China and The US: Disconnecting Over Tech
Ant Group: The Lion of IPOs
Ant Group Co, a Chinese company, has filed for its IPO with the company set to go public by October. The Fintech company, associated with Jack Ma due to Alibaba’s 33% stake in the business, has diversified in the last decade to offer a variety of services and to show investors that it is more than a financial services company. The transition from a majority mobile payments service to providing credit and managing assets has led to an estimation of $300 billion for the value of the firm.
A breakdown of the company’s revenue highlights why the firm is being valued higher than most US banks. The revenue from its payment services will exceed 50 billion Yuan (roughly $7.5bn) and its revenue from loans and other credit has grown from 10 billion Yuan in 2017 to 80 billion Yuan projected in 2020. The company is enticing for investors given its incredible growth rates. The potential for continued growth as the company shows no signs of slowing revenues suggests that it will have a high P/E ratio on the stock exchange. This view is consolidated by structurally similar companies. For instance, Mastercard’s stock price rise during the pandemic means it is trading at a price 50 times its earnings per share. Depending on how the stocks are priced for the offering, they could be a worthy investment in the short run and long run.
Operating in the most populous country in the world, it is no surprise that Alipay can produce staggering numbers that have left analysts impressed. Alipay became the world’s largest mobile payment in 2013, overtaking Paypal. The creation of a “super app” allowed consumers to take out loans or manage their mortgage from their phone from the same app they downloaded to pay electronically. The loyalty created by Alipay allows the asset management and credit segments of the business to builds its client and customer base. Alipay has a 56% share of the mobile payment industry and the state protection fending off US rivals means that the company is set to make further inroads into the market and increase its share. The barriers presented by the state prioritise the growth of their locally developed apps. Even Uber, with its vast resources and expertise, were unable to make significant inroads in China due to their lack of connections politically. A minnow in the car-hire industry, start-up Didi Chuxing, managed to outcompete Uber in China. As the average wage rises in China, the demand for technology apps will grow and Chinese firms have been given a free pass to dominate the market ahead of US firms.
With reports suggesting that 15% of the firm will be made public in the IPO, there is a lot of money in potential fees at stake. However, it is the location of the IPO that highlights the ambitions of the Chinese markets. The offering will be divided between Shanghai (10% reportedly) and Hong Kong (5%), further inforcing China’s presence in the Hong Kong market. This IPO has the potential to be the biggest outside of the US. Global investment bankers will find themselves outnumbered by mainland bankers in the near future as Chinese banks seek the upper hand.
Wall street banks are still positioning themselves to benefit financially from the Chinese listings. The potential fees could reach $300 million for the banks, including JP Morgan and Citigroup but banks situated in Hong Kong will benefit more at $450 million. The listings taking place in China and Hong Kong will only cement their places as important financial hubs for the future.
Time is ticking for TikTok in the US
Due to TikTok’s growing exposure in US markets, with almost 100 million users at the time of writing, there is increased scrutiny on the app and how the firm behind it, ByteDance, uses the data it can collect. The added incentive of channelling some of the app’s revenue away from China and into the pockets of US firms means that Trump has put a target on the firm’s back, citing security issues as his reason to launch an executive order to ban the app. The change in direction for the app has led to the firm’s US boss, Kevin Mayer, resigning as the app heads into a different direction than he envisioned.
Trump’s power to demand ByteDance sell the US rights has created an opportunity for US companies to expand their operations and diversify their assets. The alliance between Microsoft and Walmart, who are launching a joint bid, shows that many firms can gain from acquiring the app. Walmart could use the social media app to expand into e-commerce and gain information on millions of shoppers and what their preferences are. The app could provide Walmart with a direct route to a new generation of customers, providing them with the option to buy what they see in the videos. Trump’s decision to ban TikTok seems to be a ploy to slow down China’s growth in the technology market, rather than to stop a potential security breach.