Ant Group Co. met its investment bankers at a Hong Kong convention centre over Victoria Harbour only days after China snuff out the world's largest initial public offering (IPO).

Despite the fact that employees from Citigroup Inc., JPMorgan Chase & Co., and Morgan Stanley had just experienced a once-in-a-lifetime deal vaporise, along with $400 million in fees, Ant's team had a message of hope: don't lose faith. The words "Start from the Heart" were splashed on a large screen.

The euphoria from that gathering has faded a year later, with the registration for Ant's $35 billion IPO scheduled to officially expire on Wednesday. Bankers say the firm has lost contact with them on a regular basis, and some are suspicious that it will return to the market before 2023. Valuation estimates that were originally as high as $300 billion have been lowered by up to two-thirds.

More broadly, the crackdown that began with Jack Ma's fintech company has extended to every part of China's technosphere, as Beijing attempts to break the dominance of a few major players and promote "common prosperity." 

"While the direction for Ant's remaking is obvious, implementation is very challenging," Dong Ximiao, chief researcher at Zhongguancun Internet Finance Institute says.

"The uncertainty remains for Ant and its investors, and the suffering isn't going away anytime soon."

Ant's forced overhaul is dramatic. Its omnipresent super-app Alipay, a one-stop shop for a billion customers' financial requirements, is about to be divided apart. Its collection of customer data will be made accessible to competitors for a fee. There is also speculation in the halls of power that the company's lucrative consumer lending arm could be excluded from any future IPO. Employee morale is at an all-time low.

Ant is starting to mirror the traditional banks that founder Ma famously criticised as "pawnshops" at the Bund Summit in Shanghai a year ago at the firm's Hangzhou headquarters. He warned that outdated regulations would suffocate China's innovation.

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Regulatory compliance

According to an employee, regulatory compliance has taken priority at a company that once race to out-innovate competitors at every turn. According to another source, some employees believe that governmental control of the company is the best option. Authorities are considering putting a government representative among Ant's management ranks to keep an eye on the company.

According to people familiar with the plans, executives are currently pondering how to split the enormous fintech into different ventures with state-backed partners. 

According to the sources, while regulators led by the central bank have issued broad guidelines, they have been short on details, leaving Ant to rely on trial and error.

Ant has already increased its capital base to 35 billion yuan ($7.3 billion) as part of the overhaul and is working to build firewalls in an ecosystem that previously allowed it to direct visitors from Alipay to services such as wealth management, consumer lending, and on-demand neighbourhood services and delivery.

The company's profit fell 37% in the March quarter compared to the prior three months. Ant's profit increased by more than eightfold in 2019 before the crackdown. In the first half of 2020, net income topped that of the previous year.

Never-ending to do list with a slew of restrictions

Ant's and rivals' fintech operations, including Tencent Holdings', have a never-ending to-do list. Beijing's focus has switched away from reining in their growing online lending to more complex tasks such as lowering the dominance of their payments apps (which together dominate more than 90% of mobile transactions), opening up their platforms, and assuring consumer data security.

For example, e-commerce juggernaut Alibaba Group Holding has begun to integrate Tencent's payment system into several of its apps, breaching Alipay's long-held monopoly. As directed by regulators, Alipay and WeChat Pay have yet to open their ecosystems to competitors, while China's central bank is encouraging users to use its own digital yuan.

According to those familiar with the issue, the government has also proposed establishing a joint venture with local technological behemoths to control the lucrative data collected from hundreds of millions of users.

According to sources, the regulatory barriers mean the company is only worth a fraction of what it once was. As of June 30, Fidelity Investments lowered its valuation estimate for the second time this year, to around $US78 billion. Others are more positive, valuing the business at $US174 billion by BlackRock and $US189 billion by T Rowe Price Group. 

Ant had a pre-money valuation of $US280 billion before its IPO was halted.

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Challenges to overcome.

Bankers who predicted the IPO would happen this year or next year are now forecasting it will happen in 2023. There are still regulatory obstacles to overcome. 

According to sources, as part of an investigation into the IPO, several executives at the Shanghai Stock Exchange were probed for their role in Ant's hastened sale process. 

No regulator would approve a listing unless President Xi Jinping is on board.

All of this implies more delays for Ant, its investors, and bankers in getting their once-promising IPO off the ground.

You need to "get to a stage in which the government becomes very comfortable about the internet companies, and e-commerce behaviour becomes very much like a state-owned entity," said Vincent Chan, China strategist at Aletheia Capital.

"It will be a very long way to go," she added.

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