Not a day has gone by without new froth on Ant Group’s impending initial public offering (IPO) for a Shanghai-Hong Kong dual listing — and for good reason. With a funding target of about USD 35 billion, it is set to be the biggest IPO in history, despite Ant Group’s questionable credentials as a true unicorn owing to its strong ties to Alibaba (NYSE: BABA), the world’s largest e-commerce retailer.
Meanwhile, the upcoming IPO of JD Digits, the fintech arm of JD.com (NASDAQ: JD), on China’s Nasdaq-like Star Market, has received less attention. As both JD Digits and Ant Group are heading for an IPO as soon as the third quarter of 2020, parallels are unavoidable given their coinciding timings, e-commerce roots, and similar fintech business focus. However, despite apparent similarities at first glance, the two companies have marked differences.
Differences in scale
Ant Group is set to inch out Saudi Aramco (2222.SR) as the largest IPO in history, while JD Digit is expected to raise just a tenth of Ant Group’s target, at USD 2.93 billion. Ant Group’s net profit of RMB 18 billion (USD 2.6 billion) in 2019 towers over JD Digits’ RMB 790 million (USD 115 million) in the same period, providing an incomparability of scale that is hard to ignore. Ant Group frames its triple threat bluntly, offering consumer credit, wealth management, and insurance services in China on its platform.
But JD Digits is no lightweight, as its post-IPO expected market capitalization of RMB 200 billion (USD 29.2 billion) could catapult it to the top of the Shanghai Star market, alongside or even ahead of current frontrunners SMIC (688981:SH) and Kingsoft Office (688111:SH).
Still, both JD Digits and Ant Group’s scale comes as a double-edged sword, because the two companies are heavily dependent on their massive affiliates, Alibaba and JD.com, for revenue. As of the first half of 2020, JD.com still contributed to 29.9% of JD Digits’ revenue, suggesting a dependence that is not unique to the Chinese ecosystem but presents significant growth risk.
Meanwhile, Ant Group and Alibaba remain intimately connected through a thicket of agreements, among them, related to payment services, cross-licensing, data sharing, and technology services that provide both heavy revenue streams and basic infrastructural support for Ant Group.
Avoiding a fintech pigeonhole
Both Ant Group and JD Digits have ambitions beyond fintech and have repositioned themselves as more than just financial service providers, albeit with different motivations and strategies.
JD Finance —as JD Digits was formerly called— was launched in 2013, while Ant Group’s flagship product Alipay’s debuted in 2004. This nearly decade-long headstart endowed Ant Group with 1.2 billion users in a business heavily reliant on commissions. But it would be hasty to represent JD Digits just as a smaller version of Ant Group.
JD Digits pivoted to a tech solution provider for financial institutions largely because Ant Group was already dominant in its fintech products. In 2018, JD Finance decided to reflect a new focus as a broader “tech” platform, altering its name to JD Digits. Rather than tackling financial institutions head-on, JD Digits tries to complement them through products such as AI, blockchain-based smart city, and digital farming technologies, going so far as to launch a slew of smart city research institutes across China to pivot from its previous fintech obsession.
JD Digits’ IPO prospectus also explicitly identifies Salesforce and Alibaba Cloud as its peer companies, both of which specialize in enterprise products. JD Digits in particular draw parallels to Salesforce’s customer relationship management platform and Alibaba Cloud’s role as an IaaS provider of Internet of Things (IoT) and cloud computing services. These are all areas that JD Digits is trying to pivot towards away from a singular focus on fintech.
Meanwhile, Ant Group maintains a complete grip on financial services. Aside from Alipay, Ant Group also offers a suite of financial products such as Yu’e Bao, previously the world’s largest money market fund, and Zhima Credit, an independent credit filing and scoring system for individuals.
Ant Group is also pivoting to become a “super app” by adding hundreds of mini programs to challenge Meituan as China’s dominant on-demand services platform. Earlier in 2020, Alipay announced a new three-year strategy to broaden its horizons from simply being a financial products platform, into a “one-stop digital life platform,”, serving different users’ needs.
Rumors of Ant Group’s listing swirled since as early as 2017, but inopportune market conditions and the shadow of tightening regulatory restrictions in the finance industry have stymied it. Yu’e Bao, for instance, had to voluntarily curtail its expansion due to unsubtle government concerns over it becoming too big to fail, with over one-third of China’s population partaking in its money market fund (MMF) products.
Despite their marketing pivots, both companies remain subject to a flurry of tightening regulations around consumer lending and online payments, such as China Banking and Insurance Regulatory Commission’s (CBIRC)’s newest round of rules on 16 September, which restrict external financing methods and the use of funds for microloan companies.
Evolving businesses
But Ant Group’s pivot away from fintech is more cosmetic than not. In January 2020, Ant Group applied for a wholesale digital banking license in Singapore, alongside its armory of financial licenses in China ranging from payments, online banking, insurance, and micro-lending. Ahead of its IPO, it reportedly laid grounds for a new consumer finance firm in southwestern China.
Aside from new ventures, the paths taken by Ant Group and JD Digits are reflected in their existing revenue streams, even if some of both companies’ services often overlap with each other, for example, JD Digits’ consumer loan services JD Jintiao and Ant Jiebei, as well as credit management services JD Baitiao and Ant Huabei.
However, JD Digits is looking to swerve towards its B2B and B2G businesses to drive growth. Its IPO prospectus classifies its revenue streams into Business-t0-Business (B2B), Business-to-Government (B2G), and Business-to-Financial Services (B2F) components, which accounted for 52.3%, 5.57%, and 41.48% of its revenue in the first half of 2020 respectively.
Its listing materials emphasize a so-called TIE (Technology + Industry + Ecosystem) service structure as a new driver of growth, outside of its old stomping grounds for clientele from financial institutions. It allegedly has 600 clients in the financial institution sphere, but since then, has expanded to include over 40 public service organizations operating in the urban space. JD Digits is particularly keen to emphasize its newfound direction as a technology services partner. According to listing documents, R&D staff accounts for nearly 70% of its staff, while its ecosystem-building efforts will be carried out jointly with JD.com’s main retail business and JD Logistics, its fellow JD affiliate.
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For Ant Group, its current revenue streams are also heavily skewed towards payments and financial platforms, leveraging its access to China’s massive consumer base to siphon commissions from businesses. As of the first half of 2020, digital payment and merchant services, and “InvestmentTech”, and “CreditTech”, the firm’s three main business divisions, contributed 35.9,%, 15.6%, and 39.4% of its revenue respectively.
Crucially, it can manage this tilt because of its super app Alipay, the world’s largest mobile and online payments platform, which had intimate origins in Taobao, the world’s largest e-commerce platform. Since then, it has since spun into a colossus cash cow of merchant commissions. Its current incarnation as Alipay Life looks set to cross-sell more daily life services ranging from delivery to medical services, opening more touchpoints for merchants and consumers alike.
In China’s hypercompetitive Internet industry, Ant Group and JD Digits are going out of their way to avoid stepping on each others’ toes. But will this detente hold once their listings take off, and will they be able to sustain their diverging paths? The clock is ticking.
