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(Bloomberg) – China’s move to stop Ant Group Co.’s massive stock debut could reduce the fintech giant’s value by as much as $ 140 billion, according to analysts’ revised estimates.
New regulations that could force Ant to raise more capital to support the loan and seek national licenses to operate across the country could cut the company’s valuation by about half, according to estimates by Morningstar Inc. and other companies. Regulatory details are preliminary and may be subject to change.
If Ant’s $ 280 billion pre-IPO valuation were halved, it would essentially mean the company is worth less than it was two years ago when it raised funds from some of the world’s largest funds including Warburg Pincus LLC, Silver Lake. Management LLC and Temasek Holdings Pte.
The low valuation also means potentially lower fees for investment banks like China International Capital Corp who were counting on a boon from Ant’s IPO record. And it gives less weight to billionaire Jack Ma’s company to make acquisitions as it seeks to expand beyond its Chinese base and take the battle nationwide to Tencent Holdings Ltd.
In a drastic turn of events, China last week held back the sale of Ant’s $ 35 billion stock just days before the fintech giant went public in Shanghai and Hong Kong. The move reverses what had been one of China’s biggest trading success stories, as well as what would have been a critical step in developing the nation’s fast-growing capital markets.
Iris Tan, an analyst at Morningstar, said Ant could face a 25% -50% decline in valuation if its pre-IPO price-to-book ratio falls around the level of major global banks. This means that its valuation could be reduced by around $ 140 billion. Ant’s share price is currently valued 4.4 times its book value, versus 2 times at those banks, he added.
Sanjay Jain, chief financial officer of Singapore-based Aletheia Capital, estimates Ant’s price-to-earnings ratio could drop to around 10 times its loan profits, half of the company’s previous target. The new price would put the fintech giant more in line with the valuations of some of the better quality banks.
Citigroup Inc. is trading at around eight times 12-month forward earnings, while Singapore’s DBS Group Holdings Ltd. is trading at around 12.6 times. China Merchants Bank Co., one of the largest retail lenders in the country, operates about 10 times.
An Ant representative declined to comment.
Convened in Beijing
But it was called by Chinese regulators for “supervisory interviews” days before Ant’s proposed commercial debut, and authorities have belatedly announced that they have belatedly discovered a number of shortcomings that, according to some accounts, may require Ant’s review.
Under the proposed new rules, the company would need additional capital to meet stricter regulatory requirements. Online lending companies such as Ant may be required to provide at least 30% of loan finance, according to the draft rules proposed by banking regulators in November. Currently, only about 2% of loans are on Ant’s balance sheet, with most of the funding coming from banking partners.
If these rules are passed, to support its nearly 1.8 trillion yuan of outstanding loans, Ant must take out 540 billion yuan of credit on its own, according to Morningstar. Based on how small lending companies can only leverage up to 5 times, Ant Huabei and Jiebei’s credit units may need at least 54 billion yuan, he said.
“When it returns, investors will likely look at Ant a little less as a tech company than before, as it will be less asset-light and growth prospects may be lower,” said Kevin Kwek, analyst at Bernstein based in Singapore. . “There may be a discount on previous valuations given the over-regulation.”
Alibaba help
Ant was sitting on around 80 billion yuan of cash at the end of June. The capital requirement should also have a three year grace period.
For Ant to be able to meet some of the regulatory demands, one of the more realistic solutions would be for affiliate Alibaba Group Holding Ltd. to inject 20 to 40 billion yuan, said Leon Qi, an analyst at Daiwa Capital Markets based in Hong Kong. .
That said, estimates for valuations and capital requirements are also preliminary. Ant may take fewer hits if the final rules are less strict. Bernstein’s Kwek says that while he expects Ant to get a lower valuation, he is more optimistic that the company’s valuation will not drop to bank-like multiples given its credit technology and powerful payment app that sits on a billion phones.
“If Ant can demonstrate that it will be subject to less national service pressure,” or better assess the risk, it could sustain higher multiples, Aletheia Capital’s Jain said.
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