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Ant Group IPO Review, Markets Shake It Off & Rally

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Ant IPO Review

Current View on Timing of Ant Group’s IPO

My childhood was spent in New Canaan, CT, where we were taught at an early age in youth sports that “if you mess with the Rams, you get the horns.” I spent last night annoying our broker friends in Hong Kong. The optimists believe Ant Group’s IPO will be delayed by six months. I won’t depress you with the pessimists’ view (2 years, never) though consensus is six months. In any event, it appears unlikely to happen soon. It is shocking to see what would have been the largest global IPO ever have the carpet pulled out from underneath  it.

Background on the Delay

40% of Ant Group’s revenue comes from its CreditTech unit, which includes the Zhima Credit unit, credit rating, Ant Credit, and Ant Cash Now. CreditTech has acted an intermediary between borrowers and lenders while clipping a coupon on the transaction as banks assume loan risk and utilize Ant’s credit ratings to determine risk. Chinese regulators have been looking at fintech companies’ role in lending as they get a pass on taking credit risk while facilitating borrowing. Ultimately, providing households with unlimited credit growth is not necessarily a good thing from a regulator’s perspective. Helping households and small businesses garner access is a good thing though the regulator is waving a yellow flag on a credit highway without toll booths.

On Monday, regulators proposed several rules to limit the amounts that online lenders could provide and requiring fintech loan facilitators/Ant to have some skin in the game, i.e. to carry some of the risk in the loan origination process. It is very likely that Jack Ma knew this was coming and vented his frustration this past weekend. Ant Group’s financials and risk disclosures were backward-looking and did not incorporate how the new rules would diminish revenues, profitability, and net income to some degree.

So, couldn’t Ant just update their documents for this? Yes, though the tone and tenor of locals was definitely negative on the IPO being revived. Mainland media sources are stating that the IPO will be delayed for at least 6 months, if not more. The IPO cash is going to be returned.

What effect will this have on Alibaba?

Alibaba has its Singles Day extravaganza on November 11th and earnings are coming tomorrow morning pre-US open. Jack Ma’s E-Commerce rivals are going to love this as they seek to take advantage of his diminished standing with regulators. Ultimately, Alibaba and Ant Group are two incredible companies that raise China Inc’s standing. They also help foreigners understand China, which has never been more important than today. They will be fine as they have strong management that run the companies exceedingly well while taking advantage of a very strong opportunity as China’s urban middle class continues to grow. An Australian friend taught me that “the tall poppy gets cut”. My self-serving and highly biased advice: Stay diversified!

Key News

Asian equities had another strong day. The 50-stock Hang Seng Index was down -0.21%, but the broader 438-stock Hang Seng Composite gained +0.42% and the Chinese stocks listed in Hong Kong and within the MSCI China All Shares Index gained +0.44%. Hong Kong volume leaders reveal the culprit as Alibaba HK fell -7.54%, Tencent fell -1.59%, and HK Exchanges fell -1.69% though Xiaomi gained +788%, Meituan Dianping gained +6.01%, Geely Auto gained +3.14%, and JD HK gained +2.48%. Tencent had very strong inflows via Southbound Connect in one the biggest buying days from Mainland investors. Ditto for Meituan Dianping. Today was a surprisingly strong day for Hong Kong minus three stocks.

Mainland China had a good day with Shanghai gaining +0.19% and Shenzhen gaining +031% as autos/EVs had another very strong day. Mainland volume leaders were BYD, which rose +2.41%, and appliance maker Gree, which rose +3.58% on expectations for a strong Singles Day. The Renminbi rallied versus the US dollar overnight, though it did fluctuate based on the US election polls, though this wasn’t unique to China FX.

Takeaway:  This is just another confirmation of China's V-shaped recovery. However, it is worth noting that new orders hit the highest level since 2010 and employment increased though the rate of export orders slowed. The Caixin survey is done by IHS Markit.

One observation from last night was how little Asian equities were influenced by the election. In the heat of the moment, with the race tight, polls flip flopping, and S&P 500 futures fluctuating, Asian equities were rising. To some degree, markets seemed to imply that, regardless of outcome, life will go on.

MSCI’s pro-forma will be released post close on November 10th for the end of month Semi Annual Index Review.

H-Share Update

The Hang Seng bounced around the room to close -0.21%/-53 index points to close at 24,886 as volume increased +33% from yesterday, placing it at 50% above the 1-year average. Breadth was positive with 27 advancers and 19 decliners. The 204 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index gained +0.44% led by discretionary +4.15%, tech +1.59%, materials +1.46%, heath care +1.26% and industrials +1.11%. Meanwhile, communication -1.63% and energy -0.85%. Mainland investors bought a healthy $1.004 billion worth of Hong Kong stocks today as Southbound Connect trading accounted for 9.3% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen gained +0.19% and +0.31% to close at 3,277 and 2,262, respectively. Volume was off -6.86% which is below the 1-year average while breadth was off with 1,313 advancers and 2,375 decliners. The 518 mainland stocks within the MSCI China All Shares +0.99% led by discretionary +3.05%, materials +1.63%, industrials +1.41% and financials +0.95% while communication -0.08%. Northbound Stock Connect volumes were moderate with foreign investors buying $35mm of mainland stocks as Northbound Connect trading accounted for 5.6% of mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.66 versus 6.68 yesterday
  • CNY/EUR 7.80 versus 7.83 yesterday
  • Yield on 1-Day Government Bond 1.56% versus 1.71% yesterday
  • Yield on 10-Year Government Bond 3.17% versus 3.18% yesterday
  • Yield on 10-Year China Development Bank Bond 3.64% versus 3.65% yesterday