Shares of Alibaba Group (9988.HK) and Tencent (0700.HK) experienced gains in Hong Kong on Monday as the $984 million fine imposed on Ant Group by China was interpreted as a signal that the regulatory crackdown on the country’s technology sector may be coming to an end.
Following the penalty announcement on Friday, Ant Group, an affiliate of Alibaba founded by Jack Ma, revealed plans for a $6 billion share buyback. The buyback, which values the fintech company at a 75% discount compared to its abandoned initial public offering (IPO), aims to provide liquidity and certainty for investors.
The cancellation of Ant’s IPO in late 2020 marked the beginning of a broad clampdown by Beijing on various industries, including technology and education. Regulators sought to address what they viewed as excesses and poor practices after years of unchecked growth.
On Friday, the People’s Bank of China (PBOC) stated that most of the significant issues in the financial businesses of platform companies had been rectified. Regulators will now shift their focus to industry-wide regulation rather than targeting specific companies.
In a note to clients, Huatai Research analysts described this announcement as a crucial milestone toward establishing a regular, clear, and visible regulatory environment for China’s internet companies.
The heightened scrutiny over the past two years created an uncertain climate that resulted in significant declines in the share prices of China’s tech sector, including Alibaba, Tencent, and Meituan (3690.HK), a food delivery group.
Alibaba’s Hong Kong shares have dropped by 71% since early November 2020 when the Ant IPO was scrapped and the regulatory crackdown began.
— Reuters Tech News (@ReutersTech) July 10, 2023
On Monday, Alibaba’s Hong Kong-listed shares closed 3.2% higher, surpassing the 0.6% increase in the benchmark Hang Seng index (.HSI). Tencent closed 0.7% higher.
In the premarket trading in the US, Alibaba’s New York stock experienced a 0.1% decline.
Daniel Tu, the founder of Active Creation Capital, explained that Beijing’s efforts to finalize penalties and resolve outstanding issues with Ant and other tech companies aim to address China’s challenged economic recovery and alleviate investor concerns. It also fulfills commitments to support the growth of the private sector.
Aside from Ant, Chinese authorities also fined Tenpay, Tencent’s online payment platform, nearly 3 billion yuan ($414.88 million) for issues related to customer data management.
ANT GROUP’S DEVALUED POSITION
Alibaba, which spun off Ant 12 years ago and retains a 33% stake, stated on Sunday that it was considering participating in the share buyback, which would transfer shares to an employee incentive scheme.
Ant’s major shareholders, Hangzhou Junhan Equity Investment Partnership and Hangzhou Junao Equity Investment Partnership, representing the executives and employees, will not participate in the buyback.
Foreign investors became involved in Ant during the third funding round in 2018.
Ant proposed repurchasing up to 7.6% of its equity interest at a valuation of around $78.5 billion. This is significantly lower than the $315 billion valuation in 2020 when the company was on track for the world’s largest IPO before it was halted by Chinese regulators.
The buyback will provide an opportunity for Ant investors who participated in funding rounds from 2015 to 2018 to sell their stakes in the company.
According to the 2020 IPO prospectus, Ant’s largest onshore investors were the National Council for Social Security Fund, Zhifu (Shanghai) Investment Centre, Shanghai Zhongfu Equity Investment Management Center, and China Life Insurance.
The People’s Bank of China stated on Friday that Ant and its subsidiaries had violated laws and regulations in areas such as corporate governance, financial consumer protection, and anti-money laundering obligations. This resulted in one of the largest fines to date for a Chinese internet company.
The finalized penalty could potentially enable Ant to obtain a financial holding company license, restore its growth rate, and eventually revive its plans for a stock market listing. However, analysts are uncertain about whether Ant will proceed with a listing in the near future.
Oshadhi Kumarasiri, an analyst at LightStream Research, pointed out that the buyback’s purpose, according to the company, is to provide liquidity to existing investors and attract and retain talented individuals through employee incentives. Kumarasiri suggested that Ant could have achieved these objectives through an IPO, indicating that the IPO is effectively on hold.
($1 = 7.2310 Chinese yuan renminbi)
Reporting by Scott Murdoch in Sydney and Julie Zhu and Donny Kwok in Hong Kong; Additional reporting by Selena Li in Hong Kong; Editing by Anne Marie Roantree, Jamie Freed, David Goodman, and Barbara Lewis.