Shares of Alibaba (NYSE: BABA) have failed to recover yesterday after closing over 13% lower on Thursday.
Fundamental analysis: New actions from Beijing
The People’s Bank of China said it had ordered Ant Group to address its regulatory breaches and revamp its credit rating business to improve the protection of user personal data. Alibaba holds a controlling stake of about 33% in Ant Group.
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The central bank’s move raised questions among some investors about whether Beijing is looking to break up the fintech giant as a part of their crackdown on internet giants in China.
Even though details remain undisclosed, it is clear that Chinese regulators are directing Ant to pull back from its insurance, wealth management and higher-margin credit businesses. They want Ant to establish a separate holding company to maintain capital adequacy and comply with regulations. Ant will also need to obtain a license to run its personal credit operations and increase transparency when it comes to its third-party payment transactions.
As a result of the crackdown, Ant will have to face tighter scrutiny by the central bank and the country’s regulators. The company will have to hold more capital, place limits on lending exposure for major customers and send reports to regulators on a regular basis.
This means that any Ant’s attempt to refocus on payments will hurt its profitability and growth pace. Even though Ant’s flagship payments platform, Alipay, would not see any changes, it is the company’s business that it derives from Any move by Ant to refocus back on payments will slow its growth rate and profitability.
“Growth in mainland China will slow as its payments business is saturated,” said Shujin Chen, chief of financial research at Jefferies Financial Group in Hong Kong. “Ant can continue with its lending, insurance and wealth management businesses, (but) it will have to open up to greater regulation.”
Technical analysis: Shares struggle
The latest government decision that targets Ant Group is another blow for BABA investors. Given that regulatory concerns are unlikely to go away anytime soon, BABA stock is also expected to continue struggling in the near-term.
As seen in the chart above, sellers are now closing in on the key near-term support line at $205.00.
Summary
The central bank in China had instructed Ant Group to repair its regulatory breaches and revamp its credit rating business to protect user personal data.
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