FINANCE: New Investment Squashes Ant Financial Valuation
Bottom line: Ant Financial’s valuation looks low but reasonable based on its first major fund raising, and the figure is like to triple or more by the time it makes its domestic IPO in around the next 2 years.
After months of negotiations, Alibaba (NYSE: BABA) affiliated financial services unit Ant Financial has finally closed its first major funding round as it revs up a campaign to challenge established state-run banks. But what most surprised me in the latest reports were the low valuation that Ant got from the funding, with the final figure coming in far below all of the earlier forecasts.
The moral of the story is that Ant Financial and other similar privately funded financial services companies still have big potential. But limitations that restrict such companies from seeking foreign investment are likely to limit their valuations, since only a small field of domestic Chinese institutional investors have big enough sums of money to finance high-growth companies like Ant.
Ant has been in the headlines for much of the last 2 years, as it rolls out a steady series of innovative financial products and services that are posing a serious challenge to China’s state-run financial establishment. The company’s crown jewel is its Alipay electronic payments service, which has grown at lighting pace and is now posing a serious challenge to the older state-owned UnionPay.
More recently Ant has launched Yu’ebao, a product that competes with traditional bank savings accounts. And just last month it opened MYbank, one of China’s first private banks, under a pilot scheme being rolled out by Beijing. That spree of new initiatives is costing big money, which is why Ant has gone to financial markets in search of its first major funding.
Reports of the funding first surfaced in March, when Ant was reportedly in talks with a group of domestic institutional investors that included China’s national social security fund. (previous post) Now the latest reports say that Ant has finally closed the funding round, raising 13 billion yuan ($2.1 billion) — an impressive amount for a first funding round. (Chinese article) Investors included the social security fund, as well as China Development Bank and an insurance company.
Shrinking Valuation
In exchange for their cash, the investors got a combined 12 percent of Ant Financial, giving the company a valuation of 180 billion, or just under $30 billion. That compares with figures that pegged the valuation as high as $50 billion when the initial reports came out. The figures later came down to the $35-$40 billion range, but were back up to $45 billion in the latest reports just a couple of weeks ago. (previous post)
Of course much has happened since some of those earlier reports were published. Most notably, China’s stock markets that had doubled over the past year went into sharp reverse 3 weeks ago, and have now plunged nearly 30 percent. Such a plunge probably emboldened the investors to seek more equity for their money, since they would argue that Ant would be worth less if it was a publicly traded company after the sell-off.
In one other piece of company-related news, media also reported last week that Ant had been selected to become one of the first companies listed on a new Nasdaq-style enterprise board that could launch in Shanghai as early as next year. (previous post) But Ant has said it has no plans to list in the near future, meaning an IPO that could potentially give it a higher valuation is still at least a year away and probably more.
At the end of the day, $30 billion is certainly not a bad valuation for a company of Ant’s size and youth. Its core Alipay asset is probably quite valuable, perhaps worth $10-$20 billion alone. But its other businesses are probably mostly losing money, as most are in the formative stage. Ant is also being hurt by its inability to tap foreign investors. But no matter how you look at it, this is a company with huge growth potential, thanks to its strong position as China opens its financial sector to private investment. Accordingly, I expect its valuation will triple or more by the time it makes its IPO in the next 1-3 years.
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