Given the almost irrational exuberance today we have of tech stocks that only go up, I present to you a very different perspective written by Aikya investment fund analysts on every Redditor’s and his dog’s darling, BABA.
Note the views below are Aikya’s and not mine and should only serve to generate discussion on BABA’s profitability and prospects. I’m personally vested in BABA @ 250 before chancing upon this Aikya report so would like to hear fellow Redditors views if they are worth keeping.
Will BABA stocks ever get to the moon? According to Aikya, the upside is extremely fraught with accounting issues detrimental to minority shareholders (99.99% of Redditors). I definitely think the Aikya report is worth a read for BABA investors.
Related party transactions and acquisitions have been a matter of habit for the Alibaba Partnership. In April 2014, Alibaba gave Simon Xie a $1 billion loan which he used to purchase a 20% stake in Wasu Media5 through an entity that was jointly owned by Jack Ma and Simon Xie. Alibaba claimed that they were not able to invest in Wasu Media directly because of Chinese regulations and that investing through Mr. Xie’s entity was the only way. In fact, Alibaba has regularly invested alongside Yunfeng Capital, a Shanghai based private equity company that was established by Jack Ma in 2010. The list of such related party transactions runs long and as recently as 2019 Alibaba Pictures gave a $103 million loan to struggling film studio Huayi Brothers Media in which Jack Ma has a considerable stake6. The lines between Alibaba’s shareholder interests and Jack Ma’s personal interests are very blurry, and at odds with our philosophy of backing clean and well aligned ownership structures.
Since Alibaba’s IPO, the asset base has grown tenfold from $18 billion to $185 billion or 48% per year.
However, this asset growth has mostly been driven by acquisitions and self-reported asset revaluations. Between 2014 and 2020, Alibaba has expanded their balance sheet by $92 billion in relation to equity investments (incl. goodwill recognised). In the same period, the ROAs have dropped from 26% to 13% and ROIC has fallen from 33% to 8%.
Alibaba management justifies these acquisitions saying that they are linked to the building of a digital ecosystem. However, most of the businesses don’t make any money (eating up most of the core business’ free cashflow) and claims around strengthening the ecosystem often seem tenuous. For example, in 2015, Alibaba invested $590 million into Meizu, a Chinese smartphone manufacturer, which besides having nothing to do with Alibaba’s core business also meant entry into a highly competitive space. A now struggling Meizu needed a financial bailout from the government in 20197. Alibaba Pictures Group, which began in 2014 as a 60% stake in ChinaVision Group, has been another sinkhole of capital for Alibaba shareholders. The company has accumulated $500 million in losses, after four years in the red8.
Some of these acquisitions are in fact so outlandish that Alibaba’s management team cannot claim synergistic benefits for the core business. Consider South China Morning Post, where Joseph Tsai was explicit about needing to control the narrative presented on China9. Or the $192 million purchase of 50% of Guangzhou Evergrande Football Club, which appears to be a vanity project10.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.