A Forensic Accountant On Why Chinese Internet Companies Are So Tough To Analyze

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:19)

Joe, I don't know if you've been following what's going on in Hong Kong markets lately, but there is a very, very big event coming up.

Well, it's only a few weeks away now. Although I have to say, I'm not exactly sure when we're releasing this episode, but in theory, there is a very big event coming up.

Joe Weisenthal (0:39)

So much to choose from. I feel like, you know, when you say something like, oh, I'm not sure if you're following what's going on in Hong Kong lately, my mind darts to like 10 different things.

Tracy Alloway (0:50)

But in the market, there is just one thing I think that everyone is focused on at the moment, and that is the IPO of Ant Group, which is the sort of offshoot of Jack Ma's Alibaba. The big thing about this particular IPO is that I think they're aiming for a valuation of something like at least $280 billion, which would easily make it the biggest IPO ever. And the whole transaction, again, it hasn't actually taken place yet, but the whole transaction is so big that we're actually seeing it affect things like demand for Hong Kong dollars. We've seen liquidity in that market tighten.

The demand for Ant shares is expected to be so high that they haven't even bothered with cornerstone investors, which is really unusual for an IPO. We're also seeing brokers in Hong Kong offer retail investors 20 times leverage on the Ant shares because they're so certain there's gonna be a pop on the first day of trading and everyone wants to get an allocation of the equity when it first comes out. So it's a really, really big deal and you can see that there's a lot of excitement around Ant at the moment.

Joe Weisenthal (2:14)

Wow, those are some great stats. And I knew it was a big deal. I knew it was a big company, but actually you sort of just blew me away with all that stuff.

I mean, two quick questions for you. A, what does Ant do? I mean, I know it's like this big finance thing, but I actually have no concept of what the company actually does.

And B, $280 billion. I mean, that's gotta make it, it's bigger than any US financial institution by a long shot, right?

Tracy Alloway (2:39)

Yeah, I think that's right. And if you think back to Saudi Aramco, I mean, there was so much talk about Saudi Aramco when they listed on public markets for the first time. I think we even did one or two episodes about it. That ended up being something like $28 billion raised. So much smaller than what we're talking about now.

Ant Group, I'm sure I'm not gonna describe it right. And I'm sure some people are gonna take issue, but it's basically the sort of, I think it's the FinTech portion of Alibaba, including Alipay, which is one of the big, big payments providers in China along with WeChat. So if you've ever visited China, you know that cash is almost non-existent at this point. And anywhere you go, be it a Starbucks or a street side vendor, you can pay using a digital wallet like Alipay or WeChat. So that's one of the reasons people are really excited about it. And of course, it's a big FinTech giant in a very, very large market, in one of the few markets that is really growing at the moment, given China's purported economic strength.

But of course, when it comes to this type of growth, particularly in China, there's always a question mark over how you're actually measuring that and whether those measurements or those numbers are accurate or not. You know what I mean?

Joe Weisenthal (4:08)

Absolutely. So just to step back, just to sort of conceptualize the company, Alibaba is this sort of e-commerce, powerhouse, extraordinary company doing all kinds of things. And so I guess you could sort of imagine it as like, say like Facebook or some of the US mega cap internet companies, they have their own like sort of payments apps and payments messaging and stuff like that. And so this would be, this is Alibaba's, it's gigantic. And they're essentially spinning it out into its own publicly traded company that's worth an insane amount of money.

But as you say, you know, with so many of these companies, I mean, they produce financials, but all kinds of difficulty really gaining from the outside, like a true like size and scope of the business.

Tracy Alloway (4:57)