Bottom line: Jack Ma’s newly stated preference for an Ant Financial IPO in Hong Kong could touch off a new clash that would challenge the local securities regulator to grant an unusual listing exception or risk losing the blockbuster deal to New York.
Just a couple of years after a high-profile tussle that saw e-commerce giant Alibaba (NYSE: BABA) ditch Hong Kong to make its record-breaking IPO in New York, talkative founder Jack Ma is gearing up for a similar game of chicken for an upcoming IPO by his company’s affiliated Ant Financial unit. That’s my initial assessment, following media reports that Ma has said his first preference would be a Hong Kong IPO for Ant Financial, China’s leading private financial services company whose prize asset is its Alipay electronic payments service.
Ant Financial has burst into the headlines over the last 2 years, growing rapidly to become a sector leader as China opens its tightly controlled financial services sector to private investment. The company’s core Alipay service was actually once a part of Alibaba itself, but was spun off into a separate company controlled by Ma and other top executives 5 years ago due to China’s rules forbidding foreign ownership of such companies.
It’s a bit unclear if those rules have been relaxed since that spin-off, which resulted in a big spat between Alibaba and US Internet giant Yahoo (Nasdaq: YHOO), which owned 40 percent of Alibaba at that time. But based on Ma’s latest comments, it would appear that the foreign ownership rule has been relaxed as China opens the market to foreign investment, or perhaps that a Hong Kong listing isn’t considered foreign ownership.
The latest reports don’t have much detail, and simply quote Ma responding to a reporter’s about whether Ant would like to list in Hong Kong by saying “I very much hope so.” (English article; Chinese article) Ma also responded to a question about an ongoing probe into Alibaba’s accounting practices by the US securities regulator, saying such scrutiny was a “good opportunity” for people to better understand his company.
But let’s return to Ant Financial, whose planned IPO has been the subject of frequent discussion for more than a year. The company was originally eyeing a listing on a new strategic emerging industries board being planned to launch in Shanghai later this year. But that plan has been put on indefinite hold due to volatility in China’s other stock markets, forcing Ant and others to look elsewhere. (previous post)
The most recent reports have indicated that Ant might consider a listing in China, in Hong Kong or possibly a dual listing in both. So it’s a bit unclear if Ma’s comments refer to an exclusive listing in Hong Kong, or the dual listing plan. But Ant might have to wait a long time if it wants to list in China. That’s because there’s currently a long waiting line for such IPOs due to recent conservatism by China’s stock regulator, which must approve all new listing plans.
Pumped Up Valuation
Ant is probably eager to get to market sooner rather than later, in a bid to pump up its valuation and raise its already growing profile even higher as China prepares to open its financial services market to foreign companies like Visa (NYSE: V) and MasterCard (NYSE: MA) this year. Ant most recently raised $4.5 billion in only its second funding round in April, valuing it at around $60 billion. (previous post)
One listing venue that has yet to be discussed for Ant is New York, even though Alibaba itself is traded there. Jack Ma actually wanted to list his company in Hong Kong originally. But the Hong Kong securities regulator refused to grant an exception that would have allowed Alibaba to remain controlled by a small group of senior managers, forcing the company to ultimately go to New York for its record-breaking $25 billion IPO in 2014.
New York hasn’t been very kind to Alibaba since that offering. After its shares initially surged, Alibaba’s stock tumbled back to earth due to a scandal involving trafficking in pirated goods on its Taobao marketplace. Nearly 2 years after the IPO they trade just 15 percent above their offer price. The company has also been investigated twice by the US securities regulator over potential rule violations. (previous post)
The new talk of a desire to list in Hong Kong looks set to once again challenge the local securities regulator, since Ma would probably insist on a similar exception to the one he was trying to get for Alibaba. That means we could soon be looking at a showdown between Ant and the Hong Kong securities regulator, who will be put in the difficult position of either compromising its principles or potentially losing another high-profile IPO to New York.
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