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How China’s Tencent boosted Afterpay back into the $10 billion league


“I think it’s a recognition from Tencent that buy now pay later is here to stay as consumers, particularly Millennials, are shying away from credit,” said Ophir Asset management portfolio manager Andrew Mitchell.

Afterpay rival Zip agreed, pointing to the rising popularity of deferred payment services.

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“This phenomenon is really catching the attention of boards right across the world, where banks are struggling to innovate around the unsecured credit space,” Zip chief executive Larry Diamond told a Macquarie conference this week.

But Tencent’s validation is not what has kept Afterpay’s shares near record highs through the week, or seen rival stocks like Zip soar alongside it.

While it is too early to say the COVID-19 threat is behind the sector, the news so far is that these companies are doing surprisingly well, with customers moving their shopping online and spending up on things needed for a life in isolation.

“Even though we see statistics like NAB showed in their presentation around serious degradation in transaction volume across many categories, Zip’s actually seen a very very different story. In the early part of April we actually saw flat to up transaction volume growth,” says Diamond.

It’s a recognition from Tencent that buy now pay later is here to stay as consumers, particularly Millennials, are shying away from credit.

Ophir Asset’s Andrew Mitchell

Zip shares soared again on Friday, and have nearly tripled off their March lows, after the company said in a trading update that reported revenue was $15.1 million for April, up 81 per cent compared to April last year.

Receivables nearly doubled to $1.2 billion year on year and it added 70,000 customers, taking its grand total number of customers above 2 million. Just as importantly, Zip said net bad debt was just under 2 per cent and hardship assistance for customers peaked at the end of March.

“The start of May looks to be considerably stronger again relative to April,” Diamond said.

Another ASX-listed player, Sezzle, says it added more than 114,000 active customers in April – more than the 78,000 it added for the entire first quarter.

Fund manager Andrew Mitchell said this improving sentiment in the face of COVID-19 was one of the factors driving Afterpay’s rise “as well as short covering on a stock that many investors have loved to hate over the years”.

Growth potential

The big unknown, which Afterpay has yet to clarify, is what might come of its relationship with Tencent and the enticing possibilities thrown up by a WeChat app which allows users to order food, make payments, play video games and stream TV shows.

Afterpay executives said they will be sticking to their current expansion plans for the moment, but highlighted the growth opportunities from the association with WeChat and the value of what the company can learn from the Chinese internet giant.

“I think there’s a combination of, how do we learn from people who have scaled globally and understand deeply the payments infrastructure at a global level, and then just also what potential collaboration opportunities [are there] to give the most value to our retail partners,” Afterpay co-founder Nick Molnar says.

But Tencent’s mainland rival Alibaba, and its investment in Afterpay rival Klarna, might offer a more sober view of the potential.

Alibaba hopped onto Klarna’s share register in March last year with a stake of just under 1 per cent, months before the Commonwealth Bank made its move on the Swedish company.

Alibaba and Klarna were not strangers. The Swedish group’s buy now pay later app was already embedded in AliExpress, the international shopping platform for Alibaba.

Klarna founder Sebastian Siemiatkowski made it clear at the announcement that China would not be the focus of his expansion efforts, and for good reason.

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“The US is often used as a benchmark of what it means to be competitive, but in my world it just does not compare to the Chinese one,” he told Reuters at the time.

“The level of innovation there is just tremendous, especially in app retail and payments – they are the global pace setters. For Klarna, there is much better opportunity in other markets,” he said.

UBS agrees that Afterpay’s value for Tencent may lie outside of China.

“A partnership leveraging Afterpay’s merchant relationships for Chinese tourists or for cross-border transactions is possible, though in our view it is highly unlikely that Tencent will offer Afterpay leverage to its 1.2 billion WeChat customers for domestic transactions in China,” the investment bank says.

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