| New York Times | - |
Alibaba's finance
arm is one of the secrets of the Chinese e-commerce group's success.
Yet investors in the listed Alibaba Group don't control a single share
of the business, and can't reliably estimate its worth.
Alibaba’s Finance Arm, Ant Financial, Is a Mystery to Most Investors
Alibaba’s finance arm
is one of the secrets of the Chinese e-commerce group’s success. Yet
investors in the listed Alibaba Group don’t control a single share of
the business, and can’t reliably estimate its worth. That puts them at a
disadvantage to a select group of insiders with a seat on both sides of
the table.
The business, which
was recently renamed Ant Financial, houses the Alipay payment processing
system and a controlling stake in the money market fund management firm
Tianhong. It plans to take on Alibaba’s portfolio of loans to small
companies, and even start a bank.
Alipay makes up much
of the business. It gets a commission of around 0.18 percent on every
dollar it processes on Alibaba’s Tmall and Taobao marketplaces,
according to calculations based on figures in the group’s public
filings.
That might sound
small. But Alipay’s significance for Alibaba is huge. The listed company
retains only a small share of the value of goods sold via its websites
as revenue – 2.3 percent in the latest reporting quarter. At a 0.18
percent commission rate – a figure the company does not confirm — fees
to Alipay would amount to nearly a quarter of the group’s cost of sales.
Despite this
interdependence, the listed group doesn’t own Ant Financial. Instead, it
gets 37.5 percent of the financial unit’s pretax profit, plus 2.5
percent of the value of its outstanding loans each year. In the 12
months ended in June , Alipay contributed 9.4 percent of Alibaba’s total
operating profit. And if Ant Financial is sold or lists on the stock
market, Alibaba gets a payout of up to 37.5 percent of its value.
What would that stake be worth? At this point, the fog descends.
Credit Suisse, an
underwriter of Alibaba’s initial public offering, estimates the
financial business could be worth over $50 billion by 2016, suggesting a
windfall of up to $20 billion for the listed group. But outsiders lack
some crucial numbers.
Two-thirds of the
payments that Alipay processes don’t come from Tmall or Taobao. It’s not
clear how much Alipay makes on those transactions, what proportion
comes from money flowing in and out of the group’s $87 billion money
market fund called Yu’e Bao, or what kind of profit margins the asset
management business enjoys.
Even a $20 billion
windfall would be just 7 percent of Alibaba’s current market
capitalization, so it’s easy to think Ant Financial’s value doesn’t
matter. Yet it does, for two reasons.
First, the
relationship is a potential risk as well as an opportunity. Imagine that
Alipay suffered a data breach, or that Tianhong – which has come from
nowhere to become the manager of China’s biggest money market fund in
little over a year – failed to pay investors in a timely manner. The
resulting reputational fallout could quickly affect Alibaba’s e-commerce
business.
The bigger issue is
that not everyone is equally in the dark. Ant Financial’s owners include
unnamed senior figures from Alibaba’s listed company, as well as its
co-founder Jack Ma.
Mr. Ma, the Alibaba
executive chairman, has said he plans to reduce his stake in Ant
Financial over time to bring it into line with his stake of around 8
percent in the listed company, partly by giving away shares to employee
stock plans. But that hasn’t happened yet – and as time passes the value
of his holding in the unlisted business rises.
That misalignment is
perhaps the most troubling thing about the relationship, because it’s
possible that what benefits Ant Financial may not benefit Alibaba. Say
the listed group cut the commissions it charges sellers on its Tmall
site. Investors would see less revenue. But Alipay’s take wouldn’t
necessarily change.
Alibaba is investing
in lower-margin businesses to attract consumers. Profitability fell
sharply in the last quarter. But as long as more stuff gets bought,
Alipay should still be better off. With higher volumes, its own
profitability ought to increase.
Much of this was clear
when Alibaba floated in New York in September. As the company grows,
however, so does the room for conflicts.
Alibaba’s top
executives on Nov. 4 announced that their philosophy at Tmall and Taobao
is to prioritize transaction levels and customer numbers over
profitability. That’s great for Ant Financial, but a poor signal for
Alibaba’s earnings.
The trouble is, with
such skimpy disclosure investors don’t see the full picture, and given
their skewed incentives, the executives with shares in both have little
reason to end the mystery.
John Foley is Reuters Breakingviews China editor. For more independent commentary and analysis, visit breakingviews.com.
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