Ant Group Insights part 2 – Nordic Asia Investment Analysis

2020-10-22Nordic Asia Team
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Interview with Nordic Asia Partner – Investment Director Yining Wang

From Nordic Asia’s perspective why is Ant Group a unique investment case?

Ant Financial is a unique company with a unique market position. Its main product Alipay, is a super app that combines three key user cases: Daily in store or e-commerce payments via mobile, purchase of daily services and financial services through one very simple, convenient, and trustworthy platform. From a Nordic perspective we can understand the user case of Alipay as a combination of Swish, Klarna, Avanza, Insurello four in one. The difference however is that Alipay drives user traffic and user stickiness via its high frequency mobile payments (Swish) to then distribute its financial services such as consumer credit, mutual funds and insurance products as a “Alibaba E-commerce platform” for financial services.

In Sweden many of these services are not integrated into one single financial service and payments platform, therefore it is hard for one single category player to derive the cross-category traffic and user stickiness synergies that Alipay can achieve via its cross-category integrated business model. With its +700 million monthly active users in China today, Alipay has become an essential daily consumption application and through this user base Ant Group has created a unique distribution channel for direct online sales of financial services.

What are the key differences of Ant Group’s Alipay vs. Tencent’s WeChat pay?

One of the first notable differences of Alipay vs WeChat Pay is that Alipay is a standalone consumer app that is separated from Taobao or other Alibaba’s services, while WeChat pay is an integrated function within the social messaging app WeChat. Therefore, user traffic derived via WeChat pay is primarily from the social messaging integration of WeChat and not derived as a stand-alone app such as Alipay. Therefore, Alipay as a standalone application have created much more extensive product offering focused on the distribution of financial services, while the distribution of financial services in WeChat pay is through WeChat’s mini-programs. As a result, the number of investment management product offerings on Alipay is over +6,000 SKU’s vs +1,000 SKU’s in WeChat.

How did Ant Group perform during 2020 and how was it affected by COVID-19?

Ant Group maintained a strong revenue growth of 38% year on year in H1 2020, only slightly down from 2019’s 41%. EBIT% improved to 37% (vs. 18% for 2019), primarily due to the rapid growth in high profit digital financial service distribution. Despite the lower consumption and business activities by COVID-19, Alipay’s leadership in digital financial services and extensive daily life coverage has secured its outstanding performance. Greater adoption in the digital platform for convenience was seen amid the lock down. Alipay’s Monthly Active Users increased from 659 million in December 2019 to 711 million in June 2020. Digital financial platform (up 57% year on year) outgrew digital payment services (up 13% year on year) as the strategy focus. Credit services’ revenue growth was strong by 59% year on year as credit balance originated through the platform grew by 55%. Investment service revenue enjoyed accelerated growth of 56% year on year from the investment enthusiasm during first half’s capital market rally. Investment Assets Under Management increased by 36% year on year with strong growth in mutual funds enabled through the platform which has higher take rate. Insurance service grew rapidly with 99% year on year driven by substantial increases in both life and health insurance premiums contribution. Looking ahead, Ant Group’s performance will further improve as the consumption and businesses activities normalize, and digital financial service distribution will continue to be the strategic growth driver.

What are the key drivers and challenges for Ant Group that we should follow during the coming twelve months?

The key driver for Ant Group going forward is the increased user penetration of its Consumer Credit, Investment management and Insurance products per user. Ant Group’s users are still mainly using Alipay for their daily mobile payments and purchase of daily services, therefore the penetration of increased sales of its financial services onto its current user base is a driver of revenue and profits for Ant Group that we need to follow. However, we need to be cautious over any regulatory changes in order to put digital financial platforms under tighter scrutiny. Any measures limiting the access to financial services or requiring capital contribution in credit services delivery would be a drawback for Ant Group’s expansion. An example is that Yu’ebao, Alipay’s featured Money Market Fund with a payment function, was curbed in 2018 as regulators limited users’ access to contain the product’s disruptive impact. Furthermore, if PBOC (China Central Bank) continues to guide down the interest rate for consumer/small business credit, the take rate for such product may face a slopping downwards trend.

What is your view on the upcoming IPO and what do you think is a fair IPO valuation of Ant Group?

At Nordic Asia we tend to look at an investment from an IRR (internal rate of return) perspective, by first understanding the business potentials of the firm. In the long term, financial services penetration (Consumer credit, Assets Under Management and Insurance Premiums) per capita is still in significantly lower than that of western countries where currently 75% of the Chinese population does not have a credit card yet. Therefore, as a unique and dominate distribution platform of financial services in China, we think Alipay holds a strong strategic market position with the ability to derive significant industry profits when the penetration of financial services per capita in China continues to grow. Thereby the true business potentials and peak earnings of Ant Group lies in the far future beyond the horizons of current analyst estimates. In the short term, we think the current valuation reflects a fair risk / reward balance based on its fundamental business forecasts with potential upside surprise. The key driver of short-term investment returns would be a faster than expected user penetration of its Consumer credit, Investment management and Insurance products.

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