing business”
[3] Q22020 Earnings call
[4] https://www.straitstimes.com/business/companies-markets/mega-ipo-of-alibabas-ant-group-set-to-make-group-of-elite-insiders-very