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1. Ant Group’s growth and margins are positioning it for the largest IPO ever to date
  • This week, Alibaba affiliate Ant Group (formerly Ant Financial) filed for a dual-listing IPO on the Hong Kong Stock Exchange and the Shanghai Stock Exchange’s STAR Market, targeting a valuation of $200-300B. Ant Group plans to sell at least a 10% stake and raise $30B in the combined offering, surpassing Saudi Aramco’s record $29B IPO in Dec 2019 and Alibaba’s own $25B IPO in 2014.
  • In 2019, Ant Group reported $2.6B in net profit on $17.6B in revenue – a 15% margin. The 6 months ending Jun 2020 look even better – $3.2B in net profit on $10.6B in revenue, representing 38% revenue growth (year-over-year) and an impressive 30% margin. The increase in profitability reflects Ant Group’s reduced reliance on payments – which comprised just 36% of revenue in the first half of 2020 vs. 55% in 2017.
  • Ant Group’s flagship Alipay super app was originally the payments service for Alibaba’s ecommerce business. It spun out in 2011 into an entity later rebranded as Ant Financial in 2014, before rebranding again as Ant Group in Jun 2020 – a move intended to emphasize technology rather than financial services. Alipay today has 700M+ monthly active users and 1B+ yearly active users. It serves as a leading intermediary between Chinese consumers and an extensive online and offline network of 80M+ merchants. 96% of its revenue comes from mainland China (where it handles $17T in payments volume annually), though it provides services in 200+ countries.
  • Ant Group’s revenue come from two main categories: (1) Digital payment and merchant services (36% of H1 2020 revenue), largely comprised of transaction fees; and (2) its fast-growing digital finance technology platform (63% of H1 2020 revenue), which encompasses lending (39%), wealth management (16%) and insurance (8%). The digital finance platform, which connects consumers and businesses with a marketplace of financial services (100 banks, 170 asset managers, and 90 insurers), has been wildly successful with now $314B in credit balances outstanding, $600B in assets under management, and $7.6B in insurance premiums/contributions annually. Ant Group is also working on a consumer finance joint venture to scale its lending even further.
  • Payments have become a less lucrative part of Ant Group’s business. This was driven by Chinese government restrictions (2017) on payments services’ ability to generate interest from unused cash in user accounts, as well as the rise of competing players like Tencent’s WeChat Pay (which has become more popular than Alipay for offline and peer-to-peer payments).
  • Ant Group’s decision to eschew the US exchanges and opt for Shanghai and Hong Kong is, in part, due to increasing scrutiny of Chinese companies by the US government and the desire to avoid escalating US-China trade tensions. It also can expect to see a sky-high valuation on the Shanghai Stock Exchange’s frothy one-year-old STAR Market. Dual listings in Shanghai and Hong Kong have become increasingly popular of late among Chinese companies, with Hong Kong offering a more established exchange with connections to global capital markets.
  • Alipay’s success hinges on its continued ownership of the consumer relationship. It needs to keep drawing consumers back to its ecosystem to connect them to its services, merchants and partners. Payments, despite becoming less profitable, is still foundational to the super app strategy. It is part of the common fabric that supports a familiar user experience, reduces friction, and keeps users in the ecosystem. It’s no coincidence that Ant Group’s biggest domestic threat is coming from WeChat/Weixin – China’s most popular social platform.
Related Briefs:
  • Jul 15 2020: Who will be the next set of “big tech” firms?
  • Dec 13 2019: Tech players expand their ecosystems through payments & financial services
2. Amazon expands its network of delivery stations to bolster up a key weakness
  • Amazon plans to grow square footage across its entire fulfillment network by 50% this year (largely in Q3 and Q4). It’s lately been reported to be exploring unoccupied mall space for use as fulfillment centers, for instance. However, delivery stations will account for the highest proportion of Amazon’s logistics footprint in number, outpacing the growth of its 191 fulfillment centers (20% growth) and 157 other facilities (9% growth).
  • The expansion of delivery stations is expected to help Amazon meet its one-day and same-day delivery commitments. Amazon will use contract drivers to deliver packages, relying less on the lately struggling USPS. This has the potential to help reduce costs and improve delivery reliability – focus areas for Amazon, which split with FedEx last year due to delivery performance and has seen shipping costs rise faster than sales due to one-day and same-day delivery. (It incurred $24.6B in shipping costs during the 6 months ending Jun 2020, vs. $15.5B in the same period in 2019.) The move also mitigates Amazon’s political risk, given recent calls for USPS to increase its rates to Amazon.
  • The expansion offers Amazon the promise of greater control over the end-to-end customer experience. It has been gradually filling in the gaps in its in-house delivery network since 2013 (in response to carrier delays), with initiatives such as Amazon Air, Amazon Flex, Prime Now hubs, and delivery stations. By Dec 2019, Amazon Logistics delivered about 50% of its own packages. Today Amazon’s in-house programs deliver 67% of its packages, a number that could reach 85% by 2022.
  • Amazon’s investment here addresses a key vulnerability in competing with the likes of Walmart – its limitations in forward-deploying an extensive product assortment near most consumers. Delivery stations and mini-fulfillment centers allow Amazon to guarantee delivery of 100K+ SKUs in as little as 5 hours for launched cities. It also means it can compete against curbside pickup for online grocery – a major front in the ecommerce wars. (Amazon is also addressing the grocery opportunity in other ways, such as the recent launch of its first Amazon Fresh grocery store.) Faster delivery also means a more differentiated value proposition for sellers, helping Amazon fend off other 3rd-party marketplaces (e.g. Walmart, Kroger).
  • Amazon’s in-housing may pose a threat to the economics of the struggling USPS and other major carriers. Morgan Stanley estimated that Amazon’s distribution network could cost the USPS, UPS and FedEx a combined $100B in revenue by 2022. If Amazon delivers 3.5B non-Amazon packages and 6.5B of its own packages by 2022 as estimated, this could cut into the carrier giants’ share of the ecommerce shipping market from 82% today to 55%. For a business with high fixed costs and a delivery mandate – such as the USPS – the loss of revenue could prove disastrous.
Related Briefs:
  • Aug 14 2020 (3 Shifts): All roads lead to ecommerce as retailers invest in fulfillment and online assortment
  • Mar 26 2020: Grocery delivery, ecommerce & the renewal of Walmart
3. Airbnb’s IPO filing and the mixed signals from the travel industry
  • Last week, Airbnb confidentially filed to go public, kicking off a process that could see Airbnb go public by the end of this year. Airbnb had originally planned on filing at the end of Mar 2020 (reportedly leaning toward a direct listing) but had to suspend plans at the outbreak of the pandemic. Since then, it has seen its valuation shrink from $31B to $18B after raising an emergency $2B in funding in April.
  • Airbnb has had a tough year, seeing 90% of reservations during an early period of the pandemic cancelled, losing $1B in bookings and cutting 25% of its staff. Airbnb has since seen a rebound, at least according to the selective data revealed so far. It saw more bookings from May 17 to Jun 3 compared to the same period last year, and a 20% year-over-year increase by Jun 17. On July 8, it saw 1M nights booked, the first time Airbnb has seen that level of volume since the beginning of the pandemic. From June 1-20, its US reservations with at least one child were up 43% from the prior year.
  • The rebound is likely driven by consumers’ desire to get out of their home environments after an extended shelter-at-home, combined with widespread work-from-anywhere policies. Analyst data has suggested that bookings may have tapered off in July, probably due to rising COVID-19 cases and reinstatement of restrictions. The rest of the travel industry has seen mixed signals, with both indications of optimism as well as still-crippling uncertainty.
  • European booking platform Omio, for instance, raised $100M in mid-August in light of what it called a “clear sign of market recovery.” Its travel bookings have now reached 50% of pre-COVID levels. Southwest triggered a rally when it revised its Q3 2020 estimate for daily cash losses down from $23M to $20M, citing an improved revenue outlook driven by leisure demand in August and September. Alaska also forecast it would burn less than $125M in August vs. $175M in July.
  • On the other hand, Southwest also indicated it would have 30-35% less capacity in flight schedules during Q3 2020, a reduction driven by inconsistent booking patterns. 85% of global routes are still restricted. American Airlines announced this week it would cut 19K jobs by Oct 1 due to uncertain demand, and Boeing is planning additional staff buyouts. While the US State Department lifted its international travel advisory in early August, European countries have reimposed restrictions after seeing a spike in infections.
  • Business travel, which can account for up to 75% of airline profits, could see as much as a 40% decrease over the next 2-3 years – which will likely impact airlines the most. A widespread travel industry recovery is unlikely until the pandemic is under control and business returns to its (new) normal. Even then, this new normal might include a permanent 15% reduction in business travel, according to some travel executives.
  • Certain sectors are doing better than others. Budget-friendly roadside inns are doing better than luxury hotels in urban centers, with chains seeing ultra-short booking windows of late – often within 4 days of check-in. The higher optimism for booking platforms like Airbnb and Omio makes sense as a next step in the travel industry’s recovery. Booking platforms can be gateways to homes and experiences that don’t necessarily require long-distance travel in close proximity to others, in addition to being able to tap alternative revenue streams (e.g. ferry and train tickets on Omio, experiences on Airbnb). The hope is that the rest of the travel industry will follow.
Related Briefs:
  • Mar 18 2020: Looking beyond — 11 ways in which COVID-19 might be an inflection point
  • Oct 20 2019: Direct listings — first Spotify & Slack, now maybe Airbnb?
Disclosure: Amazon is a vendor of 6Pages.
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