Ant Group’s IPO Scuppered by China’s Launch of New Online Micro-loan Rules, Will Face Major Re-valuation as a Consequence: Analysts

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Chinese analysts say that the suspension of Ant Group’s record-breaking IPO on the Hong Kong and Shanghai bourses was due to ongoing efforts by Chinese authorities to tighten regulation of online micro-loans, and that the company’s valuation is set to undergo major re-adjustment as a result.

Ant Group has suspended the USD$34.4 billion IPO that was originally scheduled for 5 November, in a shock move that subsequently resulted in US-listed affiliate Alibaba Group – a one-third owner of Ant – shedding nearly $76 billion in trading.

The suspension was initially prompted by the Shanghai Stock Exchange’s (SSE) decision to delay listing of Ant on its STAR Market board, after senior figures from Ant including Jack Ma were summoned by China’s top financial authorities for a “regulatory discussion.”

The suspension is a major setback for Jack Ma’s e-commerce and fintech empire, and could also undermine the reputation of China’s capital markets, following broader efforts to raise their international standing and increase their sway within the domestic finance system.

Leading Chinese analysts believe that the suspension is likely motivated by efforts to tighten regulation of online micro-loans in China, following the collapse of the country’s once flourishing P2P lending sector due to widespread fraud issues.

On 2 November – the same date that authorities announced that Ant executives had been summoned for regulatory discussions – the Chinese central bank and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the draft version of the “Online Micro-loan Operations Provisional Administrative Measures” (网络小额贷款业务管理暂行办法(征求意见稿)), which impose far tighter restrictions on online lending operations.

These restrictions include limits on cross-provincial operations, leverage levels as well as lending amounts for individual borrowers.

“If the Measures are officially implemented, then online micro-loan operations will meet with sizeable adjustments, and large-scale Internet companies that are expanding via online micro-loan operations will endure major shock,” said Dong Ximiao (董希淼), chief researcher at the Zhongguancun Internet Finance Research Institute, to the Chinese central bank’s official news outlet

Zhou Maohua (周茂华), financial markets analyst with China Everbright bank, said that Ant’s micro-loan operations faced “rectification” given new regulatory requirements , and that this would “inevitably trigger a revaluation by investors of the prospects for Ant Group’s micro-loan operations.”

In a separate article written for Cebnet.com.cn, Dong Ximiao said that he expected Ant Group’s listing and valuation to face “major readjustments” as a result of the new online micro-loan measures.

Dong said that even if Ant Group continues to pursue listing in the wake of adjustments, “investors in general should be fully aware of related risk, and make cautious and rational investments.”

According to Dong the new online micro-loan measures will have major impacts for Ant Group and the general online micro-loan sector in five areas in particular:

  1. Stress that micro loan operation be confined to province-level administrative units. Companies will only be permitted to engage in cross-provincial operations with the approval of regulators, which in addition to mitigating risk will greatly reduce the value of online micro-loan licensing. The draft measures further stipulate that investors cannot be major shareholders in more than two companies that engage in cross-provincial micro-loan operations, or have controlling interests in more than one such company. Ant Group currently controls two micro-loan companies approved for cross-provincial operation, which means that if the measures are implemented it will only be allowed to retain one of them.
  2. Online micro loans should be small in sum and distributed in principle. Individual loans cannot exceed the lower of either 300,000 yuan or one third of a borrower’s average annual income for the past three years, while institutional loans cannot exceed 1 million yuan.
  3. Restrictions on capital contributions to joint loans. For a single joint loan the capital contribution amount of a micro-loan company cannot be less than 30%, in order to restrain rapid expansion by micro-loan companies via joint-loans. Ant Group’s micro-loan vehicles work with small and medium-sized banks to issue loans for which their capital contribution amount is less than 5%, and at times as low as 1%. According to Dong the restriction will have a “massive impact” on Ant Group’s credit expansion model as a consequence, given that company is using 36 billion yuan in assets to drive 1.7 trillion yuan in joint lending.
  4. Restrictions on financial leverage for online micro-loans. The measures stipulate that funds derived from “irregular sources” such as bank loans and shareholder loans cannot exceed one-time the net assets of a micro-loan company, while funds from standard sources such as securitised assets and debt financing cannot exceed four-times net assets. Dong says that this will have a major impact on Ant Group’s micro-loan vehicles, severely limiting their ability to use asset securitisation to obtain funds to drive expansion.
  5. Raising the capital threshold for the operation of online micro-loans. Micro-loan companies that engage in online lending must have registered capital of 1 billion yuan or greater, while the registered capital of those that engage in cross-border operations must be 5 billion yuan or greater.

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