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China takes another swipe at Ant Group: Credit and data assets split out

  • Regulators previously increased capital intensity at Ant’s CreditTech business hitting profitability, growth potential

  • Core credit products will now be removed from the Alipay super app. This will likely reduce cross-sale activity

  • Ant will also lose control of its data, which is a key driver of customer insights and product innovation

China takes another swipe at Ant Group: Credit and data assets split out
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Rahul Shah
Rahul Shah

Head of Financials Equity Research

Tellimer Research
13 September 2021
Published byTellimer Research

Ant Group still finds itself firmly in Chinese regulators’ cross-hairs. Recent announcements take aim at two of its core assets – its highly profitable credit business and its massive pool of customer data. Ant’' success has historically come from its ability to seamlessly integrate a wide range of high-quality products into a simple user-friendly interface; and its ability to leverage its scale to extract value from partner institutions. Payments has traditionally been the glue holding everything together, but lending linkages have grown strongly in recent years, and are much more lucrative. Removing key credit products from the Alipay super app will likely have a big negative impact on customer engagement and profitability. Losing control of customer data also poses a threat to the customer experience. But a longer-term problem is the risk to Ant Group’s historical ability to bring innovative new products to market that meet genuine customer needs. In our view, the negative impact on Ant Group’s valuation of these regulatory actions is substantial.

CreditTech is Ant Group’s biggest revenue generator

Ant Group's Alipay started off as a payments platform, but has diversified extensively into other financial services. Prior to the regulatory crackdown, lending now generates the largest proportion of Ant’s revenues (39% in H1 20, up from 25% in 2017) and was likely to be the biggest profit generator too. We think the growing contribution of credit activities has been the key driver of the rising profit margin trend at the company over the past few years.

CreditTech is now Ant Group's biggest revenue generator

Regulators continue to take aim at Ant Group’s CreditTech business

Ant Group's lending activity has been a key target for regulators since last year, causing its IPO plans to be shelved. There have been various regulatory changes impacting this division:

  1. Forcing Ant Group to retain on its own balance sheet 30% of the loans it originates, well above the c2% historical level.

  2. Separating consumer lending products (Huabei and Jiebei) from the Alipay ecosystem such that they are independent applications.

  3. Forming a joint-venture that will control all the key data Ant uses in its lending decisions and credit-scoring. Ant Group will own just 35% of this business. State-owned entities like Zhejiang Tourism Investment Group and Hangzhou Finance and Investment Group will also have sizeable stakes in this venture.

Implications for Ant Group

1. The business is becoming more capital intensive and less profitable since the regulator now requires Ant to carry a significantly higher proportion of loans on its books. The greater capital intensity of Ant's lending operations would also likely slow that activity's growth potential; we estimate by around two-thirds. Regarding profitability, the c15x increase in the size of the CreditTech division's balance sheet will put a big dent into key profitability measures, particularly given that the business will be more exposed to the credit risk of the loans it originates.

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2. Diminishing super app benefits. One of the key value propositions Ant Group offers its customers is its large network of offerings (like Payments, Insurance, Investech, Lending) under the umbrella of its flagship payments platform, Alipay. Enhanced convenience and customers’ faith in the quality of the product offering generate huge scope for cross-selling, which in turn lifts customer retention rates. There are also significant synergies with e-commerce partner Alibaba. However, with regulators wanting to split out the lucrative lending business, there is likely to be a broad negative spillover effect across the network.

3. Giving away ownership to the most important value driver (data). Data is one of Ant Group's most important assets. Its massive customer base and the high frequency of interactions with those customers gives the firm massive insights at the aggregate and individual customer level. Forcing Ant to give up control of this information could have a significant negative impact on the ability of the firm to keep innovating, to its long-term detriment.

Ant Group's valuation is extremely sensitive to the multiples applied to its lending business

The triple whammy of the CreditTech division's lower profitability, the Group's slower long-term growth potential (due to its higher capital intensity) and the loss of control over customer data (leading to less effective innovation) has a profoundly negative impact on Ant Group's valuation. Applying a trailing PE of 5 or 10x to the lending business (China large-cap banks currently trade at c6x PE), and a 50x multiple to the rest of the business would roughly halve the firm's valuation relative to pre-IPO valuation estimates of cUS$300bn+. Further, that 50x multiple may no longer be appropriate due to the restrictions being placed upon the business. Late entrants to the Ant Group shareholder register may now be facing losses on their holdings.

Ant Group valuation based on differing CreditTech PE multiple assumptions

Alibaba will also likely be hurt in two ways – core operations and incubated investments

Alibaba's core e-commerce business is highly dependent on effective execution by Alipay, Ant Group's payments arm, but is also strongly supported by Ant Group's lending activities (which help boost spending through Alibaba's platform), insurance products (which help lower transaction barriers, for example by covering the cost of returns shipments) and even its investment arm (Ant's investment products can typically be readily liquidated, releasing cash for purchases).

Regulators are looking to weaken alliances between commercial entities, ostensibly to stimulate competition and reduce systemic risks. Accordingly, the hitherto lucrative partnership between Ant and Alibaba could come under further pressure.

Ant Group’s product suite helps Alibaba grow its sales

Source: Company data, Tellimer Research

A further issue relates to Alibaba's extensive stable of non-core businesses. Ant Group is arguably the first and largest of these, but other businesses could also become extremely valuable over time.

A less favourable regulatory environment could make exiting these investments and crystallising their value more difficult for Alibaba. Other elements of recent regulatory soundings, such as a desire to crack down on predatory pricing, could also limit Alibaba’s ability to convert these investments into industry leaders by subsidising these businesses via the e-commerce cash cow.

Appendix: Ant Groups’ historical consumer credit business model

Ant Group has historically worked closely with its financial institution partners to make loans available to its customers. Ant has tended to focus on product design, risk selection, loan servicing/monitoring and collection. In contrast, financial institutions have played the primary role in credit disbursement and underwriting. As of June 2020, the total consumer credit balance enabled through Ant Group’s CreditTech platform was RMB1,732bn. 98% of this volume was either directly underwritten by partner institutions or subsequently securitised by Ant.

Ant Group has been working with c100 financial institution partners, primarily commercial banks. We think there are two key reasons why these institutions have historically been queuing up to work with Ant:

  1. They gain access to around 1bn retail customers, which is a scale few other businesses enjoy; and

  2. These institutions can deploy capital and earn a high and stable margin.


Ant Group focuses on simple, convenient and easy-to-use products that provide users with instant credit access. Its Huabei and Jiebei products are the most widely used consumer credit products in China; in the twelve months to June 2020, around 500mn users took out CreditTech loans.

Huabei was one of the first digital unsecured revolving credit products in China; this credit line can be used at the point of sale and is based on Ant Group’s proprietary customer insights and credit assessment models. A typical Huabei customer is young and internet-savvy, but does not have access to a credit card. As customers build their credit history, the size limits for their credit lines increase. Huabei loans typically have a 40-day interest-free period, with terms ranging from 3 to 12 months. Customers can pay in monthly installments, or at the end of the interest-free period. As at June 2020, the average outstanding Huabei balance was RMB2,000 (versus a minimum credit line of RMB20), and the typical daily interest rate was 0.04%.

Jiebei is a short-term digital unsecured loan, typically for larger transactions (the minimum credit line is RMB1,000), and is typically available for customers that have already built up a credit history with Ant Group. Borrowers can pay back the loan at any time without penalty. The typical daily interest rate is 0.04%.

Due to the seamless integration of partner banks into Ant Group's lending platform, customers can experience close to instantaneous underwriting and receipt of funds. For both products there is also an automated repayment process, which typically takes the repayment amounts from consumers' accounts in the following order: Alipay account balance; debit card linked to Alipay account; Yu'ebao balance (Yu'ebao is Ant Group’s market-leading money market mutual fund).

Real-time decision-making

Ant Group uses proprietary algorithms to analyse in real time a customer's creditworthiness, to determine the appropriate size of credit lines and product pricing, to assess the likelihood of a customer accepting a credit product and to identify the best ways of marketing products.

Credit risk management

Ant Group categorises all Alipay users into different risk buckets based on customer occupation, spending (including inputs from Alibaba), financial position etc. These categories determine the size and price of credit lines that are offered. The firm utilises around over 100 different credit assessment models for this purpose. Looking ahead, Ant Group intends to work more closely with its partner banks to develop more advanced joint risk models, which should facilitate more accurate risk profiling, but also deepen their relationship with the partner bank.

In recent years, Ant group has demonstrated a strong credit quality track record, with the delinquency rate by balance typically within a 1-2% range, and the delinquency rate by vintage coming in at less than 0.5%.

The Covid-19 pandemic and the economic disruption caused by lockdowns has generated a stress-test for the firm's credit risk management; so far the results have been favourable. The delinquency rate by balance has remained in the 2-3% range, while the delinquency rate by vintage has remained below 0.7%, with results improving after February 2020.

Ant Group: consumer loan delinquency rate

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