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Please note: A registration statement relating to sales of the shares of Ant Group Co. Ltd. has been filed with the Securities and Futures
commission and China Securities Regulatory commission but has not yet become effective. Those securities may not be sold, nor may offers
to buy be accepted, prior to the time the registration statement becomes effective. Bernstein is not involved in this offering and is not a
connected advisor to this IPO. All the financial information contained in this report is from publicly available sources, including Ant Co. Ltd.'s
preliminary prospectus. A preliminary prospectus relating to those shares is available HERE. Neither the information contained in this
publication, nor any opinion expressed herein, constitutes an offer, or an invitation to make an offer, or to buy or sell any securities, including
any shares of Ant Co. Ltd.
See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
The Ant Model
Alibaba
ecosystem
ONLINE merchants OFFLINE merchants
Preferred payment option for online Increasingly the preferred option (along
merchants especially within Alibaba ecosystem with WeChat Pay) for offline as well
Gross margin
Payment revenues of 52 bn in of 20 bps per
2019 (1) transaction
AliPay’s Total
Payment Value
(2019) of 111 tn
ANT's Digital Payments value (2019, RMB tn)
120
100
80 63
60 Net transaction
111
2 margin of ~10
40
20 bps
20
25
0
Consumption Financial Other Personal Total TPV
payments payments payments payments
Transaction cost
Transaction fees of 47bn in
of 10 bps per
2019 (2) transaction
1,500 1,409
8%
6.1%
6% 4.9%
1,000 4.6% 4.8% 4.7%
4%
500
2%
0 0%
ANT BoC CCB ICBC CMB ABC ANT CMB BoC ABC CCB ICBC
21
20
15
representing
16% of total
10
5 3.4
1.3
0
Total Online personal Ant Group AuM Tianhong AuM
investable asset
China total GWP (RMB bn) Ant Insure tech premium and revenue (RMB bn)
breakdown 40 100%
26% 31% 24% 21%
5,000
CAGR 10'-19' 35 90%
4,500
Life: 11% CAGR 17-19' 80%
4,000 30
P&C: 13% Premium: 105% 70%
3,500
A&H: 27% 25 Revenue: 97%
3,000 60%
2,500 20 50%
2,000 40%
15
1,500
30%
1,000 10
20%
500
5
10%
0
2010201120122013201420152016201720182019 0 0%
2017 2018 2019 1H20
Life P&C A&H
Total Premium Revenue Revenue as % of total premium generated
Big Tech
Conventional Telecom
Payments Players Players
India
Fintech
Disruption
Others
500
Aug-16
Sep-16
Oct-16
Nov-16
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Interoperable
Jan-19
Feb-19
UPI - Transaction Volume (Million)
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Multi-network
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
UPI changed everything in India and now expect disruption to UPI
Aug-20
Sep-20
CHINA FINANCIALS, INDIA FINANCIALS |
Oct-20 Est. 2 Bn+
13
China vs India: some high level comps
China India
MDR
Mobile Payments ~20 bps Zero MDR on UPI
Credit Cards ~60 bps ~1.75%
China figure considers only “consumption” digital payments of third party payment players, India figure is based on P2M payments as % of PFCE
** Estimated split between cards and third party payment apps (note however that mobile payments are also primarily through linked bank cards)
China India
Ant PayTM
Payments
Market Structure Duopolistic Competes with BigTech due to
UPI open architecture
No MF Manufacturing
(currently);
Invest-tech & Insure- Manufacturing +
tech Distribution Insurance manufacturing
- early
Digital Payments
Credit-tech
India has a myriad of models – the right fit will emerge with time
Invest-tech
Nascent stages – Tech players are present in MF distribution & Broking but not on manufacturing side
PayTM is the largest originator (by volume) of new SIPs, PhonePe has launched an
algo-based financial advisory platform. NJ Invest and Fisdom are pure-play investment /
insurance distribution platforms.
Insure-tech
Tech-enabled Insurers are few, online distribution platforms have strong foothold
Merchant-tech
Many angles to digitize the merchant value chain
Udaan plans to digitize small FMCG retail to drive its core supply
chain business and lending
Alibaba: Total Revenue (RMB Bn) Ant Revenues and Net Income
550.0 140,000
509.7
500.0
120,000
450.0
GMV of BABA vs
400.0 376.8 total: ~60%
100,000
350.0 CAGR:
300.0 56% 80,000
250.3
250.0
200.0 60,000
158.3
150.0
101.1 40,000
100.0 76.2
52.5
50.0 34.5
20.0
11.9
0.4 0.7 1.4 2.2 3.0 3.9 6.3 20,000
-
2004
2005
2007
2008
2009
2010
2012
2013
2014
2015
2017
2019
2020
2006
2011
2016
2018
0
2017 2018 2019
By 2010, Alipay had connections with 200 2014, Alipay spun off as ‘Ant Financial’ –
banks; virtual accounts became popular, ‘everything should start small’ …
eventually leading also to the birth of Yu’ebao* including in Microfinancing.
(2013) – investing of ‘excess’ balances Ant created the Online Merchant Bank of
Zhejiang focused on SMEs
Source: PBOC, Bernstein analysis
Note: Yu’ebao attracted millions of users within days, initial returns reached 7%
Access to credit; gets lower Able to use insights from large Avoids acquisition cost; for a
rates (given Ant’s ability to base to originate better-quality reasonable fee, able to lend
assess credit worthiness) credit for bank partners, for a to this segment that’s
reasonable fee otherwise uneconomical
12.0% 11% 2%
10.0%
1.5%
6.0%
5%
a) Can the Ant model ‘disintermediate’ existing players – banks, brokers, insurers?
b) Where might we see replication outside China? What are key requirements?
c) What would traditional banks do? What will their roles become?
India Financials
India is a growth market and investors generally seek growth-based returns in India. We believe all lenders in India trade on what market believes as the
sustainable earnings growth momentum. Lenders that have sustained cross-cycle earnings growth despite sector asset quality concerns trade at a premium.
On the other hand, lenders that have been inconsistent in earnings growth get penalized by the market until they build investor confidence again. We value our
coverage on a target P/E multiple based on one-year forward earnings calibrated by trading history and our expectation of three-year sustainable earnings
growth. We use a one-year forward multiple based on FY'22 earnings to arrive at FY'21 end target price. We corroborate our target price earnings multiples
with a P/BV based multiple as a secondary check. We also believe the market can be brutal with growth stocks if the growth story shows any structural
weakness and thus, we constantly stress-test for structural growth weakness across our industry and company investment thesis.
India Financials
Key risks to our sector thesis
CHINA FINANCIALS, INDIA FINANCIALS | 33
Disclosure Appendix - Risks
+ Asset quality risks in consumer lending
+ Excessive competition in retail lending due to margin pressures
+ Banks counter net interest margin pressures by going up the risk curve sharply that boosts earnings in the near term
Downside risks
+ New management incoming in H2FY'19 fails to meet expectations
+ Credit costs remain elevated due to unexpected asset quality shocks arising from macro / sector specific issues and / or resolution process becomes time-
consuming
+ Margins fail to improve due to competitive pressures / foray in low risk low yielding products / poor asset-liability management
+ Operating costs don't remain under control as investment in digital initiatives and new branches outpace the benefits therefrom
+ KMB continues its conservative loan growth behavior lower than market expectation to sustain its premium valuation
+ IIB is able to retain the talent at the top level as the new CEO takes over from Mar'20
+ Any significant synergies from Bhafin merger, like lower overall cost of funds, building retail liability franchise
+ IIB fee income streams get disrupted by sectoral slowdown in international trade
+ IIB's commercial vehicles, microfinance portfolio and LAP portfolio could be impacted by worsening credit quality
+ IIB's reliance on off-balance sheet items to generate fee income becomes unsustainable
+ Increased competition in the SME finance space due to entry of several new players including fintech players
+ Credit risks in construction finance and vehicle finance space
+ Faltering of growth momentum during the transition phase and difficult to recover therefrom
+ Transition costs spiral out of control
+ Key man risk
+ Manages to maintain loan book growth and fee income growth to deliver healthy operating profit growth
+ Manages to contain credit costs below our expectations as target borrower segment is at risk from Covid disruption
Bandhan Bank Ltd
Downside risks to our target price
+ Political risk due to concentrated microfinance exposure in select Eastern and North Eastern states
+ Operating cost overrun due to geographic and product expansion
+ Sub-par small business lending portfolio leading to higher credit costs
+ Key man risk
+ Manages to maintain growth in loans and fee income to protect its track record of consistent, high growth
+ Manages high-bounce rates and collections better than expectations to keep credit costs in check as credit risks in the consumer lending space play out.
+ New management is able to recover business growth and profitability trajectory ahead of market expectations
+ Asset quality issues are demonstrably resolved and bank can focus on growth again
+ SBI witnesses significantly protracted NPL cycle and elevated credit costs
+ SBI starts to lose significant market share across customer segments
+ SBI is unable to manage integration of its subsidiaries resulting in significant negative synergies from merger
+ SBI is unable to control any spiraling employee retirement costs and restructuring costs
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