How Alibaba-Backed Ant Financial Dominates Its Market

According to Reuters, Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) affiliate Ant Financial could go public as soon as early this year in Hong Kong and the company is targeting a valuation of over US$200 billion.

If Ant’s IPO goes well and the company grows in the long run, Alibaba will benefit because it owns around one-third of Ant.

Although US$200 billion is a large number, Ant certainly has a lot of potential. Here’s how Ant Financial generates sales, and why the market thinks it’s worth a lot.

Ant’s business lines

In terms of its business lines, Ant offers digital payments and various digital financial services.

In terms of its digital payment business, it has a leading super app in Alipay, which is a digital wallet/mobile operating system of sorts.

Together, Alipay and Tencent’s WeChat Pay basically have a duopoly in China’s mobile payments sector.

As a digital wallet, Alipay has around 900 million users in China who use the app to pay bills and buy things such as groceries. Alipay is accepted by many merchants across China.

Alipay is also a pretty sizable payment platform given that it has mini-programmes. Mini-programmes allow third-party companies to make sub-applications that provide features to Alipay’s user base.

In terms of mini-programmes, Alipay had around 1.7 million in early 2020 on the platform, offering everything from online shopping services to real estate trading services.

Not only do the mini-programmes add value to Alipay but Ant often benefits financially from their popularity.

In recent years, Ant’s digital payments division has expanded due to higher transaction frequency and increased merchant and user penetration. In the future, Ant hopes to expand internationally, particularly in regions such as Southeast Asia.

Ant also has promising business in digital financial services which offers everything from wealth management to micro-financing.

Due to its success in digital payments and digital financial services, Ant provided US$309 million to Alibaba’s income in the quarter ended September.

Ant used to pay 37.5% of its pre-tax profits to Alibaba. Due to a transaction done last year, though, Alibaba now owns 33% of Ant but isn’t entitled to the 37.5% portion of the pre-tax profits anymore.

Why Ant could be worth more than US$200 billion

According to Reuters, Ant was valued at around US$200 billion in private markets late last year and early this year. If and when it goes public, there are reasons to believe it will be valued higher.

First, recent IPOs in Hong Kong have done pretty well, with Alibaba’s Hong Kong debut as perhaps the best comparable.

Second, Ant adds value by going public because it has access to more financial resources.

With publicly traded shares, Ant can use its stock as currency to buy other companies. If need be, Ant can use the public market to issue shares to fund its growth.

Third, investors could value Ant higher than US$200 billion because the company has a lot of potential.

Due to its status as a mobile payments operating system of sorts, its huge user base, and its future growth potential internationally, many investors are bullish on Ant as long as the execution is there.

Judging by Ant’s growing business in the past, management has done a really good job so far.

Foolish conclusion

Ant Financial has a lot of potential. It’s a leading fintech company with a huge user base that will have even more resources when it goes public. If Ant’s IPO does well, Alibaba (and its shareholders) will most certainty benefit.