Alipay Presents Valuation Challenges Pre-Alibaba IPO

Alibaba may have raised its IPO share price range to as much as $68 due to investor demand, but it’s much harder to calculate how much the Chinese e-commerce giant’s payment affiliate, Alipay, is worth, according to the Wall Street Journal.

Like PayPal in the U.S., Alipay processes transactions on Alibaba’s online shopping platforms. It doesn’t yet generate profits for Alibaba, so doesn’t figure in near-term earnings estimates. Alipay also offers a money-market fund that has attracted tens of billions of dollars by offering higher rates than ordinary bank deposits, which are subject to government ceilings.

So how much is Alipay worth? Credit Suisse calculates a valuation for Alibaba rival Tencent’s payments business Tenpay of $25.7 billion. Since Tenpay has about 20 percent of China’s online payments market compared with almost 50 percent for Alipay, simple math implies that Alipay may be worth $65 billion. Sanford C. Bernstein separately estimates Alipay’s value at $50 billion to $70 billion, plus an extra $25 billion to $40 billion for a small-business lending unit.

But regulation poses risks: Earlier this year, a central bank crackdown on certain kinds of mobile payments triggered a sharp correction in Tencent’s shares, and Alipay faces an even bigger potential backlash.

The Alipay business was separated from the rest of Alibaba in 2011 due to pressure from government regulators. A deal was eventually struck whereby Alibaba is entitled to a one-time payment of up to 37.5 percent of the value of Alipay in the event that it is sold or goes public. That could mean a payout for Alibaba shareholders someday, but how big it will actually be remains unknown.