Ant in Wonderland: IPO fiasco’s reality problem

The pulling of the Alibaba fintech’s listing plans makes sense – except when it doesn't 

by Jonathan Rogers
Ant in Wonderland: IPO fiasco’s reality problem

(ATF) The Ant Group IPO was supposed to be a rollicking, barnstorming success – the biggest in the history of public equity markets, a virile marker of China’s relentless rise in economic and capital markets terms and a salutation to the country’s unrivalled embrace of financial technology and the advance of its cashless consumer society.

That was the script but the script was torn up at the last minute. No one saw that coming, or so it seems. 

The facts constitute a peculiar debacle. A joint listing of a $34bn-equivalent IPO in Hong Kong and Shanghai for the consumer financial arm of giant retailer Alibaba, which priced to great success last week, was stymied by the latter’s Stock Exchange (SSE) on November 4, due, according to the SSE’s website in a statement directed at the Ant Group, to “material matters [such that] your company may not meet the conditions for offering and listing, or the requirements for information disclosure.” The IPO was suspended until further notice and the Ant Group was facing having to refund investors who subscribed to the IPO.

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That shocking intervention, coming just 48 hours before the newly minted equity was due to commence trading, precipitously dulled the building excitement surrounding the Shanghai-based Star market from which one leg of the Ant Group’s IPO was supposed to emerge in A-share form. 

The nascent Star market is a seemingly freewheeling venue, just 15-months old and modelled on the Nasdaq, wherein the IPO process appeared streamlined and via which the ongoing rapacious investor appetite for China tech enterprises could seamlessly be tapped. 

It seemed everybody was set for a big win, from company founder, the iconic homegrown tech superstar Jack Ma, his co-founder cohort and investors who were staring at a massive gain (many if not most retail players were looking to stag the IPO) based on grey market pricing for the paper. 

The Hong Kong leg of the trade which aimed to raise HK$133.6bn ($17.2bn) pulled in an eye-popping HK$1.3trn of retail orders, representing the frothiest demand in the former British colony’s stock market history and the H-shares were flagged at HK$120 per share on November 3 in the grey market, representing a 50% gain once the deal was (hypothetically, in hindsight) freed to trade.

And the retail allocation of the Shanghai leg was covered a staggering 870 times, with the bid totalling $2.8trn-equivalent.

Meanwhile, the legion of investment bankers who had been furiously working on the deal –perhaps egregiously underpriced given that grey market touch price – in the promise of a stupendous wallet running to hundreds of millions of dollars for their efforts may have to wait for the IPO’s return to claim their fees. Wait and see.

Star damaged

All of this peculiar tale carries something of an Alice in Wonderland sensation in that it both does and does not make sense. It does not make sense for a variety of reasons, damaging as it does the perception in the minds of potential issuers in the Star market that it is a viable listing arena, as well as souring the collective mind of those who subscribed and expected to make a killing on the deal, both on the Shanghai and Hong Kong bourses.

At the same time, in a broader structural context, the decision to scupper the China leg of the deal flies in the face of the extraordinary recent strides the country has made in opening up its capital markets to foreign participation. Numerous boxes have been ticked over the past eighteen months, ranging from allowing the big foreign credit ratings agencies to operate in China, approving overseas investment banks to lead domestic bond deals and consolidating the purview of the three big regulators via a clearly defined taxonomy for Green finance (the Green Bond Catalogue).

All of these measures are set to bring in more stringent market practice and via a closer alignment with Western ESG standards, a potential wall of offshore cash into China’s domestic Green debt markets, both primary and secondary. 

This virtuous dynamic kicked off with the establishment of the Stock Connect and Bond Connect platforms - introduced in 2014 and 2017 respectively - to allow foreign investors access to China’s domestic capital markets via Hong Kong-based execution infrastructure. Those two hubs got the ball rolling and it’s certainly rolling fast. 

So why this peculiar roadblock in the form of the Ant Group IPO withdrawal? 

The snide constituency suggests it represents a top-down muscle flexing from the authorities in the face of Mr Ma (et al)’s thundering juggernaught of wealth creation, a case of “tall poppy syndrome,” if you will, to mix metaphors. 

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Perhaps, but the most likely take is an inherent fear of the capability of market forces to initiate chaos, specifically with regard to misgivings around the possibility that fintech can erode the pre-eminence of China’s big four state-owned banks. China has already had its run-in with shadow banking in recent times and the dangers of items such as local government funding vehicles (LGFVs) and has headed that danger off at the pass with market reforms over the past five or so years. 

There are fears that the kind of activities the Ant Group gets involved in, such as micro-lending without the commensurate balance sheet commitment to back it up might be inherently destabilising. That is logical. The conversations Ant Group’s top executives are reported to have had in recent days with China’s financial regulators concerning disclosure requirements against a fast-moving regulatory backdrop in the fintech sector 

The macro-prudential standards which apply within China’s banking system - and beyond, at the consolidated level in relation to overseas balance sheet exposure (think “Belt and Road”project lending) - are there for a reason and are axiomatic to the stress testing of the country’s financial system. It makes systemic sense that the fast-growing fintech sector fall within that net. 

But China is cognisant of the transformative economic potential of fintech enterprises such as the Ant Group. It will not be killing this particular golden goose just yet.

China’s big three financial regulators met with Mr Ma and his senior executives on Monday and although the content of the talks was not disclosed it appears to have been about moves to tighten regulatory control of the internet consumer finance industry - the People’s Bank of China and the China Banking and Insurance Regulatory Commission (CBIRC) on Monday published draft regulations for online micro-lending. 

Clearer guidelines

Some 40% of Ant’s sales derived from its lending business over the six months to June  and it now accounts for a colossal 10% of China’s non-mortgage consumer loans, although much of that lending is passed on via securitisation or via Ant’s partner banks, with just around 2% sitting on Ant’s balance sheet. Compare that with the conventional lending practices of China’s banks - big four or otherwise - and a red flag goes up. 

The timing of the release of the draft guidelines struck many as somewhat “off.” Perhaps, but the underlying narrative suggests that the micro-lending aspect of consumer fintech in China needs clearer guidelines which bring the sector in line with macro-prudential parameters within the broader financial arena.

My suspicion is that the IPO will be resurrected within the next six to eight months, even if the tweaks to Ant’s business model implied by the new regulations suggest a somewhat different pricing level.