Ant Group, the Alibaba (NYSE:BABA)-backed fintech company that owns the digital payments platform Alipay, will soon go public in one of the biggest IPOs in history. Ant was valued at $150 billion after its last funding round in 2018 and could hit a valuation of $200 billion in its public debut.
Ant's revenue rose 38% year-over-year to 72.5 billion yuan ($10.7 billion) in the first half of 2020. Within that total, its digital finance services revenue rose 56% to 46 billion yuan ($6.8 billion). Its net profit grew 21% year-over-year to 21.9 billion yuan ($3.2 billion).
Alipay served 711 million monthly active users (MAUs) at the end of June, and the app processed 118 trillion yuan ($17.4 trillion) in payments over the past 12 months. Its main rival, Tencent's (OTC:TCEHY) Tenpay (which includes WeChat Pay and QQ Wallet), served an estimated 940 million MAUs last year, according to an Ipsos survey.
Ant seems like a promising play on China's growing fintech market, but it will only go public in Hong Kong and Shanghai due to the U.S.-China trade war and the recent threats to delist U.S.-listed Chinese stocks. That news might be disappointing to U.S. investors, but there are still four other ways to profit from Ant's upcoming IPO.
1. Use a broker with international access
Many U.S.-based brokers don't offer investors access to the Shanghai and Hong Kong exchanges. However, three notable brokers -- Interactive Brokers, Fidelity, and Charles Schwab -- allow U.S. investors to buy shares in Hong Kong.
Investors probably won't be allocated any IPO shares through those brokerages unless they're already top-tier clients, but they'll be able to buy shares of Ant on the open market. However, investors should carefully research the commissions, taxes, and exchange rates before placing any overseas trades.
2. Invest in Alibaba
A simpler way to invest in Ant is to buy shares of Alibaba. Alibaba previously held an agreement with Ant which entitled it to 37.5% of its fintech affiliate's pre-tax profits. But last September, Alibaba traded those rights for a 33% stake in the company.
Alibaba's equity stake in Ant generated 5.32 billion yuan ($752 million) in investment profits, or 4% of its net income, in fiscal 2020. It also generated fees from the previous profit-sharing agreement in the first half of the year.
It's unclear if Alibaba will sell any shares of Ant after its IPO, but it will likely remain its top shareholder. Ant won't generate as much revenue for Alibaba as its core e-commerce and cloud businesses, but it could boost its investment profits over the long term. Meanwhile, the expansion of Alipay -- which is tightly tethered to Alibaba's online marketplaces and retail stores -- will strengthen Alibaba's ecosystem and widen its moat against Tencent.
3. Buy some related ETFs
ETFs (exchange-traded funds) that focus on recent IPOs and Asian markets will also likely add shares of Ant to their portfolios.
Speaking to CNBC, CFRA analyst Todd Rosenbluth recently predicted Renaissance Capital's International IPO ETF (NYSEMKT:IPOS), which allocates over half its portfolio to Chinese stocks, would be one of the first ETFs to buy shares of Ant.
Rosenbluth's other top picks include the iShares MSCI China ETF (NASDAQ:MCHI) and the SPDR S&P China ETF (NYSEMKT:GXC), which could both add shares of Ant in the months following its IPO. However, these ETFs all own large baskets of stocks, which would limit their overall exposure to Ant, and charge expense ratios between 0.6%-0.8%.
4. Wait for an ADR
Lastly, investors can wait for Ant's ADR (American Depositary Receipt) to reach U.S. exchanges. ADRs are either sponsored, which means a company officially sets them up with a depositary bank; or unsponsored, which means a broker-dealer sets them up without the company's direct cooperation.
ADRs are also split into three levels. Level 1 ADRs, which are unsponsored and only trade on OTC exchanges, are typically the riskiest because they don't need to file regular reports with the SEC. Level 2 and Level 3 ADRs must file SEC reports, while Level 3 ADRs face the strictest reporting requirements. Only Level 3 ADRs are allowed to list on the major U.S. exchanges.
The trade war has doused hopes for a formal Level 3 ADR listing for Ant, but a Level 1 ADR could still reach the OTC markets through the market middlemen. However, investors should be mindful of the risks if those unsponsored shares become available, and realize that OTC stocks are also exposed to the proposed regulations targeting U.S.-listed Chinese stocks.