DO NOT Count on the ANT Financial IPO to Lift BABA Stock

In April, ANT Financial, the finance arm of Alibaba (BABA) which includes Alipay, raised $4.5 billion, valuing it at $60 billion. This was the largest private fundraising round ever for an internet company. ANT Financial plans to go public on the Shanghai Stock Exchange, perhaps as early as this year. Investors are speculating about whether this will make a difference for BABA stock ipo baba stock

ANT Financial plans global expansion, receiving licenses in South Korea, Hong Kong and India. There are big plans in store; Alipay has 450 million users and ANT Financial is targeting 2 billion users worldwide within the next 5-10 years.

Alibaba is entitled for 37.5% of the equity of ANT Financial if the firm ever goes public; if ANT Financial is worth $60 billion, this would value Alibaba’s stake at $22.5 billion. Should you buy BABA stock because of ANT?

What is ANT Financial?

ANT Financial is one of the world’s largest players in fintech, an emerging industry which seeks to use technology to make finance more efficient. ANT includes Alipay, the #1 player in online payments in China; Yu’ebao, a money market fund with 260 million users; Zhaocaibao, a peer-to-peer lending service; and Sesame Credit, a credit rating service.

McKinsey & Co. expects that global payments will total $2 trillion by 2020. Chinese firms, including BABA as well as Baidu (BIDU) and Tencent (TCEHY), lead the world in fintech. These new digital banks will threaten existing banks, compressing their margins and reducing prospects for future growth.

By linking borrowers and savers via mobile devices, fintech will disrupt traditional banking with a lower-cost business model. The 2014 Global Findex found that 2 billion people worldwide were unbanked, with most of them in South Asia, East Asia and Africa. The gap between access to mobile phones and access to bank accounts in many of these countries is creating opportunities for fintech players to grow market share. This could catapult players like Baidu, BABA and Tencent to the commanding heights of global finance, allowing them a great deal of influence in Asia and Africa.

Should You Buy BABA Stock because of ANT Financial? 

Alibaba’s share in ANT Financial is worth $22.5 billion, or $9.41 a share. Analysts at Bernstein are even more bullish, and think ANT is worth $100 billion, or $15 for every share of BABA stock. The stock has traded in a range between $60 and $82 this year, but many analysts think an ANT Financial IPO could help BABA stock climb as high as $90-$100 a share. Is that realistic?

Perhaps, but there are many legal and political issues investors should know before buying BABA stock. I’ve mentioned these risks before. Buying BABA stock does not get you actual shares of Alibaba, but of a Cayman Islands-based holding company known as a variable interest entity (VIE), set up to bypass Chinese government regulations. The Communist Party wants to limit foreign ownership of Chinese internet companies such as Alibaba, and one day may very well decide that Alibaba’s VIE goes against the spirit if not the letter of the law.

Even then, the Chinese government is not the only concern for BABA stock owners. Alibaba once owned 100% of Alipay, until Jack Ma decided to spin off Alipay into ANT Financial, an entity probably controlled by himself. Nobody knows what his stake in ANT is, although estimates put it at 40%. Ma argued that Alipay, as a financial entity, could not be owned by BABA; it needed to be owned 100% by Chinese investors. This caused a dispute with Yahoo! (YHOO), a major shareholder in BABA. The dispute was resolved by promising Alibaba 37.5% of the equity value of ANT.

As Barron’s notes:

“Alibaba shareholders will garner the selfsame 37.5% interest in Ant following any IPO or other monetization event. That economic interest would probably come in the form of added Ant shares, which calls into question the original reason for transferring Alipay to Ant. Apparently it’s now OK for foreign-owned Alibaba to own a big part of a Chinese banking entity. In the meantime, Alibaba’s effective 37.5% interest is a mere shadow of its former 100% interest in Alipay.”

BABA shareholders therefore not only have to worry about the Chinese government causing problems, but also Jack Ma. Should Jack Ma do something that is against the interest of Alibaba shareholders, they cannot expect the Chinese government and legal system to take their side.

There are other concerns. The U.S. Securities and Exchange Commission (SEC) is now investigating Alibaba’s accounting practices to determine whether were inflated. This caused S&P Global Market Intelligence to downgrade BABA to a “Buy” from “Strong Buy.”

With all these red flags, investors should not count on the IPO of ANT Financial to lift Alibaba stock.

As of writing, Lucas Hahn did not hold an interest in any of the aforementioned securities.

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