While the US presidential election has been the main item on Tuesday’s news menu, on the other side of the world a different drama was unfolding.
The Shanghai Stock Exchange announced the suspension of Ant Financial’s hotly anticipated IPO. Set to be the largest share sale on record, Thursday’s expected public listing was halted after the exchange cited changes in the regulatory environment. Only a day earlier, Ant Group and Alibaba’s co-founder Jack Ma was summoned by government officials and representatives of the People’s Bank of China for a meeting to discuss issues regarding the financial sector.
The new rules stipulate that if bank loans or loans from shareholders are lending companies’ funding sources, then they must have leverage of 1x over their net assets. Additionally, if ABS or bonds are their funding sources, they must maintain leverage of 4x over net assets.
The new regulation will have consequences to Ant Financial’s business model, should the 4x max leverage requirement be applied to its outstanding loan balance.
Since the news broke, Alibaba (BABA), owner of a 33% stake in Ant Financial, saw its share price plunge by 7%.
While Needham analyst Vincent Yu expects to see the deal go through at “some point in the near future,” he admits “uncertainties remain in the short run.” This has necessitated a rejig to his Alibaba model.
“We are adjusting our SBC expenses for FY 2Q21E to reflect the one-time adjustment caused by the increases in valuation to ~$280 billion for Ant Financial according to its IPO document, compared to its previous valuation of ~$150 billion,” Yu said. “The uncertainties of Ant Financial’s IPO process would lead to adjustments in its valuation, likely downward from its current price. Our SBC estimates, which are based on a valuation of $280 billion, should provide ample room for the changes in this line item.”
Overall, there’s no change to Yu’s BABA rating which stays a Buy. The $330 price target remains, too, and suggests upside of 15% from current levels. (To watch Yu’s track record, click here)
Alibaba might be drawing the Chinese regulators’ ire, but it has Wall Street’s full support. All 23 analysts who have recently posted a BABA review rate the stock a Buy. Alibaba’s Strong Buy consensus rating is backed by a $337.29 average price target, implying potential upside of 17% over the next 12 months. (See Alibaba stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
