Alibaba, Tencent’s eFinance Has Beijing’s Support, Worth Billions: CLSA

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China’s largest Internet conglomerates Alibaba Group (BABA) and Tencent Holdings (0700.HK/TCEHY) were assigned private banking licenses late last year. Tencent-backed WeBank began a trial operation two weeks ago, while Alibaba-backed MYBank is scheduled to open this May.

China’s eFinance is getting Beijing’s support and can provide a sizable boost to Alibaba and Tencent’s stocks. CLSA now value Alibaba and Tencent’s financial business at $17 billion and $12 billion respectively, or $7 and 10 Hong Kong dollars per share each. Alibaba and Tencent closed at $102.94 and HK$136.

One worry is that the vibrant eFinance can erode China’s largest banks’ profits – and Beijing would not like it because these banks are owned by the government. Yu’eBao, Alibaba’s online money market funds, took banks by a big surprise last year. By arbitraging the yield gap between money market and interbank rate, Alibaba was able to offer 7-8% yield initially. Investors can put in as little as just 1 yuan and withdraw within the same day. As a result, it quickly became one of the largest money market funds in the world and at least 1 trillion yuan from 81 million consumers left the banks. Not surprisingly, Beijing did some crackdown. Last March, the People’s Bank of China limited money transfers to online market funds.

But now Beijing has changed stance, noted analyst Elinor Leung, Man Ho Lam and Zoe Zhao. WeBank and MYBank will mostly provide financing to consumers and small-and-medium enterprises (SME), so they do not really directly compete with China’s largest banks, which mostly give loans to blue chips and state-owned enterprises.

The analysts also cited VIP politicians’ public remarks. Premier Li Keqiang visited Tencent’s WeBank this month and described WeBank’s 35,000 yuan loan to a truck driver as “one small step for WeBank, one giant leap for financial reforms.”  China’s central bank deputy governor Pan Gongsheng said the government would support eFinance with “moderate regulation.” Green light!

Here are the CLSA analysts’ bullish view:

Apart from the launch of new private banks, we will see a proliferation of e-financial products in 2015. There is a big opportunity in fee incomes with no regulatory ceiling. WeBank and MYbank are legal platforms to sell financial products online, including domestic & international clearing, bill financing, bonds, forex and issuing bank/credit cards.

Third-party payment has expanded beyond online shopping. Alipay and Tenpay have expanded their services to phone bill top-up, utilities bill payment, money transfer, purchasing financial products, O2O services, offline stores and overseas websites/markets. China online-payment market grew at a 74% Cagr to Rmb5.4tn last three years, representing ~10% of China’s Rmb40tn payment market. Alibaba and Tencent dominate with 50% and 20% shares, respectively. Transactions on Alipay transaction is nearly 4x that of Paypal.