Alibaba paves way for potential IPO as profit rockets

Acquisition of Ant Financial’s stake could be preparation for Chinese ecommerce major's potential initial public offering, experts say

Alibaba Group's operating margin shrank to 31 per cent in the last quarter from a year earlier. Reuters

Alibaba Group agreed to buy a 33 per cent stake in Ant Financial, a key step in clearing the way for an initial public offering of the Chinese payments giant as the Chinese ecommerce juggernaut posted a 35 per cent surge in net profit in the third quarter, rising to $3.7 billion thanks to the annual Singles Day sales bonanza in November.

"Alibaba had another great quarter driven by the continued strength of the Chinese consumer and the wide and innovative range of services we provide for merchants and consumers," Alibaba chief executive Daniel Zhang said in an earnings report, according to AFP.

China’s biggest ecommerce operator will buy new shares in Ant in exchange for certain intellectual property rights, the company said Thursday. There will be no cash impact, it added. Alibaba also raised its annual sales forecast after posting earnings that topped estimates, Bloomberg said.

Buying a stake in Ant would be Alibaba’s first investment in its financial affiliate since the Alipay business was controversially spun out from the e-commerce operator by founder Jack Ma in 2011. The two companies reached a profit-sharing agreement in 2014 ahead of Alibaba’s own IPO, an arrangement that will end with the equity purchase.

“This acquisition of Ant Financial’s stake could be a preparation for its potential IPO,” said Steven Zhu, a Shanghai-based analyst with Pacific Epoch. “Alibaba was able to improve revenue growth because performance-based ads were able to generate better revenue on mobile apps and its catered user pages drove more sales.”

Ant Financial, known formally as Zhejiang Ant Small & Micro Financial Services Group, operates Alipay as well as money market funds and credit scoring. It’s based in Hangzhou, China, the same hometown as Alibaba.

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The internet finance behemoth is one of Mr Ma’s most closely watched assets and was valued at $74.5 billion in 2016 by CLSA. Ant Financial almost doubled earnings in fiscal 2017 as it expanded its footprint in wealth management and overseas markets. The deal will likely be subject to regulatory approval.

Alibaba said revenue in the 12 months ending March will rise 55 to 56 per cent, up from a range of 49 to 53 per cent previously. Third-quarter revenue rose 56 per cent to 83.03 billion yuan (Dh48.47bn), topping estimates for 79.7bn yuan. Adjusted earnings-per-share were 10.61 yuan, surpassed projections for 10.53 yuan.

The e-commerce giant’s revenue growth has been underpinned by Chinese consumer strength and investments to link its business to traditional retailers. Billionaire Mr Ma’s splurged $13bn since 2015 in brick and mortar companies - shaking up supermarkets and department stores, equipping them with management systems, and investing billions into artificial intelligence and cloud computing.

"Reacceleration in overall e-commerce growth shows the early benefits of Alibaba’s new retail strategy," Karen Chan, an analyst at Jefferies Group, wrote in a research report. Alibaba will "extend its last-mile reach to the 60 per cent offline consumer population."

Alibaba stock has gained 18.5 per cent this year compared with a 4.4 per cent gain for the NYSE Composite Index.