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Supernova: Ant explodes beyond startup limits

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By Jonathan Breen
28 Jul 2020

Ant Group revealed last week that it is planning a multi-billion-dollar dual listing in Hong Kong and Shanghai. The company is often referred to as a startup, but it will float at a valuation well above $100bn and has been in business for six years. What is the right term for a company like Ant? It is time for a new moniker.

Jack Ma founded Ant in 2014 as the financial technology arm of Alibaba Group Holding. Ant is best known for the mobile payments app Alipay. At its last funding round in mid-2018, Ant was valued at $150bn. The usual terms for large ‘startups’, unicorn and decacorn — referring to companies with valuations above $1bn and $10bn, respectively — don’t come close to describing Ant.

The fintech giant is not alone. Chinese peers including ByteDance, the parent of popular mobile video app TikTok, and ride-hailing company Didi Chuxing are also ‘startups’ with valuations as high as $100bn. And both are said to be considering multi-billion-dollar IPOs.

The industry needs a new catch-all for these kinds of companies. GlobalCapital Asia supports the suggestion of one banker, who likens these firms to supernovas. The term seems justified by Ant’s dual mega-IPO plan and post-listing market capitalisation target of up to $200bn. The company will run two IPOs concurrently, one on the Shanghai Stock Exchange’s Star market and the other on Hong Kong’s stock exchange.

Supernova may also be appropriate for a less desirable characteristic of China’s unlisted behemoths. The term describes a stellar explosion at the last moments of a star’s evolution; similarly, much of the growth potential of China’s giant ‘startups’ is behind them.

Startups are typically valued based on their potential for growth, with many yet to have turned a profit by the time they pass a $1bn valuation. China has long provided the US with a flow of loss-making startups, partly because of the reputation of US investors as being savvy — and occasionally generous — estimators of future growth.

But valuing China’s supernovas with the same measure won’t be easy. They have already been through their periods of rapid growth and are already turning over billions of dollars in revenue. Last year, Ant booked around Rmb120bn ($17bn) in revenue, according to media reports. It has evolved from a disrupter of traditional banking to a hugely successful and intrinsic element of China’s financial system.

That highlights another factor to bear in mind about China’s supernovas — they are likely to face much more political risk than smaller firms. Most of the Mainland’s largest private sector firms are considered to have close relationships with the government. Ant is no exception. That puts them in the firing line.

The scariest pressure will not come from the Chinese government, which has so far been smart about letting tech behemoths grow and grow fast. Investors should be more worried about pressure from foreign governments. TikTok, ByteDance’s most valuable asset, has already been banned in India. A similar move is being discussed in the US.


Dual listings

Ant will be a test case for all the Chinese supernovas that are planning to go public. Its peers should take note of every element of the transaction.

Take one example that may become part of the supernova playbook: dual listings. The company is looking to make the most of the liquidity and hunger for tech stocks in Hong Kong and China’s new Star market.

Who can blame it? Hong Kong has been on the receiving end of multi-billion dollar secondary listings by US-listed Chinese national champions such as Alibaba, NetEase and JD.com, which have each returned with wildly successful IPOs on the HKEX within the past nine months.

The one-year-old Star market, meanwhile, has shown it can digest mega floats, such as Semiconductor Manufacturing International Corp’s Rmb46.3bn secondary listing earlier this month. Hong Kong and Shanghai present China’s tech behemoths with a route to tap the huge pools of capital on the Mainland and overseas simultaneously. The two markets offer an ideal mix for supernovas that expect to raise tens of billions in public equity.

The term supernova should be used selectively. Perhaps a good rule of thumb would be technology companies with less than 10 years of operating history and a projected valuation of at least $100bn. But wherever you set the cut-off, it seems likely that supernovas will light up Asia’s IPO markets over the coming years.

By Jonathan Breen
28 Jul 2020