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Breakingviews - Alibaba will feel the Ant sting

Logos of Ant Group and Alibaba are pictured at the headquarters of Ant Group, an affiliate of Alibaba, in Hangzhou, Zhejiang province, China October 29, 2020. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - Alibaba is starting to feel the Ant sting. The e-commerce giant’s ties to the reeling financial technology company are weighing on its $780 billion valuation. A suspended initial public offering and Beijing’s new credit rules have hit just as growth at Alibaba’s core shopping business slows. Boss Daniel Zhang will have to start pulling harder on other levers.

Since Alibaba converted a profit-sharing agreement into a 33% stake in the payments affiliate last year, the two Jack Ma-founded companies have worked closely together. More than two-thirds of transactions on Alibaba’s Chinese retail sites, for example, were settled through the Alipay app in the year to March. It also has the right to nominate two directors on Ant’s board. Unusually, the pair have equity-award schemes linked to one another. In the three months to September, Alibaba reported over $2 billion worth of Ant share-based compensation expenses.

Ma’s latest woes will be shared by Zhang. Alibaba’s Hong Kong-listed stock price tumbled 7.5% following the shocking last-minute suspension of Ant’s record share sale. The listing could be delayed for months. And even then, Ant’s mooted $300 billion-plus valuation is apt to take a hit if new online lending rules dent growth.

There are other worries for Alibaba, too. State regulators are investigating how Ant uses offerings like Huabei, a virtual credit card service, to encourage poor and young people to amass debt, Reuters reported. Zhang says his company does not track how much of its shopping transactions are funded by the service, but Ant’s IPO prospectus touts that “many consumers select Huabei as their preferred funding option in Alipay for online and offline purchases”.

A slowdown in the country’s consumer credit market could be painful for Alibaba. Revenue in its main commerce unit, which accounts for 84% of the total, grew just 29% from the September quarter 2019, to $19 billion. That’s down sharply from the 40% pace a year earlier despite the broader uptick in online shopping because of the pandemic. Zhang has been ploughing funds into initiatives such as cloud computing and, more recently UK luxury retailer Farfetch. The pressure to deliver elsewhere is on the rise.

This item has been corrected to amend last sentence of the second paragraph to reflect share-based compensation expenses, not the value of shares distributed in the quarter.

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