Morningstar - Q4 2020 - 27

project (jointly owned with BHP), alleging failure to
consider impacts on culturally sensitive areas.
Other companies in the industry face comparable
issues. Cook believes the destruction of the
Juukan site will draw more attention to
racial injustice and mining practices around the
world and the exploitation of local, often
indigenous, groups.

Ant Is Growing Strong We forecast 21% average annual revenue growth over the
next decade.
Digital payment and
merchant services

Operating Margin

CreditTech
InvestmentTech

InsureTech
Others

Revenue
CNY Million

40%

1,000,000
10-year revenue CAGR
forecast at 21%

30%

30

800,000
600,000

Ruth Saldanha is a senior editor at Morningstar Canada.

20
400,000

Ant Group Has Built
a Wide Moat

10

200,000

0

0
2018

2020

2022

2024

2026

2029

Source: Morningstar.
ASIA

China

China's Ant Group is predicted to be the world's
largest initial public offering, with an IPO target
of HKD 1.95 trillion reported by Bloomberg on
Sept. 21. Our valuation of Ant Group is HKD 2.45
trillion. This translates to a price/earnings ratio of
53 and 45 times for 2021 and 2022, respectively.
This multiple may seem high, but we note that it is
due to Ant being at the early stage of monetization.
Best known for its Alipay mobile payments service,
Ant is already China's largest digital financial
services provider in revenue terms with a network
of over 711 million monthly active users and 80
million merchants on Alipay. Ant has been able to
ride the growth of parent Alibaba BABA, but we
expect future earnings to be increasingly driven by
the steps taken to monetize its network through
its digital financial platform services.
Its access to the vast amount of merchant and
customer data allows Ant to expand its credit
services, while managing risks, to small
businesses and people who have not been well
serviced by the traditional financial system.
Its investment portal provides asset-management
partners with a way to reach China's youth,
presenting an untapped investor market. Similarly,
its insurance platform allows China's masses
to gain access to a variety of insurers.

These three pillars, which already made up 56%
of Ant's revenue in 2019, are expected to
help drive a 10-year revenue compounded annual
growth rate of 21% and operating profit CAGR
of 26% in our forecast. This leads to our
discounted cash flow-derived fair value estimate
of HKD 2.45 trillion, or USD 316 billion.
The key risks are largely regulatory, as the
government might want to reduce the dominance
that Alibaba and Tencent TCEHY have in online
activity. For example, the move to standardize a
quick response, or QR, code may allow banks
and other Internet service providers to increase
their share of the digital payments space.
However, we don't see this as a significant priority
for banks. We also think the capital required
for these players to maintain sustainable market
share is prohibitive for smaller competitors.
We rate Ant as having a wide moat. Only 6% of
our current Asia coverage list and 15% of our
global universe have wide moats. Despite policy
risks, we think Ant will be able to defend its
leading market position for at least 20 years, giving
the company a long duration of positive economic
profit. Given the strength of its network and its
already established market position, we anticipate
Ant's return on invested capital to exceed its

weighted average cost of capital by a wide spread
for the next 20 years. Network effect, in which
Ant's selling proposition to its customers benefits
from the growing size of its network, is an attribute
shared by Alibaba's and Ant's global peers such
as American Express AXP and PayPal PYPL. This is
a strong moat source once established, and
we expect this to help offset potential risks from
new competition.
Relative to most standards the customer reach
of Ant is quite unparalleled. Its third-party
payments platform, Alipay, has 711 million monthly
active users and 80 million merchants; its
investment platform has 642 million users, and
for the 12 months through June 30, it sold
insurance to 570 million Alipay users. We think
this exemplifies the potential monetization and
cross-selling reach of Ant as a whole. The
proceeds from the IPO are slated to be spent to
improve Ant's technology infrastructure, on
research and development for new products and
services, and for expansion of its cross-border
digital payments business.
Chelsey Tam and Iris Tan, CFA, are senior equity analysts
with Morningstar.
David Pang is an associate equity research analyst
with Morningstar.

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