In little more than six months, Alibaba’s hugely popular investment fund product Yu’E Bao has helped its fund partner Tianhong Asset Management shoot to fame and grab the number one position in China in terms of assets under management.
Tianhong’s revenue soared nearly 200 percent to 311 million yuan (US$50.7 million) last year. Meanwhile, the company revealed last month that the fund has swelled to 250 billion yuan in size, a 23-fold jump from the 10.5 billion yuan seen in the first quarter last year and helping the firm overtake China Asset Management Co. as the largest fund house in the country.
Time for champagne? Not quite. Tianhong, one should note, reported a net loss for 2013.
The second half was obviously the turning point for the fund. In the first half, Tianhong earned 8.5 million yuan with a top line of 61.9 million yuan. But after the launch of Yu’E Bao, the financials turned worse. For the full year, Tianhong lost 2.4 million yuan, according to unaudited data leaked by Zhejiang Materials Development (000906.CN), a company in which Tianhong just acquired a stake.
How could the operator of the best-selling, fastest-growing fund lose money?
The answer: most of the profit goes to Alibaba. Another factor is the huge technology cost.
Alibaba has carved up a huge share from the fund’s management fee, as Yicai.com noted. Over 80 percent of the management fee the fund received is said to have been handed to Alibaba, against the normal sharing percentage of around 50 percent.
We can take a look at the Yu’E Bao fee sharing scheme, as revealed by Alipay, Alibaba’s online payment services unit, recently.
Yu’E Bao collects 0.63 percent fee in each transaction. Of that fee, 8 basis points goes to CITIC Bank as custodian fee. Twenty-five basis points is supposed to go to Tianhong as its sales fee, but it has to share some with Alibaba in return for using Alipay’s payment technologies. For the balance of 30 basis points, again in theory, it is management fee and belongs to Tianhong, but Alibaba gets a cut again, for reasons unclear. And, the proportion is unknown.
Now, Tianhong cannot just sit there and collect fees. To cope with nearly 50 million fund customers, it has to devote a lot of time and efforts on its systems, on its own.
Sources from Tianhong’s Yu’E Bao project told the China Securities Journal that the fund had already invested a lot to develop its first technology system before the product was launched. That system could accommodate 20 million users at a time, but with Yu’E Bao’s surging popularity, it soon reached its limit.
So Tianhong had to develop a whole new system to solve the server problem. This time, the system could hold up as many as 300 million users at the same time. However, this cost Tianhong an arm and a leg. The huge capital expense ate up most of the fund’s profit last year.
Although, Alibaba seems to be the sole beneficiary of the Yu’E Bao hype at the moment, things could get better, somewhat, for Tianhong this year.
Firstly, unlike its first platform, Tianhong’s latest technology system can be easily upgraded in the future, which means the huge investment involved last year is a one-off expense.
Also, Alibaba invested 262 million yuan in Tianhong in exchange for 51 percent stake last October, which makes it the fund’s largest shareholder. The shift from partnership to ownership could mean more favorable profit sharing schemes for Tianhong.
The uncertainty is whether Yu’E Bao could face some regulatory hurdle if it keeps rattling banks for better rates as its key “added value”.
Yu’ E Bao typically pools small savings from individuals into a big lump sum and ask banks to pay much higher interest rates.
Niu Wenxin, a China Central Television financial news commentator, called Yu’E Bao “a devil and a parasite” in the finance industry.
Writing on his personal blog, Niu said the online fund has been luring clients by promising high yield rates which it achieves by bargaining with banks. Banks in turn have to transfer the burden to their loan borrowers.
As such, he said, investors should not at all be happy about the high returns promised by the fund as the ultimate victims will be the people themselves.
He then called on the government to ban such products to prevent them from destroying the financial sector.
Although Niu was making a personal comment by using his own blog, his official position as head of the CCTV financial news department renders his views as reflective of some of the official thinking on the issue.
Rumored to have hit 400 billion yuan in size according to the latest reports, Yu’E Bao will surely come under closer examination.
With little proprietary technology and not much to bring to the table, Tianhong does not seem to have much bargaining power in its relationship with Alibaba. It’s fair to say that customers are flocking to the fund because they are parking money in Alipay accounts anyway. It’s also Alibaba they trust, not Tianhong.
Tianhong has therefore invested in and developed a product that can hardly be applied elsewhere. With limited chance of making it big on its own, Tianhong will have to do as Alibaba says in the foreseeable future.
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