In the best-case scenario, Alibaba is the goofiest, most convoluted, opaque, mismanaged accounting mess and business structure in history.
By Deep Throat IPO:
Well, here we go folks. They’ve done it again. The Alibaba Accounting Department, after a couple of fits and starts and a month delay, at the 11th hour, finally managed to file yet another, laugh-out-loud, gut-buster of a 20-F Annual Report with the SEC. Needless to say, as always, they did not disappoint!
Here are the bullet points:
The Capital Structure (Now you see it…now you don’t…)
1. There are now 920 separate operating entities in the Alibaba ecosystem. 500 in the People’s Republic of China and 420 scattered all over the rest of the planet. Alibaba has created 300 new “legal” entities a year for the last two years.
2. They’ve “Enhanced” their Capital Structure. The lawyers have been busy beavers.
3. Major Business Segments and Operating Entities appear and disappear from the 20-F’s. There is no explanation in the footnotes.
So Who Actually Owns the Ordinary/ADS Shares?
1. ADS Shares (BABA) at US Financial Institutions have ballooned from 196 million four years ago to 1.669 Billion now. Per the 20-F these shares are concentrated in 128 US Financial Institutions held in “street name.”
2. A significant number of the shares in US Institutions are held by Chinese insiders through Offshore Shell Companies. 450 million shares are held by the largest 20 Institutions.
3. The Chinese Communist Party is manipulating the bid/ask through myriad offshore entities on a relatively small population of “arm’s length” trades in order to create the illusion of a market made at a price that defies financial gravity. The risk of collapse grows larger by the day.
Employees and their Office Space!
In the last year, Alibaba has added roughly “Fifteen Pentagons” in office space with only 16,000 additional full-time employees, or roughly 3,400 new square feet per new employee. Real Estate is expensive, yet, overhead stayed about the same. Weird, huh?
GMVVVVVVVVV!
1. Alibaba has a retail presence roughly 1.5 x Walmart (WMT) now. Gross merchandise volume, or GMV, is $768 billion vs. Walmart’s piddling $500 billion.
2. BABA has developed a huge new revenue stream, winding down the huge, and rapidly growing supply of China’s Non-Performing Loans, yet, this business segment wasn’t mentioned in the 20-F at all.
3. Based on the value of “real” retail GMV, the market cap of Alibaba should be about the same as Target (TGT) ($ 40 Billion) rather than $470 Billion, the company’s current market cap. I smell a disconnect.
“Investees” (More Prestidigitation!)
1. We examine Footnote 4 of the 20-F where we see that Book Values (Cost Basis plus write-ups) of Investees have increased roughly $22.3 billion in the current year.
2. A number of former “Flagship” businesses (Auto Navi, UC Web, OneTouch, Singapore Post, Weibo, Meizu) are all missing in action. They’ve disappeared without a trace or mention in the 20-F.
3. Consolidating money-losing-dog-shit businesses using all sorts of valuation shenanigans to hide what’s happening, and/or bailing out friends with US Shareholder Money seems to have consumed much of management’s time and resources.
4. We examine the footnotes for Alibaba Pictures, Cainiao, Wanda, OFO, Alibaba Health and Wasu. These are awesome!
Ant Financial
Even though Alibaba and Ant Financial are joined at the hip, US Investors continue to see only half of the story. In this section we question the economic value of the processing fees charged and the Ant “profit sharing” payments accrued to Alibaba. If Ant Financial/Alipay had charged a market rate for the transaction processing fees and escrow services, Alibaba would most likely be unprofitable, even after taking into account all of the other financial silliness we’ve discussed above.
Audit Fees (Pg 225)
You couldn’t successfully audit a good-sized publicly held, domestic US Car Dealership for the fees that PWC Hong Kong charges to audit a global enterprise like Alibaba
Share-Based Compensation
Last year, if share-based compensation were handed out on a pro-rata basis, Alibaba would have issued the equivalent value of $116,000 to every one of its 66,000 full time employees. (42,565,654 shares at $180/share).
Jay Clayton’s SEC
The SEC, our best and brightest financial regulator, is absolutely, completely OK with everything I’ve described above. Steady as she goes. Don’t want to rock the boat. Jay should be really proud of his trained puppy dogs. “Roll over! Play dead! That’s such a good boy!”
Conclusion
1. This financial cancer is everywhere. Western markets are screwed. The outcome is certain and the party is over. At some point in the indeterminable future, the world will be tasked with cleaning up the mess.
2. Oddly enough, you can’t short Alibaba. Yet. The Chinese Communist Party has the other side of your trade.
Alibaba Management is somehow increasing the length and content of their 20-Fs, yet, incredibly, they seem to disclose and communicate an even smaller snippet of “meaningful” financial information every year. In fact, there’s no longer any doubt in my mind, that they actually go out of their way to deliver ever larger bales of content-free financial silliness.
They are not “unfamiliar with Western Financial Reporting Conventions,” nor are they doing things “the way they do it in China,” as some pundits would have us believe. Math is math no matter where you are on the planet. Financial gravity is the same whether you are in London, New York or Beijing. Alibaba Managers are in fact masters of manipulation, bending the truth brilliantly to suit their needs. Perhaps they are banking on the premise that nobody actually reads their filings/drivel anyway. (The SEC staff doesn’t seem all that concerned!)
If, by some strange, impossible happenstance, I’m completely, totally wrong, and Alibaba isn’t actually the tip of the spear for the CCP’s full frontal assault on the Western Financial System, the only other conclusion I can possibly come to is that Alibaba the goofiest, most convoluted, opaque, mismanaged accounting mess and business structure in history. That, unfortunately, is the half-trillion dollar “best-case” scenario. By Deep Throat IPO. For the full analysis and citations feel free to click to my blog-post.