4 Ways U.S. Investors Can Get a Share of Ant Group’s IPO
Group of ants, the Ali Baba (NYSE: BABA)Backed fintech company that owns the Alipay digital payment platform, will soon go public in one of the largest IPOs in history. Ant was valued at $ 150 billion after its last funding round in 2018 and could reach a valuation of $ 200 billion on its public debut.
Ant’s revenue grew 38% year-on-year to 72.5 billion yuan ($ 10.7 billion) in the first half of 2020. Of that total, its digital financial services revenue grew 56% for reach 46 billion yuan ($ 6.8 billion). Its net profit rose 21% year-on-year to 21.9 billion yuan ($ 3.2 billion).
Alipay served 711 million monthly active users (MAU) at the end of June, and the app has processed 118 trillion yuan ($ 17.4 trillion) in payments in the past 12 months. His main rival, Tencent‘s (OTC: TCEHY) Tenpay (which includes WeChat Pay and QQ Wallet), served around 940 million MAU last year, according to an Ipsos survey.
Ant appears to be a promising coin in the growing Chinese fintech market, but it will only be released to the public in Hong Kong and Shanghai due to the US-China trade war and the recent threats to delist Chinese stocks listed in the United States. This may be disappointing news for U.S. investors, but there are still four more ways to profit from Ant’s upcoming IPO.
1. Use a broker with international access
Many brokers based in the United States do not offer investor access on the Shanghai and Hong Kong stock exchanges. However, three notable brokers – Interactive brokers, loyalty, and Charles Schwab – allow American investors to buy shares in Hong Kong.
Investors are unlikely to be awarded any IPO shares through these brokerage firms unless they are already high profile clients, but they will be able to buy Ant shares on the open market. However, investors should research carefully commissions, taxes and exchange rates before carrying out transactions abroad.
2. Invest in Alibaba
An easier way to invest in Ant is to buy shares of Alibaba. Alibaba previously held an agreement with Ant that entitled it to 37.5% of the pre-tax profits of its fintech subsidiary. But last September, Alibaba traded those rights for a 33% stake in the company.
from Alibaba participation in Ant generated 5.32 billion yuan ($ 752 million) in investment profits, or 4% of its net profit, in fiscal year 2020. It also generated fees related to the participation agreement previous profits in the first half of the year.
It is not known whether Alibaba will sell shares of Ant after its IPO, but it will likely remain its largest shareholder. Ant will not generate as much revenue for Alibaba as its core e-commerce and cloud businesses, but it could increase its long-term investment profits. Meanwhile, Alipay’s expansion – which is closely tied to Alibaba’s online marketplaces and retail stores – will strengthen Alibaba’s ecosystem and widen its gap against Tencent.
3. Buy related ETFs
ETFs (exchange-traded funds) that focus on recent IPOs and Asian markets will likely add shares of Ant to their portfolios as well.
Speaking to CNBC, CFRA analyst Todd Rosenbluth recently predicted Renaissance Capital International IPO ETF (NYSEMKT: IPOS), which allocates more than half of its portfolio to Chinese stocks, is said to be one of the first ETFs to buy shares in Ant.
Rosenbluth’s other top picks include the IShares MSCI China ETF (NASDAQ: MCHI) and the ETF SPDR S&P China (NYSEMKT: GXC), both of whom could add shares of Ant in the months following its IPO. However, these ETFs all have large baskets of stocks, which would limit their overall exposure to Ant, and charge expense ratios between 0.6% and 0.8%.
4. Wait for an ADR
Finally, investors can wait for Ant’s ADR (American Depositary Receipt) to reach the American stock exchanges. ADRs are either sponsored, ie a company officially sets them up with a custodian bank; or unsponsored, which means that a broker sets them up without the direct cooperation of the company.
ADRs are also divided into three levels. Level 1 ADRs, which are not sponsored and only trade on OTC exchanges, are generally the riskiest because they do not need to file regular reports with the SEC. Level 2 and Level 3 ADRs must file SEC reports, while Level 3 ADRs are subject to the more stringent reporting requirements. Only level 3 ADRs are allowed to be listed on the main US stock exchanges.
The trade war has extinguished hopes of an official Level 3 ADR listing for Ant, but a Level 1 ADR could still reach OTC markets through market intermediaries. However, investors should be aware of the risks if these unsponsored stocks become available and be aware that OTC stocks are also exposed to proposed regulations targeting Chinese stocks listed in the United States.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.