Behind Ant Group’s Failed IPO, A Sign Of More To Come?

Jack Ma was going to get a little richer. He’s worth a cool $61 billion. He’s the creator of Ant Financial and Alibaba BABA and Ant Group. They’re all part of one big happy family. It was a sad day in early November after Ma and others were summoned to a meeting with financial regulators in Hong Kong. Ant Group’s monster $30 billion IPO was postponed.

News of the postponed IPO focused on some regulatory bottlenecks. But there could be more at play: alarm bells sounding off from Washington that suggested American investors might be turned off by Ant.

Ant Group’s “Risk Factors” section in its draft prospectus submitted to the Hong Kong Stock Exchange was over 50 pages long, with several material risk factors standing out. It used legalese to paint over the real world political, reputational and regulatory challenges the company could face in the period ahead if prevailing winds on China continue under a Biden Administration.

Without detailed knowledge of the overall risk environment related to the evolving bilateral U.S.-China relationship, the track record of risk that exists for Chinese tech companies dealing in sensitive user data was a red flag for some.

Prospective investors in the company’s stock would be hard pressed to obtain an adequate understanding of the underlying material risk factors associated with Ant Group or its affiliate firms through a reading of that draft prospectus, says RWR Advisory.


Here is one underlying risk:

Ant Group and Alibaba are both sizeable investors in, and customers of, Megvii Technology, an artificial intelligence (AI) startup that specializes in facial recognition technology.

This is an important company to keep in mind because Megvii was sanctioned by the U.S. Government and added to the Entity List of the Commerce Department’s Bureau of Industry and Security (BIS) in October 2019 for having been “implicated in human rights violations and abuses in the implementation of China’s campaign of repression, arbitrary detention, and high-technology surveillance” in Xinjiang province in far west China.

Ant Group did note the risk of export controls and sanctions and the impetus for such regulatory actions, including the potential application of its technology for “surveillance or military purposes.” The risk section, however, omits reference to the U.S. government’s recent actions against Chinese tech firms, including Megvii.

Concern over the detention of Uyghur Muslims has led to China company export bans by Customs and Border Protection in the U.S. Human rights can be a hammer the Biden Administration uses to highlight its toughness on China.

Chinese companies are coming under pressure now for sourcing everything from cotton to poly-silicon used in making solar cells for solar panels from Xinjiang, where the Uyghur detention camps are located.

Ant does mention their plausibility and does note that countries other than the U.S. can lash out in similar fashion. This would be a headwind for the stock.

Both Alibaba Group and Ant appear to be substantial shareholders of Megvii Technology mainly through indirectly owned subsidiaries, based on its filings with securities regulators.

Alibaba and Ant are also linked to Megvii through transactions and partnerships. This information was disclosed by Megvii in its own draft prospectus back on July 29, 2019.

That’s worth remembering.

As recent as February, Megvii Technology was planning to file for an IPO in Hong Kong. It would be the second time in a year, as their first application expired due to time constraints associated with the coronavirus lockdowns and — perhaps more importantly — Megvii’s inclusion on the “Entity List” in October 2019.

Megvii was expected to be IPO ready in the spring. Deloitte had finished auditing their 2019 financials. But as of October 2020, Megvii is MIA.

The Megvii-Ant connection is a problem, because some people in the Pentagon think they have the power to make it a problem.

U.S. investors need to pay attention to a June list by the Pentagon of Chinese companies loaded with subsidiaries and government military contracts that make them — as Margaret Atwood once wrote — “tightrope walking over Niagara Falls.”

The Blindside

The Pentagon released a list of Chinese military-associated companies operating directly or indirectly in the United States at the start of the summer. Because Wall Street was neck deep in the SARS 2 pandemic and hoping for it to end, it largely went unnoticed.

The list, originally commissioned by Congress in 1999 pursuant to Section 239 of the National Defense Authorization Act, includes several large, state-owned conglomerates with ties to the CCP and the People’s Liberation Army.

There are a few companies with ADRs involved in building telecom systems on islands in the South China Sea, and weapons manufacturers building missiles pointing at Taiwan.

Of course, some can say that China can ban investing in Raytheon or Lockheed Martin LMT because it is a U.S. military contractor, and that would make sense. Then again, Chinese individuals are barely allowed to invest here. The U.S. sends portfolio money to China by the boat load. China invests primarily in Treasury bonds.

The U.S. does not stop American investors from buying Chinese military contractors. Or suggest they not buy stocks in cameras making surveillance cams in forced labor camps. Americans are invested in those companies, either actively or passively through index funds.

One of those companies is China Mobil. It looks innocent, but to Washington it’s a problem.

There is no talk of delisting it. China hawks are working it. Don’t be blindsided.

In May 2019, the U.S. Federal Communications Commission denied China Mobile International’s an application to provide international telecommunications services between the U.S. and foreign destinations. The decision was made after an extensive review by relevant Executive Branch agencies, which examined potential national security, law enforcement, foreign policy, and trade policy concerns, concluding that the application “raises substantial national security and law enforcement risks” due to “several factors related to China Mobile USA’s ownership and control by the Chinese government.”

These are muddy waters. Many companies run afoul of Washington, and break laws. Brazil’s oil giant Petrobras was a piggy bank for a group of politicians there, some of whom used it to syphon off government contract money. Petrobras was sued.

Gazprom and Sberbank are sanctioned from conducting certain business with the U.S., but investors are not banned from owning their stocks and bonds. Both of those Russian state owned enterprises are in the VanEck Russia ETF. Anyone buying that ETF owns sanctioned companies.

Between Ant’s setback and concerns at the almighty Pentagon about Chinese companies, investors are going to have to get comfortable with greater risks in owning China.

China Mobile trades at a multiple of around 7.5 times earnings. America Movil of Mexico trades at 34.5 times. Orange of France trades in the high teens.

Will a Biden presidency take some of the risk off those securities? Only if the Pentagon and a China skeptical Congress stand down.

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