Highlights and hidden troubles of trillions of ants

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Products: Huxiang commercial group
Author Li Ling
On the afternoon of August 25, ant group Co. submitted its offering documents to the science and Technology Innovation Board of Shanghai Stock Exchange, and simultaneously submitted A1 application documents to the Hong Kong stock exchange, officially launching the a + H listing plan.
The prospectus disclosed that: the total share capital of ant a + H will not be less than 30 billion shares, and the total number of new shares issued by the IPO will not be less than 10% of the total share capital after the issuance, which means that no less than 3 billion new shares will be issued.
In 2018, ant’s valuation has reached US $150 billion in round C financing. According to previous rumors, the target value of ant’s dual listing plan is US $225 billion. It is no surprise that the listing of ants will become the largest IPO in the world this year, perhaps not one of them.
According to the prospectus, ant group’s annual revenue in 2019 is 120.6 billion yuan, and the net profit is 18.07 billion yuan; in the first half of 2020, the revenue is 72.528 billion yuan, and the net profit is 21.92 billion yuan, which is more than the net profit of last year, and its gold absorption ability is amazing.
The fund-raising will be mainly used in three directions: supporting investment in innovation and science and technology, promoting the upgrading of digital economy, strengthening global cooperation and helping global sustainable development.
Since its establishment in 2004, the ant group has gone through three stages of growth: the Alipay formed in the early stage of e-commerce development, forming the ant financial service of systematic financial services, and then to the ant group that emphasizes technology innovation and global vision. Through this offering document, the outside world can have a glimpse of the business layout, revenue composition and other core data of China’s largest technology finance unicorn.
Cash cow
According to the latest prospectus, ant’s revenue mainly comes from digital payment and business services, and digital financial technology. Among them, digital financial technology includes micro loan (Huabei, jiebei, e-commerce loan), financial management, insurance and other businesses.
In terms of revenue contribution, the revenue contribution of innovation business and other businesses (mainly blockchain, cloud computing and other technologies) is less than 1% in three consecutive years, which is far from the key business.
In the first half of 2020, ant group’s total revenue is 72.528 billion yuan, the operating profit is 24.903 billion yuan, and the profit in the period is 21.923 billion yuan. Among them, the income from payment was 26.011 billion yuan, accounting for 35.9% of the total contribution income; the micro loan income was 28.586 billion yuan, accounting for 39.4%; the financing income was 11.283 billion yuan, accounting for 15.6%; the insurance income was 6.104 billion yuan, accounting for 8.4%. Digital financial technology has accounted for more than 60% of the revenue, and micro loan has become the largest contribution to ant’s revenue.
Ants have been growing at a high speed in the past few years.
Ant group’s income in 2019 is 120.618 billion yuan, which is 41% higher than that in 2018 (85.722 billion yuan), and 84% higher than that in 2017 (65.396 billion yuan). In other words, from 2017 to 2019, ants almost doubled their income.
However, for the two core businesses of payment and micro loan, their revenue contribution rate shows opposite trend.
The income of ant payment in 2017, 2018 and 2019 were 35.89 billion yuan, 44.361 billion yuan and 51.905 billion yuan, respectively, accounting for 54.9%, 51.8% and 43% of the revenue, respectively, showing an obvious downward trend year by year.
In 2017, 2018 and 2019, the income of ant micro loan was 10.490 billion yuan, 22.421 billion yuan and 41.885 billion yuan, respectively, accounting for 24.8%, 26.25% and 34.7% of the income contribution respectively, and the income contribution ratio increased year by year.
By the first half of 2020, the income of micro loan exceeded payment for the first time, accounting for nearly 40% of income, and 3.5% higher than payment. This means that micro payment is the core business of ant.
Finance and insurance are also changing. From 2017 to 2019, ant’s financial income contribution ratio experienced a slight rise, then decreased slightly, and the overall trend is unclear. In contrast, the income share of insurance business increased year by year, nearly 4% in three years.
Ant classifies micro loan, financial management and insurance as the income of digital financial technology platform. If it is classified according to this classification, as the income of ant digital financial technology platform continues to increase, its contribution to the total income is growing, and the influence of this business will also expand.
The way to absorb gold
Alipay, as the main carrier of ant group business, now has more than 1 billion users and about 80000000 merchants. For the C-end, ant’s business mainly includes payment, consumer credit, financial management and insurance and other basic financial services; for the b-end, ant mainly provides enterprises with digital financial technology support or customer touch and risk management solutions.
Let’s take a look at a set of data, and feel the real size of the ants made up of these numbers.
In the whole year of 2019, the total payment transaction scale of ants in digital payment will reach 111 trillion yuan, which is more than China’s GDP in 2019 (99 trillion yuan), and nearly three times of the total amount of social consumer goods in that year.
Ant’s payment income is mainly based on a certain proportion of the transaction amount to collect service fees from businesses, including cross-border payment. In the 12 months up to June 30, 2020, ant’s international payment transaction scale has reached 621.9 billion yuan.
As the financial infrastructure of digital life, the drainage efficiency of payment business is amazing. The liquidity of small and micro loans can not be ignored.
The main business of ant micro loan is consumer credit and small and micro merchant credit, mainly for C-end consumers or small and micro business operators who are not included in the service scope of traditional financial institutions. The business logic of this is that ants are responsible for capturing credit demand, which is then channeled to financial institutions for independent credit decision-making and loan issuance.
Financial institutions get customers from ants and pay technical service fees to the latter. As of June 30, 2020, ant has more than 100 bank partners, including all policy banks, large commercial banks, trust companies, etc., contributing to a loan balance of 2.1 trillion yuan.

It is worth noting that the ant small loan model does not use its own balance sheet to carry out credit business and does not provide guarantee. As of June 30, 2020, in the credit balance promoted by ants, the amount of loans or asset securitization by the financial institutions it cooperates with accounts for about 98%.
According to the asset management scale, premium and apportionment amount, ant is the largest online financial management and insurance service platform in China, with an asset management scale of 4.1 trillion yuan and premium and apportionment amount of 52 billion yuan.
As of June 30, 2020, there are about 170 asset management companies and 90 insurance institutions cooperating with ants, including most of China’s public fund companies, insurance companies, banks and securities companies.
On the whole, charging technical service fees from cooperative institutions is the main way to realize the core financial business of ant payment, small loan, financial management and insurance. Through its artificial intelligence technology, ants intelligently match customers with different risk preferences with financial and insurance products, and then push the products of financial institutions to a wider group of matching users, thus charging technical service fees from financial institutions.
Worries under high light
Ant disclosed in the prospectus that the future development strategy is to continue to innovate in business models, product services and technology fields, and the strategic goal is to meet the interests and needs of ecosystem participants. The specific operations are as follows: enhance user activity and expand user base; create value together with partners; invest and innovate and technology; develop cross-border payment and business services.
However, contrary to the strong growth trend of income, the growth of ant users has gradually slowed down in the past two years.
Ant’s monthly live users were 499 million in 2017, 618 million in 2018 and 659 million in 2019. In other words, ant’s monthly live users increased by 24% year-on-year in 2018 and 7% in 2019, significantly slowing down.
User activity directly determines the future growth rate of ants. In the “risk factors” section of the prospectus, ant disclosed that it has carried out an overall growth strategy to promote user participation and activity, such as business activities. However, it also said that “there is no guarantee that the service content for businesses will increase significantly in the future, and even if it does, it may not be able to increase at all, or even if it increases, it will not improve the user participation and business activity on the platform, It leads to users being attracted by competitors. ”
In fact, ant has already begun to solve the problem of weak user growth.
According to the prospectus, ant has invested a lot in promotion and advertising in 2018 to achieve the strategic goal of covering most of China’s Internet users and businesses and enhancing their participation.
In 2018, the sales cost of ants was 47.3 billion yuan, accounting for 55.2% of the annual revenue, which reduced the overall profitability. Up to 2019, ant will continue to promote such measures, but its investment in marketing will be reduced. In the first half of 2019, the sales cost of ants accounted for 19.8% of the revenue in the period, thus the sales cost was 14.4 billion yuan. Compared with the annual technology research and development cost of 10.6 billion yuan in the same year, the sales cost of ants is an absolute large expenditure.
In addition to the potential risks of business growth and innovation, ant’s “risk factors” on laws and regulations deserve special attention: “we and our partners are subject to extensive laws and regulations, and future laws and regulations may impose additional requirements and other obligations, which may have a significant adverse impact on business, financial status and business performance.”
The strong supervision of payment system itself and the tightening trend in recent years may lead to the increase of compliance cost of ants. Most of the operating costs of ants are transaction costs, mainly to facilitate the transaction on Alipay and generate financial transfers to financial institutions. From 2017 to 2019, ant’s transaction cost is always the largest item of operating cost.
In the whole year of 2017, 2018, 2019, and the six months ending June 30, 2020, the proportions of ant transaction costs to operating costs were 81.6%, 81.3%, 77.2% and 75.5%, respectively.
With the increase of cost, the attractiveness of ants to businesses and cooperative financial institutions is reduced, the intermediary role is weakened, and the performance may also be affected. Once the high transaction costs rise, it will directly reduce the profitability of ants. But ants said there was no guarantee that transaction rates and other costs would not increase in the future, or that incremental costs would be passed on to customers.
In addition, the adjustment of charge types and regulations will directly affect ant’s future performance. For example, the “Interim Measures for the management of Internet loans of commercial banks” issued by the China Banking and Insurance Regulatory Commission on July 12, 2020, and the judicial protection ceiling of the Supreme People’s Court on reducing the interest rate of private lending on August 20 will directly affect ant’s core business.
Giant’s “small business”
Another focus of attention of the outside world is whether the ants can keep pace with each other after the listing.
Data show that Hangzhou Junhan and Hangzhou junao hold 29.86% and 20.66% of the total issued shares of ant respectively. As ant’s employee stock holding platform, Junhan and junao will hold no less than 40% of the total shares after the listing.
The holding company of the above two companies, Hangzhou YUNPU, and Ma Yun account for 34% of the shares and are the actual controllers. In addition, Jing Xiandong, chairman of ant group, Hu Xiaoming, CEO of ant group, and Jiang Fang, CPO of Ali group, respectively hold 22% of the shares of Hangzhou YUNPU.
In addition to these core executives, Alibaba owns 33% of ant through its subsidiaries Hangzhou Alibaba and Taobao holding limited. The national social security fund, which accounts for 2.9% of the shares, is the largest external shareholder of ants.
According to the Hong Kong listing rules, Ma Yun, Jing Xiandong, Hu Xiaoming, Jiang Fang, Hangzhou YUNPU, Hangzhou Junhan, Hangzhou junao and Alibaba are the controlling shareholders of ant. According to the relevant domestic rules, the only shareholders of ant are Hangzhou Junhan and Hangzhou junao. From the coincidence degree of names, Ma Yun is undoubtedly the biggest winner of ant listing.

However, ant’s gross profit margin decreased from 63.7% in 2017 to 52.3% in 2018. Regardless of the benefits from listing, ants’ gross profit rate is high, but its net profit rate is not high. In 2019, ICBC realized 776.002 billion yuan of operating revenue, including 313.4 billion yuan of net profit. Over the same period, ant’s revenue was 120.6 billion yuan, and its net profit was 18 billion yuan, far lower than the net interest rate of banks and other financial institutions.
Ant as a platform, its core competitiveness, science and technology service mainly refers to Alipay’s traffic, intelligent business decision-making system, joint wind control, product, technology and other capabilities. Whether it is core business micro loan or innovative business, it rarely directly participates in the high return link of lending interest. It only provides the ability of user recommendation and joint risk control. It essentially uses technology to earn intermediary fees or user matching and drainage fees.
In addition to not participating in the link with the highest rate of return, the ant user group itself does not have the conditions of high return. The unit price of credit for small and micro enterprises or consumer loans with high penetration rate is much lower than that of traditional financial institutions. For example, the minimum credit line of Huabei is as low as 1000 yuan, and the average balance of users is only 2000 yuan. Under the interest free period of 40 days for individual users, it is basically not related to the huge profits of traditional financial institutions.
As China’s largest technology and financial unicorn, the outside world naturally does not need to worry about the future market value growth of ants. However, the risk factors in the financial report always remind ants that ant still needs to strengthen exploration and expand business boundaries and enhance profitability in order to get out of the growth curve of the next stage.
As emphasized in the prospectus, ants are born out of Ali’s digital economy and are committed to promoting the construction of digital infrastructure for China’s commerce and service industries. The financial technology platform created by trillion giants will eventually become a part of Ali’s future layout.