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In episode 74 of Tech Buzz China, co-hosts Rui Ma and Ying Lu talk in depth about Ant Group, Alibaba’s financial affiliate, ahead of its upcoming mega-IPO. Media reports that the company — which already holds the record for “largest-ever single private fundraise” for its $14 billion raise in 2018 — seeks to raise $30 billion. That figure would indeed make it the largest public offering the world has ever seen.
We first covered Ant Group over two years ago in Episode 11, titled “After Alibaba, Team Jack Ma’s Newest Centacorn: Ant Financial.” At the time, Ant had said it planned to transition from the payments business, which accounted for over half of revenues, into a company that would rely mostly on “technical services” for revenue. Looking back, we can see that Ant has achieved that — and more. This year, its revenues total $20 billion with a 30% net margin, and it has several diversified, significant, and growing revenue streams. But can it sustain this growth?
Listen to find out: What are the major products and services that Ant offers? In what ways are these offerings mapped to the evolving financial behaviors of Chinese consumers, as well as to the existing product landscape? Where is China’s very young consumer finance industry headed, and what does that mean for Ant Group’s expansion potential and even its investments? What are its weaknesses? Is it more of a finance company, or a tech platform?
Yes, Rui is still writing her e-book on ByteDance! You’ll want to get updates on it by subscribing to our newsletter, at techbuzzchina.com. As always, past transcripts and other content are also viewable at pandaily.com and supchina.com.
If you enjoy our work, please do let us know by leaving us an iTunes review (drop us a note saying you did, and we’ll send you an Extra Buzz newsletter subscription!), and by tweeting at us at @techbuzzchina. We also read your emails, at [email protected] and [email protected]. Thank you to our growing community for your always valuable feedback!
And thanks to our ever-talented producers, Caiwei Chen and Kaiser Kuo, and Jason MacRonald.
Our intern Hengyu Cai helped in transcript.
[00:00]Hi everyone! We predict there is going to be one company and one company only that’s the king of China tech headlines this month, and no, it’s not ByteDance, exciting as the drama of its TikTok spinoff is turning out to be.
Nope, it’s Ant Group, in what might be the biggest offering in history. Yeah. Media is reporting that the company seeks to raise $30Bn in its IPO, which means it would edge out Saudi Arabia’s Aramco, who raised $29.4Bn last December, and of course beating Alibaba’s own IPO, which was a colossal $25Bn back in 2014.
[00:40]I don’t know … I feel like they have to go for the title of “largest” because they’re so close, you know. And they already have the record for “largest ever” single private fundraise. That was when they raised a staggering $14Bn in 2018 at a $150Bn valuation.
Which is also when we first covered the company here on Tech Buzz. Episode 11, Jack Ma’s Newest Centacorn. Back then, Ant had just announced that it would gradually transition from the payments business, which accounted for over half of revenues, into a company that would rely mostly on what it calls “technical services,” for revenue.
[01:20]Did that happen? Quite a big business to be turning around, no? I mean, most people knew the payments business as Alipay, which had — let me check — 520mm users in 2018 and 54% of Chrina’s mobile payments market share. Probably a lot of people even today equate Ant with Alipay. But it’s far beyond that now.
Well, it’s not like Alipay hasn’t grown. It has over 1 billion users and 80 million merchants, but even at that scale, the payments business is just over a third of revenues these days. That’s right, that means the rest of the business grew even faster. And total revenues? Probably over $20Bn this year, with a 30% net margin.
And what is all the rest of Ant? Well, if you went back and listened to Episode 11, or you just have an amazing memory, you’ll have a good idea of some of those products, but today, we’ll fill in the rest. And at the end, you tell us if you think Ant truly deserves the excitement around achieving the title of Biggest IPO ever, or if you think yeah, that might be true, but it’s still just a lot of hype.
[03:01]Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network by SupChina! We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech.
Tech Buzz China is a part of Pandaily.com, an English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Ying Lu.
[03:37]And I’m your other co-host, Rui Ma. We are a part of the Sinica Podcast Network, created by SupChina! In addition to Tech Buzz, you can also find Sinica which covers current affairs. And we are also proud to be partnered with Financial Times’ Tech Scroll Asia, a newsletter on Asia tech news from one of the best publications in the business. Go to ft.com/tech-scroll-asia to sign up today!
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[04:22]We thought about waiting for the IPO to drop before we recorded this episode, but nah. I think the 674-page preliminary prospectus gives us way enough to work with. Too much, actually, so we have to necessarily cut out some parts of the business and keep in only the most important parts.
Before we start, I have a suggestion on how you can listen to this episode most effectively without getting lost, because Ant really does have a lot of stuff going on, and it is kind of confusing. And that is, remember these following revenue segments, and always ask yourself, which revenue segment does this service fall into? The segments are as follows: digital payments and merchant services, and CreditTech, InvestmentTech, and InsureTech, all of which do pretty much exactly what their names tell you they do.
[05:23]Yup, no points for creativity there. But also this: that payments is about a bit over a third of the revenue stream, and that of the remaining two-thirds, CreditTech accounts for over 60%. Which means that actually CreditTech is nearly 40% of total revenues and has the single largest slice, with InvestmentTech lagging far behind at 15%, and InsureTech barely registering at 8%.
Which means that to understand Ant, you must know its payments and CreditTech businesses. And luckily for you, we are going to be spending a lot of time on those. But first, let’s get back to the history of how Ant got started. Of course, that means we go back in time to the early 2000s, when Alibaba has been around for four years, and it’s looking at launching a C2C marketplace where people can buy stuff from each other, because back then eBay was all the rage.
[06:20]That, of course, was Taobao, which was launched in May 2003. And the very first problem it had to solve was trust. How do you get strangers separated by thousands of miles to send money to each other? Remember, international payment mechanisms such as Paypal didn’t really work in China at this point. So, the obvious solution was … Alibaba had to make its own escrow service — enter Alipay.
Supposedly, the first transaction completed under this system was a used digital camera sold in October 2003, that’s five months after Taobao officially launched. Despite guaranteeing the transaction, customer service had to step in and convince the buyer not to back out … it was, at the time, still a pretty newfangled concept.
[07:11]But because it made so much sense, by the beginning of 2004, 70% of transactions on Taobao would be available through Alipay. Jack Ma, though, was not content to let Alipay be a part of Taobao. He firmly believed that it should be a payment platform for everyone in the industry, and that consumer confidence and trust in online transactions hinged upon its success.
Which is why in December 2004, a bit over a year after it was first launched, Alipay became its standalone product, with its own account system. Thereafter, Alipay launched marketing campaigns basically guaranteeing payments in full, and quickly grew its user base.
Things were looking good. But there was just one thing. People still thought Alipay was tied to Taobao. In order to correct that misconception, Alipay spent the next several years establishing partnerships — such as with gaming companies, so you could prepay for your World of Warcraft gameplay, for example — and even expanded abroad, dipping its toe in the international market by going into Hong Kong in 2007.
[08:19]It was definitely the market leader at this point, but it was still, honestly speaking, a piece of crap to use. You had to jump through 7 pages to complete a single transaction. That’s because everything still had to go through your internet banking system, and completion rates were low. Well, not that low, something like 60%.
Yeah. I personally never really used Alipay because when I arrived in China in 2007 it just seemed such a pain. But it’s undeniable that they were pioneers and built a playbook by which others, like Tencent’s WeChat, could study and emulate and benefit directly from.
Indeed, in 2010 they sat down with a bunch of traditional banking partners and outlined how to decrease friction for the transaction. Things were greatly streamlined so that all you really had to do was to put in your PIN. That boosted completion rates to 90%. This was called 快捷支付, or Quick Pay.
[09:17]Part of the streamlining also meant that now you didn’t have to do all of your payments in Internet Explorer anymore, because that was the only browser compatible with the Chinese banking system. Remember those early days? It was pretty inconvenient. But now all of a sudden, Alipay could work in other browsers and on other operating systems.
Something else happened around this time that was also crucial to Alipay’s success, and that was the “invention” of Single’s Day. We talked about the history of the massive shopping “holiday” in Tech Buzz Episode 29, but basically, now Alibaba CEO Daniel Zhang decided that since China didn’t have its corresponding Black Friday, why didn’t Alibaba just make one up out of thin air?
And you already know how the story goes. This was one of those overnight runaway successes, and pretty much immediately, Alibaba has to figure out, how do we beef up the payment system, because we’re really putting a lot of stress on it by sending through what was then considered a staggering thousands of transactions a minute.
[10:24]Well, last year’s Single’s Day saw a peak of more than half a million transactions per second so Alipay has come a long way since then. At the time though, it wasn’t so obvious that building their own cloud and database management system, versus say, using an existing open source one, was the right play. It was certainly the harder play. But then, that’s paid off, because now Aliyun 阿里云, that is, Alibaba Cloud, is the third largest provider globally.
OK, but that’s not part of Ant Group. We’re just going down the timeline of all the big milestone’s in Ant’s life. And now, of course, we’ve arrived at around 2011, 2012, which is when Chinese adoption of smartphones goes through the roof — mobile internet users officially exceed PC internet users in mid-2012 — and also when WeChat launches and takes the country by storm.
But before we go there let’s officially recognize the spinning off of Ant from Alibaba. We won’t go into detail here, because we did that already once before in Episode 11, when the company was still called Ant Financial and worth just $150Bn.
[11:36]Right. The TL;DR is that the Chinese government, who was in the process of regulating third-party payment providers, might deny Alipay one of the coveted operating licenses because it was foreign owned, or so Jack Ma claimed. So he decided to spin off the payment business to a separate entity he owned 80% of. Boom, problem solved, no longer foreign owned!
Why would Alibaba ever have been considered a foreign company, you ask?Well, it was majority owned by Yahoo and Softbank — an American company and a Japanese company — at the time. I mean, yeah, I know, kind of a weak excuse since so was Tencent, but because there was a long lag before the spinoff occurred and when it was discovered — actually almost two years since the first transaction — people just had to work with it. The spinoff was not going to get unwound and the parties — some of whom hated each other, like Jack and Yahoo — just had to come to a compromise: have Alibaba own about a third of this new entity with Alipay in it, and call that new thing Ant.
[12:50]Ant because of the focus on small customers — whether they be individuals or small businesses. But this is why most of the “Most Valuable Startup” lists don’t include Ant, because it wasn’t built from the ground up. I mean, its “Series B” was $4.5Bn in 2016, definitively doesn’t look like a startup, right. Jack Ma, by the way, doesn’t own 80% of Ant these days. But you don’t need to shed any tears for him either, his 8.8% stake is about $18Bn at the current floated IPO valuation of $200Bn.
Sure, the secret Alipay spinoff was pretty shady, but the man also does know what he’s doing. For example, Jack Ma very early on perceived that mobile internet was going to be the next big thing, and he had the Alipay team launch an app in 2009. He also perceived the threat of WeChat early on and had Alipay accept QR codes so that it could be used more easily for not just online, but also offline transactions. This was really smart strategically, and of course WeChat did the same — China is the land of QR codes. For a while it was a race between these two giants to see how many merchants they could sign up to accept their respective payment apps.
[14:13]This is where we’ll go really quickly through the next several years, because please, go back and listen to Episode 11, will you, if you want more details. Meanwhile, we’re still in year 2013 of our retelling, and Alibaba launches Yu’EBao, this super liquid money market fund account that you could start investing in for as little as 1 RMB — that’s like $0.15 — and receive interest daily. Actually, you could do 24/7 withdrawals and deposits. I mean, why not? It’s all just a few taps in the app.
The interest rate you got everyday fluctuated with the market, but the extremely low barrier to entry and the daily liquidity as well as a super simple app experience meant that this product exploded in popularity. Think about it, you are getting returns on a consumer finance product that is effectively as easy to use as your checking account. As many people have pointed out, this was as revolutionary as Robinhood with their no-fee trading and fractional shares.
[15:28]Yeah, I’m not sure how much easier you could make it. You’d literally have to make it connected to your brain via Elon Musk’s Neuralink or something so you don’t even have to tap. And just as Robinhood was to stock trading, Alibaba’s Yu’EBao was to Alipay’s asset management business. In case you’re curious, Yu’EBao is $173Bn today. Remember what we said about the revenue segments. It should be pretty clear that this is the beginning of that 15% of the business called InvestmentTech.
Let’s try to keep it in chronological order though, and since we’re still summarizing stuff we went through in Episode 11, let’s just skip a bit more than a year ahead, to January 2015, when Ant launched Sesame Credit, 芝麻信用. TL;DR – China doesn’t have a credit scoring system. The Chinese government decides to rectify this by giving out 8 sort of preliminary licenses — but basically permission to engage in credit scoring — to various entities. Ant, of course, receives one, and so does Tencent, but that’s how Sesame Credit was born.
[16:45]The main consumer facing product is basically your sesame credit score, which, according to the website, is calculated by your credit history, behavior and preferences, how well you fulfilled past contracts, other identity factors, and your personal connections. Note that this is substantially broader than what your US credit score would reveal, which is really just how much debt you’ve taken on, are currently allowed to take on, what that looks like compared to your income, and how creditworthy you’ve been in the past.
And this is where we are getting into new territory, and you’re pretty much caught up — product wise anyway — on all the Ant products that we had covered on Tech Buzz before. They are: Huabei 花呗 and Jiebei 借呗, which mean: Just Spend! and Just Borrow! respectively.
[17:36]I was going to explain them in my own words, but actually I think the prospectus does a mighty fine job, bless those hardworking bankers and lawyers. And so here’s how Ant describes them: “In 2014, we launched Huabei, which was among the first digital unsecured revolving credit
products for daily expenditures offered to consumers in China. In 2015, we launched Jiebei, a short-term digital unsecured consumer credit product for larger consumption transactions, to meet the spending needs of Huabei users who develop a sufficient credit history.”
Yeah, that’s pretty clear I think. Basically, Huabei is like a credit card, albeit a virtual one. In fact, its English name is “Ant Credit Pay.” You apply for a credit line, and you can get anywhere from as low as $7 and up to $7000 in credit available immediately. Unfortunately, I have my U.S. number tied to my Alipay account so couldn’t get approval, but given that my Sesame Credit score is very average, since I never use it, and that’s a key determinant of how much I’d be able to get through Huabei, I’m probably nearer $7 than $7000.
[18:53]And there are limitations to Huabei. Just like Alipay, or MasterCard, or Visa … it’s not accepted everywhere. But most e-commerce sites accept it, and a growing number of offline merchants as well. And you can now get a $70 monthly credit line even for those merchants who don’t accept it. Not much, but better than nothing. But most importantly, you can’t get cash advances on Huabei. It’s prohibited. And if you’re found out to be doing it, you’d get your account frozen pretty quickly.
By the way, the cash advance industry is a pretty big one in China. I don’t know how it is in the rest of the world, but here in the U.S., it’s pretty expensive to get a cash advance from your credit card, because of extra fees, higher interest rates, no grace period on collecting interest, etc. In China, you have higher fees, etc. and the fact that you have to repay the cash balance all at once, you can’t pay a minimum balance like you can with your typical credit card balances, which makes it doubly more attractive to try to game the system if you want to get cash.
[20:02]Yeah, which is why you have a ton of folks with POS (point of sale) machines whose business model is to literally 套现, ie help you get a cash advance by using your credit card by faking a transaction. It’s not allowed, of course, but that hasn’t stopped people from doing it. As we’ve said, Huabei bans it too, and tries to catch it using advanced anti-fraud software, but some estimates put fraudulent transactions at up to one-third of total transaction volumes, so I don’t know that it’s going away any time soon. It is also one of the things my investor friends are always looking for, to understand the true volume of the transaction platforms they’re looking at investing in.
But still … for Huabei, this risk is capped, on an individual level anyway. While Huabei credit limits do go up to $7000, your average user is much lower than that. Remember, in China, where average monthly salaries begin at $1000 or lower, Huabei is meant for your “everyday consumption” and not big ticket items, so it is sufficient, if you’re being financially prudent. You can think of Huabei as a proprietary and controlled system where Ant is able to have a really good grasp of the delinquency or default risk, because limits are low and spending is restricted.
[21:24]Jiebei, on the other hand, is much riskier, from Ant’s perspective, anyway. That’s because it’s basically a consumer loan. I mean, that’s its name, right? Just Borrow! It’s only available for those with Sesame Credit scores above 600, so I don’t even qualify for it. But you can borrow quite a bit with Jiebei. Over $40,000. With a daily interest rate of 0.02 to 0.05%, depending on your credit score, which is like somewhere around 10-20% annualized.
Jiebei, whose English name is “Ant Cash Now,” solves the problem that consumers in China have been having for a long time, which is just access to affordable, short-term loans. And Jiebei, unlike Huabei, is not tied to consumption. So you could use the money towards whatever you want.
Amazing, right! Well, yes, sort of. You see, there is a cost to using Jiebei. In 2008, China established a sort of centralized personal credit system called the PBCCRC, and guess what, all Jiebei loans go through a credit check through this official system, which all the banks plug into, and so each inquiry is kind of like a “hard credit check” here in the U.S., which can actually impact your ability to get a loan at a traditional bank, such as for a mortgage. I don’t know what’s the equivalent for other countries, but basically, if you have more than a few in the last year or two, it’s seen as a red flag.
[23:04]So use at your discretion. Given how young China’s credit system is, I can’t fault users for being confused about how this all works. But there are lots of horror stories of people being denied bank loans after using Jiebei on the interwebs. Which is why when Huabei said it would also start plugging into the nationwide credit system this summer, people started freaking out and were debating whether or not to abandon the product.
I mean, I think people are just assuming it’s going to make a hard credit inquiry every time they use it, which I can’t imagine being the case. But if it’s not, and it’s actually going to help them instead of hurt them when they use Huabei responsibly, which would be my guess, then they’ll probably welcome it. Either way, this isn’t going away. Ant’s Sesame Credit, along with 7 other credit companies, including ones from Tencent and Ping’an, joined forces to make another credit system in 2018 at the behest of the government.
We’re calling it a system, even though Baihang Credit 百行征信 is technically a company, just not one operating solely for the sake of profit. Remember those 8 preliminary licenses we talked about earlier, one of which Sesame Credit received? Well, the government decided that actually we’re just going to combine all of you into one. You guys are now all partial owners of one company. The National Internet Finance Association of China owns 36%, and all the rest of you own 8% each.
[24:35]You might be rolling your eyes now thinking: that’s so China, but actually, hear us out, it makes a lot of sense. Someone who operates a credit system shouldn’t also be operating other financial businesses, because then they lose that objectivity and independence. Obviously, Ant and Tencent and every other player do have other businesses, so that’s strike one. Then strike two is that, for credit agencies, you can’t have whoever collects the data own that data and not share it. Again, that’s exactly what the internet companies are doing.
So to solve this — for now — all 8 of the companies own a stake in Baihang, although they have no operational control. And they can still do their own scoring or whatever, but they just can’t pass it off as a citizen’s definitive credit score. Like, your Sesame score is your Sesame score. It’s not your credit score. And until the government figures out a better solution, this is how it’s going to be.
Yeah the Chinese government does this a lot, issue draft orders and preliminary licenses and then change their mind. The pro is that you might not know how to regulate a fast growing industry, so you give yourself the flexibility of changing your tactics. The con is that no one knows what’s coming down the line, and it can be kind of scary to operate, when you have regulatory uncertainty like this.
[26:01]But all right, all you really need to take away from all of this is that the Chinese consumer finance industry is very young. Really young. So young that you could argue the industry didn’t even really get started until the CBIRC, that is the China Banking and Insurance Regulatory Commission, issued some guidelines in 2009, and started regulating it in earnest in 2015. It’s been growing rapidly in the past five years, tripling to $1.4Trn or so by 2019. But that’s still much smaller than the U.S., which sits at over $4Trn, which means that China is only just one-third the size of the U.S., despite having five times the population.
Ant’s CreditTech business, by the way, has a balance of over $300Bn as of June 30, 2020, with 80% of it in consumer debt, and 20% of it to SMBs. But these numbers aren’t that big. I mean, we haven’t even told you how much in payments flowed through the Alipay platform in the last twelve months. That number is $17Trn, all but $100Bn or so of which is from inside China.
[27:17]Large as that market is, growth is slowing, down from 23% in 2018 to just 17% in 2019. And margins are razor thin. In fact, we can basically do some simple math and arrive at the conclusion that Ant is only getting something like 0.05% of each transaction. No wonder then that the CreditTech products like Huabei and Jiebei are now bigger than Alipay revenue-wise.
Remember that Huabei is about 9% annualized, and Jiebei can be as much as double that. With how much room there is left to grow for this whole sector, no wonder the bulls are ultra excited about the prospects. And especially since Ant is barely doing any of the actualunderwriting or risk assumption here — according to its prospectus, 98% of credit balance originating through the platform is now underwritten by one of their approximately 100 partner financial institutions or securitized.
[28:17]The largest partner for all that SMB CreditTech and InvestmentTech, by the way, is going through MYBank, an online-only lender that Ant owns 30% of. According to MYBank, it can approve loans in a 3-1-0 format, which stands for 3 minutes to apply, 1 second to get a decision, and 0 humans involved. Which makes it super cheap to operate versus a traditional bank and a very attractive alternative for the 80% of the small businesses in China with shoddy access to credit. So you can see why folks are so excited about CreditTech in general. Besides being 40% of revenues, it’s up more than 2.5x in the last three years, which is impressive, even for China. You can’t be excited about Ant if you aren’t also excited by this piece of the business.
So we’re now at present-day in our Ant Group walkthrough and there are just a few more pieces of the puzzle left to update you on. The first being, that piece that Ant calls InvestmentTech that’s now 15% of revenues … that can’t just be all from Yu’EBao, can it? Just a money market fund alone can get you one-sixth of the way to a $200Bn company?
[29:34]No, of course not, that division is now no longer just one investment product but an entire platform of investment products called Ant Fortune, or 蚂蚁财富. Here, users can find 3500 funds to invest in, representing 170 different partner asset managers. Ant claims to use “AI” to pair consumers with the best investment products for them. The business model? Simple. Fees based on transaction volume.
The volume of investment enabled on the platform, which is more typically referred to as AUM, or assets under management, is about $600Bn USD through this June. I mean, Yu’EBao is probably just a quarter of that, last reported at $173Bn, so the bulk of it is indeed from other products, some of which are still owned by Ant, like 存金宝, for investing in gold, 招财宝, which is fixed income, and your typical mutual fund or ETF investments.
A lot of 宝s, but the important thing to note is that it really is just a marketplace, allowing asset managers to sell whatever it is that they have, and revenues are growing a lot slower than that of its brother, CreditTech. Indeed, it’s basically up 60% in the last 3 years, the same rate as the much more mature Alipay. But it kind of makes sense, right? Investment ranks lower than consumption in a household’s financial stack.
[31:06]But to have a thriving capital market, the Chinese government thinks more investment could be encouraged. CBIRC, the banking and insurance regulatory commission we referred to earlier, has been pushing for more long-term investment into equities since the beginning of the year. Even steering a portion of the Chinese household savings of $10Trn, so goes the logic, would be pretty good for the stock market. I mean, it’s always been a goal of the government, so this isn’t too new, but maybe that partially accounts for the faster growth we’re seeing this year for Ant’s InvestmentTech business than in past years.
Yup, it’s up more than 50% year-on-year when you look at results for the first half of this year vs 2019, whereas in the past, it’s been more like a 20-30% growth. I’d say that’s a positive indicator, but it also shows us how much government policy can affect this business. Although I still think in the long term, the promised liberalization of Chinese financial markets is acompelling tailwind. You just might encounter a lot of speed bumps on the way there, that’s all.
[32:16]Which brings us to our last business line, which is InsureTech, something we have skipped over entirely thus far. The main reason? It’s still pretty small, clocking in at 8% of total revenues. Growth was faster in the past when it was an even smaller base, but it’s still doing 50% this year.
Compared to everything else Ant does though, this is truly very, very small. The prospectus tells us that insurance premiums and contributions on the platform is not even $8Bn so far. If you’re an optimist, your reaction is probably: that’s tiny, which means that there’s a lot of growth waiting to happen! And maybe you’re right.
The bull case is that China is finally the second-largest insurance market in the world, with over $600Bn in premiums collected, but it lags developed countries in % penetration of GDP. Hey don’t look at me, I’m not an insurance expert, I’m just quoting you what Deloitte published on the sector. And according to them, most developed countries are about 10% of GDP, or at least 6.5% like the US, whereas China is still at a measly 4.4%.
[33:37]And another way of looking at it? The U.S. has 4.2 insurance policies per capita, and China 0.6. That’s almost a difference of 10 times. And part of it is because the industry is new, yes, and there weren’t a ton of products available, but part of it is because, well, you know, it takes time for consumers to be educated on what to buy and why to buy as well. So like all unintuitive things — and I would say insurance is unintuitive — it’s going to take some time.
Well, it would probably have taken more time if it weren’t for COVID19, but that trend is likely accelerated. How much? We have no idea yet. But coupled with the fact that there are various opening-up measures by the government to encourage foreign entrants into this space, this could get big sooner rather than later.
Yup, ownership caps for foreign insurance companies were removed earlier this year and other policies such as making it possible for you to sell your product directly to consumers are more reasons to believe market liberalization is for real. If you’re Ant, this can only mean good things.
[34:48]And what’s great about the InsureTech business is that the revenue Ant collects is 20% of the premium value transacted. Yeah, it received 10 billion RMB in revenues from a marketplace that saw 52 billion RMB in transactions in the last twelve months. 20%.
Well, yes and no. There is a little wrinkle in here, which I think is worth mentioning, just because it’s so weird, even though I don’t think the impact is necessarily that big. And that is the fact that one of Ant’s own products, Xianghubao 相互宝, is categorized as an InsureTech business.
I don’t know that it has an English name, but Xianghu means “reciprocal” or “mutual.” Bao here is still the word for treasure, but the word for “insurance” or “protection” is the same sound, so the product, in press releases, is referred to as a “mutual aid platform.”
[35:53]The way it works is simple. You pay a monthly fee into a giant pool of money along with other people, and if you get one of 100 pre-agreed critical illnesses — mostly cancers — you can submit a claim to Ant, and if approved, you get paid a one-time payment of up to $43,000.
So this isn’t an insurance product but kinda complements whatever other insurance you might already have. Or, if we think about the stats we talked about earlier, most likely don’t have.And indeed, most of the folks buying Xianghubao make $1000 or less a month and a third of them come from rural China. You do have to be under 59 years old to participate and in good health, but other than that, there is a good case to be made that it is more accessible than lots of other insurance products out there.
It totally is. When it first started in October 2018 it cost less than one RMB per month to participate, but now that it is at 100 million users, the monthly fee is 3 RMB, or about $0.50. It’s still very, very low compared to normal insurance premiums, but remember that it’s also got very limited coverage, and there’s been horror stories of Ant denying payouts, as well as using all sorts of growth hacking tactics to get folks to unwittingly sign up, all of which have brought controversy to the platform.
[37:20]I would like to believe that this had the best intentions at heart, but again, I’m not sure that’s compatible with profit. Either way, the run rate for Xianghubao alone, if we’re just using 3RMB and 100 million as rough estimates, accounts for at least 7% of Ant’s InsureTech transaction volume, and possibly more, since the monthly payments have been increasing so much Ant had to come out and say that it was going to guarantee a cap of $27 per year.
I think the main complaint people have is just how opaque some of these metrics are, and how you kind of have to take the company at its word, even though there are inconsistencies like this one, where a product is categorized as InsureTech when the company’s own press releases make it clear it’s not insurance.
Although I could just as easily take the opposite position and ask, do you really need all this detail? In the grand scheme of things, most of these Baos, aside from Zhifubao 支付宝 Alipay and maybe Yu’EBao 余额宝, are just rounding errors for Ant. The prospectus is already 674 pages. Must we make it break 4-digits?
[38:36]Yeah, I can see both sides of this one. The bigger question, as some of you have floated, is why Ant deserves a 10x revenue multiple based on trailing twelve month sales, when, if you take the business apart, piece by piece, you see that for example, that huge CreditTech piece, accounting for 40% of Ant’s revenues, might be worth just five times to investors … not revenues but earnings. Yes, we’re talking about Lexin 乐信, that’s ticker LX for those of you who haven’t heard of the company.
We visited Lexin for our investor trip last year! They described themselves as the SoFi of China. And that’s kind of what Ant CreditTech is doing, indeed. But neither SoFi nor Lexin have the all important, extremely dominant Alipay, right? So you could make the argument that they don’t have the “closed ecosystem” that Ant does, where you could theoretically give a consumer or small business basically all the financial products it will ever need. Because you have that highest frequency piece down, consumption, so you kind of “own” the customer, and you can build a platform for anything they need from there.
[39:49]That is exactly why Ant — and Tencent too — are very hard to beat. In Episode 11, we talked to Wayne Shiong, who is a very active fintech investor, and so has invested in basically a version of all of the products we mention that Ant has, but even he concedes that Ant is probably poised for massive success. Their size, their stickiness, and just the breadth of their platform.
Yeah, honestly, I won’t name any names here, but not just investors, even folks who directly compete with Ant on some of these products respect what they’ve done. It’s just one of thosethings, like, we can sit here and argue about valuations, but Ant is just so unique that it’s really difficult to say it doesn’t at least deserve some premium, because you could make a good case that the sum is going to be greater than its parts. It’s pretty dang profitable, for one, at 30% net margin.
OK but fintech can be pretty profitable in general, let’s not get too wow’ed there. And all this stuff about Ant being very unique? It comes with a big cost. And that is — come on, everyone can see it. Ant is the consumer finance sector in China. Which you’d be very concerned about, if you’re the government.
[41:07]Which is why the government continues to make attempts to figure out how to rein in Ant Group. In July, the Chinese central bank apparently urged antitrust probes into Alipay and WeChat Pay, although so far, these haven’t translated into full-on investigations or anything. But, there are whispers of changes to antitrust regulations in the pipeline, and that could hurt Ant as it tries to grow. And not just that, there are new rules coming out all the time. Literally as we are recording this episode, for example, the government announced that it will cap loan interest rates to 15.4%, which will likely eat into Ant’s margins, since it is so heavy on CreditTech.
But the Chinese government isn’t the only one who is keeping close tabs on what Ant is up to. Financial services are a sensitive sector generally, so it shouldn’t surprise you that when Ant tried to buy Moneygram, an American money transfer service, in 2018, the U.S. government blocked the deal.
Investments and acquisitions are a big part of Ant’s strategy — of any Chinese internet giant’s strategy, really — and Ant has, as you would expect, invested all over the globe. In fact, as of the end of 2019, it had invested in 171 companies over the last decade or so, and apparently accounted for 35% of all global fintech investment in 2018, according to CB Insights.
[42:43]The most strategic of those investments might be Paytm, India’s largest e-commerce payment system, currently valued at $10Bn, but there’s also Klarna, Swedish fintech unicorn that it recently invested in. And aside from fintech, it’s also very active in investing in software servicing businesses as well as local services businesses, such as Hellobike, one of the few bikesharing companies that survived all the bankruptcies in the sector and seems to be doing quite OK now.
This very large roadmap probably either excites you, or scares you. Or both. Exciting because well, we’ve seen how Chinese giants have used smart investments to build an amazing ecosystem, but maybe a little scary too because of how much geopolitical risk there is insome of these places. I mean, it is one of the reasons that people are speculating that Ant is not listing in the US, and choosing a dual-listing in Hong Kong and China instead, although the company insists this was always the plan. Anyway, aside from the U.S., we have all been watching the Indian-Chinese relationship deteriorate.
[43:53]Yup. India just banned Alipay last week! But doesn’t that make the case more strongly for doing investments instead of direct operations? Sure, there’s still a risk, but it’s lower, and also, Ant can depend on Alibaba for more visibility. It’s got a big brother to help guide it through. Joe Tsai and Alibaba CEO Daniel Zhang both sit on Ant’s investment committee, and of course Alibaba owns a third of Ant.
Well, they really are quite intertwined. As you would expect of a spinoff, Ant’s senior management mainly hail from Alibaba. Executive Chairman Eric Jing joined Alipay in 2009 and was its CFO, then CEO. He was both CEO & Chairman of Ant until December 2019, actually, when Simon Hu, also an Alipay veteran since 2006, was promoted into the CEO role. Ant’s CTO has been at Alipay for even longer, since 2004, but was actually just named into the role last month, after his predecessor went to become Alibaba’s CTO instead.
[45:06]Still all within the family. I guess at Alibaba you also have a ton of cloud services and AI that you need to work on, but if you want to do blockchain, then you gotta stay at Ant, where you can work on AntChain, Ant’s Blockchain-as-a-service open platform. We didn’t really talk about it because this falls under Ant’s “innovation” revenue segment, which accounts for less than 1% of sales, but if you’re into blockchain, the TL;DR is that Ant is really focusing only on the boring use cases of the blockchain, no tokens, no coins, no DeFi … just pure utility.
We mention it because Jack Ma has been very public about his love for blockchain technology, which is probably why Ant has topped the blockchain patent charts in the last 4 years. And it has announced a slew of government partnerships recently — things like using a blockchain ledger for residential real estate — although it’s just so far away from the impact of the other business units for now that I don’t really think you need to pay attention to it at all.
[46:12]And while there is more to talk about when it comes to Ant, we are going to have to stop here because any more context, and this episode is going to run into triple digits too! So first things first, Ant’s predecessor was Alipay, a digital payments service that Alibaba started to support its C2C marketplace, Taobao, because without an escrow service, there was no way for buyers and sellers who didn’t know each other to trust each other. So that’s what Alipay did.
Of course, as soon as you have users willing to connect their payment details to your service, you wouldn’t just want to service them on your own Alibaba platforms. So soon, Alipay was adding partnerships so that you could use it to pay on other websites and even offline too. And meanwhile, it was constantly working with the banking system to make payments even easier, reducing the friction from multiple steps to just one, entering your payment PIN.
[47:06]Obviously, Alipay wasn’t the only one to see this opportunity, and digital payments was booming. The Chinese government, who often steps in with regulations after an emerging sector grows in size, began intimating that they would be distributing third party payment licenses, which Alipay would have to procure if it wanted to continue to operate. Jack Ma, believing that Alibaba’s majority foreign-owned structure by that time would make it ineligible, quietly spun out Alipay from Alibaba.
Well, that was Jack’s story. Yahoo in particular was incensed. This was a huge scandal at the time, but the shareholders eventually came to an agreement. Alibaba Group would receive fees from the newly named Ant Financial spinoff for now, and have the option of converting to one-third equity ownership in the future. We go over the whole story in Episode 11, our first Tech Buzz show on Ant. That happened in 2011.
WeChat has also burst onto the scene around this time, and to Jack Ma’s credit, he recognizes quickly that mobile internet is the next big thing, so Alipay gets a smartphone app and QR codes are incorporated. Alipay continues to have over 50% of market share to this day, by the way, and in addition to having over 700mm MAU, it processed $17Trn in transactions in the last twelve months. Although that only amounted to $8Bn in revenues, or0.05% of the transaction volume. Still, this business accounted for 36% of total revenues, making it Ant’s second largest revenue stream.
[48:45]Back in 2013 though, it was obvious that in China there was a gaping hole when it came to consumer finance, so Ant did a few clever things, it launched a money market fund with daily liquidity accessible in your Alipay wallet called Yu’EBao in 2013, and consumer finance products Huabei and Jiebei in the next two years. Huabei was like a credit card, and Jiebei was like getting a small loan.
You already know payments is the second largest revenue stream … these three other products give us the first and third place revenue streams for Ant. The biggest is CreditTech, at 40%, which Huabei and Jiebei fall under. Basically, Ant helps other partner financial institutions also conduct a small loan business online, and the current balance is $300Bn, with the bulk of it going to individuals. Business lending, though, is what folks focus on a lot because that’s just a massive market that was previously inaccessible, until online-only lenders like Ant-owned MYBank came in to do super quick decision, data-driven loans at roughly the same default rates as traditional banks. All of these factors together mean that the CreditTech piece of the business looks to be on a run rate that is going to be more than triple what it was doing just 3 years ago.
[50:08]Which brings us to our third largest revenue segment, InvestmentTech. Remember that money market product Yu’EBao? Well, now it’s part of a bigger platform on which Ant partners with other asset managers and sell their fund products as well. It’s currently at 15% of total revenues and has enabled $600Bn or so of transactions so far.
If you were counting, these 3 pieces make up over 90% of Ant’s revenues already. So what’s left? Well, InsureTech. Insurance is in a pretty early stage in China so on a percentage basis, this piece is growing the fastest, but it’s also the smallest at 8%. Again, Ant has chosen to provide a marketplace. And with the final 1% or so made up by new initiatives such as blockchain, there you go, we just ran through all of Ant’s businesses.
And if you can’t tell, only the payments business is, in a sense, proprietary. The rest are all platforms. In fact, they are all “digital finance technology platforms,” which is how Ant groups them right now. 35% payments, and the rest — CreditTech, InvestmentTech, InsureTech — all go into this platform category. You see, Ant wants to be as little finance-y stuff like payments as possible, and as much tech as possible.
[51:33]Why? Simple. Government regulations. It may already be under risk of triggering antitrust investigations in China. There’s all that risk. Why not just have partners take responsibility and just provide the “technology?” Right now 98% of the credit balance through Ant is underwritten by partners or securitized. And Ant is making enough money to spare. Net margin? 30%.
So there you go. Ant’s colossal size is both its biggest strength and its most obvious weakness. But there’s no doubt that it has done a tremendous job reinventing itself as a tech platform services provider from the mostly payments revenue that it was receiving just a few years ago. And having all these pieces bundled together — all these users, all this transactional data — makes Ant quite a unique beast. I don’t think there’s anything quite like it.
That’s what bulls say, that even though each piece alone might not be so highly valued, but together, it’s like this uber platform that dominates in every aspect of consumer finance.
Maybe soon to be small business finance too, although it should tread lightly there — banks are already whining, even as they acknowledge Ant enables them to do new businesses.
[52:53]And at the end of the day, does it really matter? Ant is not going public in the U.S.. It’s doing a dual IPO in Hong Kong and China. In China, it’s going public on the high tech-specific one-year-old STAR exchange in Shanghai, which we talked about in Episode 40. The first batch of companies — 25 of them — are currently trading at 133 times earnings. Yeah, there’s a lot of exuberance there from local investors, who just never had this kind of access to high quality tech companies in the past.
But are also kind of nuts anyway, as we discussed in the episode on the Chinese stock market. And anyway, we are talking here about the biggest IPO not just on the HKSE, or STAR, but of all time. I’m expecting chaos. What about you, Rui?
Oh for sure. It’s going to be crazy. A company that made $18mm in profit every day the first half of this year and grew 38% year-on-year, in the middle of covid? I’m not sure people are really going to even register the proposed $200Bn price tag. It’s a bet on all of Chinese digital finance. It’s such a big company that it practically is the sector right now.
Being so big — is that good or bad? What do you think? Let us know!
[54:30]Thanks for listening and don’t forget to write us that review for your free Extra Buzz subscription. Have any questions or suggestions? Email us! We really enjoyed putting this together, and we’re always open to any comments or suggestions. You can find us on twitter at thepandaily, at techbuzzchina, and my personal Twitter account is YINGLU2020.
And my Twitter is spelled RUIMA. Tech Buzz China by Pandaily is powered by the Sinica Podcast Network on SupChina. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Caiwei Chen and Kaiser Kuo. Thank you for listening!