In a bid to ease investors’ concern emanating from the recent antitrust probe on Alibaba and Ants Group by the Chinese government, the company is considering a holding company with regulations similar to banks. Bloomberg made the report citing sources.
Alibaba and Ant have been at the center of antimonopoly investigations by the Chinese regulators, which has impacted their stock negatively over the past weeks.
Now Ant is planning to fold its financial operations into a holding company that could be regulated more like a bank, according to people with the knowledge of the plan.
The lead figure in Ant, Jack Ma, got into trouble with the Chinese government earlier in the year, after he criticized the regulatory bodies over what he called “pawnship mentality” and not knowing the difference between supervision and regulation.
To get out of the trouble, Ant is planning to move any unit that would require a financial license into the holding company, pending regulatory approval. The people who spoke on anonymity with Bloomberg said the plan is still under discussion and subject to change.
According to the report, the operations that Ant is looking to fold into the holding company include wealth management services, consumer lending, insurance, payments and MYbank, an online lender in which Ant is the largest shareholder. But under the financial holding company structure, Ant’s businesses would likely be subject to more capital restrictions, potentially limiting its ability to lend more and expand at the pace of the last few years.
It added that the proposals suggest Ant would still be able to operate in financial services beyond its payment business, and that will ease investors’ concern about how to interpret the central bank’s directive, asking Ant to return to its root as a payment lender.
“This means China is still trying to encourage domestic consumption, and they need platforms like Ant to help with consumer loans. The key is that consumer lending shouldn’t be over-leveraged,” said Wang Zhen, a Shanghai-based analyst with UOB-Kay Hian Holdings Ltd.
It has become clear that China is not trying to break up Ant Group, but subject it to regulation, although regulators told Ant to devise a plan to overhaul its business. Under the new model, the financial segment of Ant will have to be run in harmony with the regulatory policies of China’s finance industry, but rules on how financial holding companies could be regulated are still under deliberation.
The news of a possible solution has softened the tension surrounding Ant’s stocks and its investors are beginning to heave sigh of relief. Japanese conglomerate, SoftBank Group Corp, who has the largest share in Alibaba recorded a 4.5% rise, the most in over two weeks, while Alibaba shares rose 5.7% in Hong Kong.
While operating as a holding company will offer Ant a way out of the government’s grip, it will also diminish its revenue and stymie growth.
“Its growth would slow a lot. The valuation of the non-payment business, including wealth management and consumer lending, could be slashed by as much as 75%,” said Francis Chan, a Bloomberg Intelligence analyst in Hong Kong.
Ant’s IPO filing stated that it held $11 billion in cash and equivalents as of June. The company said in its prospectus in October that it would use its subsidiary Zhejiang Finance Credit Network Technology Co. to apply for the financial holdings license.
But as Bloomberg report notes, under the rules announced in November, non-financial companies which control at least two cross-sector financial institutions are required to hold a financial holding license.
Part of the new rule says the use of asset-backed securities to fund consumer loans capped at four times net asset value; loans using funding from banks and shareholders shouldn’t exceed firms’ net asset value, and regulators will have to cap interest rates charged on consumer loans.
Chan said Ant will need to inject an estimated 70 billion yuan ($11 billion) at least, as a new capital for its lending business. The calculation is based on draft rules that require Ant to co-fund 30% of loans, with a maximum asset leverage of five times.
He added that Ant’s valuation could plunge below $153 billion as a result of the changes it will undergo as a holding company. The company was above $300 billion in November, before its IPO was halted.
According to one person familiar with the matter, Ant is planning to leave its digital lifestyle business – the services that link users with food deliveries, on-demand neighborhood services and hotel bookings – out of the financial holding company. He added that Ant will still be the parent of all the operations.
However, the person explained that Ant is not planning to break up now, but it’s seeking more guidance from regulators on acceptable steps to take and may change every plan based on the feedback.