Ant Group to face stricter supervision
Chinese authorities plan to turn Ant Group into a financial holding company whose financial activities are put under stricter regulatory supervision in a move related to a monthlong antitrust probe.
A "comprehensive and actionable "revamp plan of Ant was released on Monday, providing a business overhaul in five aspects where the company should work to "correct its behavior of unfair competition", according to a joint statement by four government agencies including the People's Bank of China, the central bank.
The authorities ordered the company to disconnect its payment app Alipay from sister credit products like Huabei and Jiebei in order to offer customers more payment choices.
The company should end its monopoly on information collection, improve corporate governance, and manage liquidity risks of important fund products and actively reduce the balance of its money market fund Yu'EBao.
The IPO plan for Ant, the financial affiliate of Alibaba Group, was suspended days before its trading debut in November, when authorities cited a change in the regulatory environment.
Meanwhile, Alibaba Group Holding Ltd said on Monday that the antitrust penalty imposed on it is unlikely to have a "material negative impact" on the company's business, and it pledged to invest more in improving how it serves merchants and customers.
"We don't expect a material negative impact," Daniel Zhang, chairman and CEO of Alibaba, said in a conference call to investors on Monday. "We don't rely on exclusivity to retain our merchants," he added. Alibaba's Hong Kong listed shares soared 6.6 percent in trading on Monday.
The State Administration for Market Regulation fined Alibaba 18.2 billion yuan ($2.8 billion) on Saturday for abusing its dominant position over rivals and merchants on its e-commerce platforms.
Zhang said even under the previous model, only a number of flagship stores operated directly by brands were under that exclusivity model. He said merchants are free to work with Alibaba under the flagship format, or under the distribution system with other peer platforms, or can collaborate with distributors.
Instead, the company will further strengthen the customer experience and provide new tools to merchants with lower costs, by waiving service fees and improving technologies. Category expansion, the introduction of new brands and new category incubation remain key to business growth.
These moves will incur additional costs, which Zhang said are "not one-off costs but a necessary investment" in order to enable merchants to operate better.
"We have reserved billions of renminbi in additional annual spending to support initiatives in the year ahead," the company's Chief Financial Officer Maggie Wu said in the call.
"We view the announcement of the fine by the State Administration for Market Regulation on Saturday as an indication of the closure of the four-month antitrust investigation into Alibaba," said Alicia Yap, an analyst at Citigroup Global Markets Asia.
"The conclusion of the investigation and Alibaba's decision to waive its right to appeal, or hold a public hearing, suggest that the company wanted to move forward and rebuild its business operations," she said in a research note after the call on Monday.
The management team said it feels "comfortable" that there is nothing wrong with the company's fundamental business model, and reassured investors that the model is "fully endorsed and affirmed by the authorities".
"The good thing is we have gone through this process with the regulators, we've gotten to know their thinking well," said Alibaba Executive Vice-Chairman Joe Tsai, "We have very established plans to correct some of the practices … and we have established very good internal control and compliance systems in order to continue to comply with the law."
"It's a costly fine, but as the market has already factored in the bad news, there are reasons to be bullish now," said Liu Xingliang, a member of the Telecommunications Economics Expert Committee of the Ministry of Industry and Information Technology.
"While the internet has been forcing all industries to transform, it's time for the internet to revamp itself," he said. "This incident will encourage Alibaba and the entire sector to learn to operate in compliance, stay within the law, and respect the market, peer companies and partners."
Yap, who maintained the stocks' "buy" rating and set target prices of HK$328 in Hong Kong and $338 in New York, said, "We believe with the latest development, together with recent earnings revision reset, it could help lift the overhang that has weighed on share price performance in the last few months."