IPOs: Alibaba’s Ant Surprises with Profits, Mega-Listing Plan

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Bottom line: Ant Financial could raise more than $22 billion in a 2017 IPO if China’s Internet bubble remains intact for the next year, though there’s a 50-50 chance that bubble will burst and the company’s value will stagnate or even come down.

Ant Financial targets massive dual listing

Just a week after reports emerged that it was nearing one the biggest fundings of all time by a private Chinese company, a new report is saying that Alibaba-affiliated (NYSE: BABA) Ant Financial is on the cusp of formally closing a massive capital raising of more than $3.5 billion. Flush with all that cash from only its second funding round, the company is looking quite confident and saying it hopes to make the biggest IPO of all time on a Chinese domestic stock exchange.

Specifically, the latest report in the influential China Business Network says Ant hopes to eclipse the current record held by the 2010 IPO from Agricultural Bank of China (HKEx: 1288; Shanghai: 601288), one of China’s big 4 state-run lenders. Ant’s offering could come as soon as next year in a dual listing in China and Hong Kong, following the surprise disclosure that Ant would meet the strict profitability requirements for such a listing .

The new revelations that Ant has been profitable for the last 3 years, a requirement for all companies to list on the main boards in China and Hong Kong, came as quite a surprise to me and probably many others. That’s because even though Ant’s core Alipay electronic payments service is quite profitable, its newer businesses are believed to be losing big money. Most of the past reports I’ve seen cite analysts who believe Ant is posting net losses at the moment, which would disqualify it for a listing in China and Hong Kong. 

We’ll return to the questions of profitability, listing venue and the IPO’s size shortly, but first let’s review the latest report that says Ant has surpassed the $3.5 billion in new money it was aiming to raise for only its second funding round. (Chinese article) The new funding values Ant at about $60 billion, consistent with reports from last week, and is about a third higher than what the company was worth when it closed its first funding round a year ago.

The latest CBN report says that Ant is now in the process of signing agreements with all the new investors, though it doesn’t name any of those. Ant had originally been looking to raise $1.5 billion in this particular funding round, but apparently demand was so high that it raised that to $3.5 billion and ultimately beat even that target.

A separate Bloomberg report this week said that Ant expects this latest funding round will be its final one before it makes an IPO, with a dual listing in Shanghai and Hong Kong as the preferred option. (English article) It added that listing could come as early as this year, though the newer CBN report says such an IPO won’t come until next year at the earliest.

New Financials

The newer report contains a number of financials for Ant, including revenue of just over 10 billion yuan ($1.5 billion) in 2014, nearly double the previous year. The company posted a profit of $2.6 billion yuan for the year, the report says, though no growth rate or comparable figure for the year before was given.

Based on that information, it appears that either the analysts who said Ant was losing money were wrong, or that Ant has found a way to make itself look profitable. I suspect the latter is the case, and was probably done by moving certain loss-making assets into another company. Such financial shenanigans are quite common in China, and I suspect Ant will quietly buy the money-losing assets back at cheap prices in the future if they start earning money.

In terms of IPO size, Ant’s aim of beating the AgBank listing of 2010 means this new offering would need to raise more than the $22.1 billion. That goal sounds a bit lofty based on Ant’s current valuation of $60 billion, since companies typically offer about 10-20 percent of their share in an IPO. That means that if the IPO were to happen today, Ant could raise a maximum of $12 billion at its current value. That implies Ant believes its value could rise sharply in the next year, which is possible but could also change if the current bubble in private Chinese company valuations finally bursts.

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