In Alibaba's Parallel Universe, Where Ant Had an IPO
(Bloomberg Opinion) -- There’s no way to dress up the terrible 12 months Alibaba Group Holding Ltd. has faced since the aborted debut of its fintech division. But let’s imagine for a moment what might have happened had Ant Group Co.’s dual listings gone ahead, if only to consider where the Chinese e-commerce giant’s problems truly lie.
In a parallel universe, where founder Jack Ma didn’t criticize regulators in October 2020 and Beijing didn’t respond by halting Ant’s highly anticipated initial public offerings in Shanghai and Hong Kong, Alibaba would have become a minority (albeit significant) owner of one the world’s biggest financial companies. From there, Ant’s earnings would have been open for the world to see on a quarterly basis — instead of just the prospectus snapshot we saw in late 2020 — and investors would have ridden the decline of these newly minted shares as the company’s challenges became apparent.
Such a fall was inevitable because this crackdown was always in the cards. Ma’s now-famous speech at the Bund Summit may have precipitated a swift reaction from regulators, but Chinese President Xi Jinping was already on the path toward reining in big tech and forcing companies to conform to what is known now as the policy of “common prosperity.” And as a public company, Ant wouldn’t have been able to hide the impact of tighter new rules, which include a likely split between its payments business and its lending products.
As it stands, what we can glean is that Ant is not doing so badly (yet). Data from Alibaba’s earnings released Thursday show that income at the financial-services unit — which is anchored on the Alipay payments systems but includes loans, insurance and investment products — climbed 39% in the June quarter. Alibaba reports its 33% equity share of Ant’s earnings one quarter in arrears. Alibaba explained that such profit growth was largely due to a rise in the value of investments held by Ant. But because that company remains private, we lack further visibility into the business. Tencent Holdings Ltd., for example, last week noted that its own payments business has suffered due to Covid-control measures that curbed physical shopping in some parts of the country.
Alibaba’s own shares would have also been hit by the stricter regulations. We know this because, in the world we’re actually living in, they’re down 43% since Ant on Nov. 3 announced that its IPO was off. Now, one might argue that more transparency from a publicly listed Ant would have made investors less skittish. Unlikely. A forced split between Alipay and its credit-product apps would halve the value of the latter and see group valuation plunge below $72 billion, according to calculations by Bloomberg Intelligence analysts Francis Chan and Peter Lau. That’s a shadow of the $300 billion it was set to be worth upon debut last November.
Whether or not Ant debuted, Alibaba would still be facing other key challenges at its core e-commerce business. These can be summarized in three parts: slowing Chinese domestic spending, a pandemic-spurred shock to the economy, and moves to break up fiefdoms and walled-gardens among the major internet players.
China’s slowing economy has already garnered a lot of attention, so it’s sufficient to point out that such a fact has been known for at least three years and Alibaba tackled it by acquiring more businesses, notably in physical retail. In essence, it’s buying growth and suffering margin erosion as result. Revenue in the September quarter, for example, climbed 29%. But if not for its purchase of supermarket chain Sun Art that figure would have been 16%. And its forecast for next year of up to 23% growth trails analyst expectations for almost 27%.
And there’s not much Alibaba could do in the face of Covid-19 but adapt, which it did by putting more effort into areas that saw healthier demand such as in corporate services. Revenue at its cloud division climbed 34%, the fastest of its divisions, but remains unprofitable.
Which leaves the ongoing crackdown on practices where companies are considered by regulators to be using their data and size to maintain monopolistic power. In April, Alibaba was handed a record $2.8 billion penalty for antitrust behavior. The key infraction was its long-standing policy — since at least 2015 — of using its dominance to force merchants to choose its platforms over those of rivals, the anti-monopoly regulator wrote in a statement at the time. Meituan, its competitor in the food-delivery sector, was last month fined $530 million — equal to 3% of its 2020 domestic revenue — for similar practices.
Financial penalties aren’t the only result of these walls crumbling. Tencent opened its WeChat messenger to external links in September, loosening its stranglehold on a platform used by a billion Chinese consumers. Beijing is considering asking Tencent, ByteDance Ltd. and other media to allow rivals to access and display their content in search results, Bloomberg News reported last month. Such moves will make it harder for internet companies such as Alibaba to keep customers glued to their own platforms, pushing up competition and marketing costs, and driving down profits.
Maybe Jack Ma’s unguarded words set Alibaba up for its annus horribilis, but these two universes were destined to become one anyway. Now investors need to reconcile themselves with a realistic and uncertain future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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