Ant Group’s IPO troubles to lessen its value by $140bn

China’s proceed to halt Ant Group’s massive stock debut could reduce the FinTech giant’s value by as much as $140 billion, according to analysts’ revised estimates.

New regulations that could force Ant to improve more capital to back lending and seek national licences to use in the united states may decrease the firm’s valuation by about 50 %, according to estimates from Morningstar and other firms. The regulatory details are preliminary and could be subject to change.

If Ant’s $280bn pre-IPO valuation is halved, it could essentially mean the business is worth less than what it was two years ago when it raised money from a number of the world’s greatest funds including Warburg Pincus, Silver Lake Management and Temasek Holdings.

The reduced valuation does mean potentially lower service fees for investment banks like China International Capital Corporation that were relying on a windfall from Ant’s record-setting IPO. And it gives billionaire Jack Ma’s firm less heft to handle acquisitions as it looks to expand beyond its Chinese base and take the fight domestically to Tencent Holdings.

In a drastic turn of events, China put the brakes last week on Ant’s $35bn share sale just days prior to the FinTech juggernaut was because of go public in Shanghai and Hong Kong. The move upends what had been one of China’s biggest business success stories, as well as what was to become a pivotal part of the development of the nation’s fast-growing capital markets.

Iris Tan, an analyst at Morningstar, said that Ant could face a 25-50 % downside in valuation, if its pre-IPO price-to-book ratio drops to around the level of top global banks. Which means its valuation could possibly be slashed by about $140bn. Ant’s stock price happens to be valued at 4.4 times its book value, versus 2 times at those banks, she added.

Sanjay Jain, Singapore-based head of financials at Aletheia Capital, estimates that Ant’s price-to-earnings ratio could drop to about 10 times its lending profits, half of the prior target it had assigned to the business. The brand new price would put the FinTech giant more consistent with valuations of a number of the better quality banks.

Citigroup is trading at about eight times forward 12-month earnings, while DBS Group Holdings of Singapore is trading at about 12.6 times. China Merchants Bank, among the country’s biggest retail lenders, trades at about 10 times.

A representative for Ant declined to comment.

Mr Ma was summoned by China regulators for “supervisory interviews” days before Ant’s proposed trading debut and authorities announced that that they had belatedly discovered a range of shortcomings that, by some accounts, may need Ant to be overhauled.

Beneath the proposed new rules, the company would want additional capital to meet up more stringent regulatory demands. Online lending companies like Ant could possibly be necessary to provide at least 30 per cent of funding for loans, according to draft rules proposed by banking regulators in November. Currently, no more than 2 % of loans take a seat on Ant’s balance sheet, with the bulk of funding coming from bank partners.

If those rules are passed, to aid its practically 1.8 trillion yuan of loans outstanding, Ant must underwrite 540bn yuan of credit alone, according to Morningstar. Based how small loan companies can only leverage up to 5 times, Ant’s credit units Huabei and Jiebei could be needing at least 54bn yuan, it said.

“When it returns, investors will probably look at Ant somewhat less such as a tech company than before given it will be less asset-light, and growth assumptions may be lower,” said Kevin Kwek, a Singapore-based analyst with Bernstein. “A discount on previous valuations might occur given the regulatory overhang.”

Ant was sitting on about 80bn yuan of cash as of the finish of June. The capital requirement is also likely to have a three-year grace period.

To ensure that Ant to meet a number of the regulatory demands, one of the most realistic solutions will be for affiliate Alibaba Group Holding to inject 20bn to 40bn yuan, said Leon Qi, a Hong Kong-based analyst with Daiwa Capital Markets.

That said, the estimates for valuations and capital requirements are also preliminary. Ant could take less of popular if final rules are less stringent. Bernstein’s Mr Kwek said that while he expects Ant to obtain a lower valuation, he’s more optimistic that the company’s valuation will not drop to bank-type multiples given its credit technology and its own powerful payments iphone app that sits on a billion phones.

“If Ant can demonstrate that it'll be at the mercy of less national service pressure”, or can determine risk better, it might argue for higher multiples, said Aletheia Capital’s Mr Jain.