Tencent Afterpay tilt unlikely, says Citi

Afterpay’s Nick Molnar giving a lecture at Harvard in 2019.

Tencent’s acquisition of a 5 per cent interest in Afterpay could lead to more product development and technology collaboration, according to analysts from Citi.

However, they believe that the chances that the acquisition of shares is the precursor to a takeover are unlikely.

Shares in Afterpay on Monday increased more than 30 per cent in early trade on the Tencent news.

The move by the Chinese conglomerate to buy shares in the Australian-listed buy-now-pay-later service provider comes after its rival, Ant Financial, took a minority stake in Swedish payment solutions company Klarna earlier this year.

Tencent developed the Chinese messaging service WeChat and has a history of investing in fintech companies globally.

It noted that it looked forward to a long-term business partnership with Afterpay after the listed financial provided details of its investment on Friday night.

“We see potential for the partnership to accelerate Afterpay’s product development, especially in the area of mobile payments, in-store payments and cross-border trade,” Citi said in a research note.

“Further, we have previously flagged the potential for Afterpay to be added as a payment option to mobile wallets, such as WeChat Pay.”

Citi said that they saw the potential for Afterpay to enter the Chinese market in partnership with Tencent and leverage the Tencent user base of about 1.2bn WeChat users.

It has a 39 per cent market share of third-party mobile payment volumes in China.

China represents a $US1.5 trillion online retail market, which is about 2.5 times the market in the United States.

Millennials represent 30 per cent of its population, so Citi said that the addressable market was material.

While Afterpay had established a China subsidiary in the first half of the year, it was created to establish a Chinese technology and development centre.

Citi said that while a takeover could not be ruled out, the analysts believed that the probability of this occurring was likely to be low in the near term, especially given the size of the stake and the joint statement released to the market.

They said that Foreign Investment Review Board approval was another factor to consider, with the Australian government recently increasing screening requirements for foreign investment into Australia.

Morgan Stanley analysts said that a strategic investor would likely help to stabilise the Afterpay share price, which has seen increasing volatility given market concerns on credit losses and potential weakness in consumer discretionary sales.

The two co-founders of Afterpay, founded by Nick Molnar and Anthony Eisen, owned about 8 per cent of the company each as per latest disclosures.