April 13, 2018

Breakingviews: Ant Financial – Frankenstein’s Centicorn

by Breakingviews

Ant Financial is too big to be described as a unicorn. Rather than being worth a few billion dollars, the Chinese payment firm affiliated to Alibaba is planning to raise money at a price that would value it at an eye-popping $150 billion ahead of a possible initial public offering. For such an exotic beast, investors might need to resort to some exotic valuation techniques.

Sizing up Ant, analysts might normally start by projecting future revenue or earnings, just as they would a regular company. The trouble is that no other company does so many things, or comes with as much hype. Ant processes payments, sells wealth-management products, peddles insurance, lends money to small businesses, and stores data on customers’ financial habits. It also comes with the imprimatur of Chinese entrepreneur Jack Ma, runs the world’s biggest money-market fund, and facilitates transactions for Ma’s $450 billion, Amazon-like Alibaba.

One off-the-wall approach is to take companies that do each of those things elsewhere and stitch them together like a financial Frankenstein’s monster. First, take PayPal. The $90 billion firm may be the nearest thing to Ant’s colossal payments business, Alipay. But where PayPal gets most of its revenue from the United States and the United Kingdom, which have a combined population of just under 400 million, Alipay has a target market of 1.4 billion people in China alone. Scale up for that, and down for the much lower GDP per head in the People’s Republic, and Alipay might be worth $61 billion.

Ant’s wealth-management arm has a Western comparator too: Charles Schwab, with a market value of $68 billion. Make similar adjustments for U.S. population and wealth – the latter involving China’s GDP per person of just 15 percent of the U.S. level, boosted to 20 percent to allow for faster economic growth – and this Ant business would be worth $55 billion.

It’s hard to get a handle on Ant’s other, less well-known operations. But it’s not wild to throw in $34 billion U.S. insurer Allstate, the $4.9 billion credit scorer Fair Isaac, and UK upstart lender Metro Bank, which has a market value of $4.4 billion. Adjust for China’s population relative to those markets and GDP per head, and they would contribute a further $53 billion.

The result? Ant Financial could be worth around $170 billion. It’s a back-of-the-envelope method that implicitly assumes market shares, revenue models and so on similar to the Western counterparts. That’s a stretch. Moreover, Ant runs the risk of being regulated much more strictly as it strays into territory staked out by China’s banks. And it’s engaged in a turf war with $500 billion rival Tencent.

Then again, the success of the IPO of money-losing music-streaming service Spotify shows that investors are exuberant when it comes to prominent consumer-oriented tech companies. With Ant promising big numbers, the potential for disruption, and fintech with Chinese characteristics, its value could get more beastly yet.

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