Digital payments / merchant services and SME / consumer loans are the two main sources of revenue
AS Ant Group has filed for dual listing in Shanghai and Hong Kong, the deal is set to become the world’s largest IPO in 2020. While Ant Group’s high profit margin was well expected, the latest account performance and profitability still surprised most investors.
According to the prospectus, at the end of June, the Ant group recorded a turnover of 72.5 billion yuan (10.5 billion dollars) and a net profit of 21.9 billion yuan, respectively 38% and ten times year-over-year growth. Ant Group’s 30.2% net profit margin is well above the 26.4% of its parent company Alibaba during the same period.
As a cash cow and profit machine for the Alibaba Group, Ant has two major revenue streams including digital payment and merchant services (Alipay) and CreditTech (SME loans and consumer loans). The two companies accounted for 75.3% of total turnover.
As of June, more than 500 million users had obtained consumer loans from Ant Group in the past 12 months. In contrast, China Construction Bank, China’s second-largest bank, only surpassed 100 million credit card users in May.
While consumer lending is a major driver of Ant’s growth, the business model, however, is totally different from that of financial institutions as lending does not consume Ant’s balance sheet. In other words, Ant Group only acts as an intermediary in a loan transaction.
In a typical consumer loan transaction, Ant will only charge a technology service fee of 2.08% per transaction with a partner bank that ultimately provides loans and charges interest. Ant also has its own credit scoring system. Based on users’ past transactions and activities, Ant is able to generate a personal credit score, which indicates the risk profile of its clients.
According to the prospectus, Ant Group has granted more than 2.1 trillion yuan in outstanding loans. Ninety-eight percent of the funding came from banks and asset-backed securities. As of June 30, Ant Group had partnered with 100 banks to provide loans to its customers.
Ant’s other driving force is its flagship product Alipay. At the end of June, Alipay had 711 million monthly active users and served more than 80 million merchants. For each payment transaction, Alipay only charges merchants a service fee of 0.05% based on the transaction volume. According to Iresearch, Alipay had a 55.4% market share in China in the first quarter.
The explosive growth and profitability put the Ant Group at a significant valuation of over US $ 200 billion, which also led to a reassessment of its parent company Alibaba Group. Since Ant officially announced its IPO plan on July 20, Alibaba’s share price has jumped more than 16%.
Citi, JP Morgan, Morgan Stanley and CICC have been named as co-sponsors of the Hong Kong IPO. For the Shanghai IPO, CICC and China Securities acted as co-sponsors.