Its always fun to do a look back on suspicious earnings. Lets have some fun with Alibaba. I am especially prepared for their earnings forensics after relistening to their archived investor calls, scanning an old 6-K, Presentations and Press Releases and the 20F (Filed Thursday 6/15/17)
Here are a few of the ‘cra cra’ points I’ve been shouting at clouds since their IPO(s):
Auditors can’t catch a well conceived fraud. They usually aren’t staffed to catch it, they rely on management’s (usually fraudulent) representations and have little or no real contractual liability or incentive to put forth the effort to figure it out. Moreover, many foreign auditors operate as independent franchises of a well recognized name (PWC, E&Y, et al. When you add incentives like impunity from US Prosecution, Civil Penalties and SEC & NYSE Sanctions, it’s easy to see how the auditors rubber stamp machine might kick into high gear for the right fee structure.
Alibaba’s Audit & Audit Related Fees were $8.2 Million FYE 2017 compared to $6.8 Million in 2016. An impossibly meager sum to audit an international juggernaut, growing at 50% a year, with tens of billions of transactions through more than 600 operating (300 of them are brand new) subsidiaries and related parties, scattered all over the globe from mainland China to the Caribbean. (By comparison, Amazon’s and Apple’s Audit and Audit Related fees were $16.4 Million and $14.2 Million Respectively)
The most glaring problems are valuations and incomplete disclosures. There are so many things they could do to fully disclose the accurate, complete financial condition of this business, but they choose not to do them. For example, the inclusion of audited financial statements for Ant/Alipay and affiliates would be a nice start. The 2017 20-F is the equivalent of a teenager replying “out” when you ask where he/she is going.
The issue with Alibaba is that everything represented in this 20-F refers to financial assets. The valuation of financial assets must be based on expected future earnings of all of these Investees. Unfortunately, based solely on the scant “real” financial information presented in this tome, it’s starting to look like management and the Chineses Communist Party couldn’t pick the winner of a one horse race without first tinkering with the appearance of the pony.
As of the 20-F, 2017, there’s about $380 Billion tied up in Alibaba Market Cap. $50 Billion in Altaba (what’s left of Yahoo!), $60 Billion in Ant (per Bloomberg Reports), $90 Billion in Softbank, $38 Billion in “off the books” Alibaba “Investees”, etc., etc. and all of the associated bank loans and leverage attached to same.
Incredible 56% revenue growth last quarter. If we do a little math (based on ratios described in the 20-F just a couple of months ago) we can extrapolate that, according to their numbers, Alibaba now sells nearly all of the On-Line, Retail, Consumer Physical Goods in China. When we compare Alibaba’s GMV figures to China’s National Bureau of Statistics (The Chinese counterpart of the US Bureau of Economic Analysis), Alibaba handled roughly US$176 Billion of GMV, or 92% of all of China’s On-line Retail Consumer Physical Goods, in its “ecosystem” in the quarter.
The most astounding aspect of this odd math, is that the NBS reports that On-Line sales in the quarter grew at “only” 28.6% (Clothing, Alibaba’s presumed meal ticket was only 20.8%). Alibaba’s reported 56% Revenue Growth would seem implausible (since they are effectively the entire On-Line Economy in China now) unless they have somehow nearly doubled the revenue associated with each On-Line transaction in the last couple of months since the 20-F, which would also seem to contradict the law of large numbers.
NBS – June Quarter – In the first six months of 2017, the national online retail sales of goods and services was 3,107.3 billion yuan, increased 33.4 percent year-on-year. Of which, the online retail sales of physical goods was 2374.7 billion yuan, increased 28.6 percent, accounting for 13.8 percent of the total retail sales of consumer goods; Of the online retail sales of physical goods, food, clothing and other commodities went up by 25.1 percent, 20.8 percent and 31.8 percent respectively.
How does Alibaba accomplish this magic?
Remember, from the SEC Correspondence file, Alibaba’s GMV sales do not actually have to be closed on the platform they just need to be somehow “reported as closed”. This accounting magic explains the plethora of luxury knock-offs (Gucci, Prada, Coach, Ralph Lauren, Rolex, Cartier, etc.), yachts, vehicles, industrial goods (pipe, steel, fuel oil, etc.) bad loans, real estate, commercial paper, etc. all available for purchase in the Alibaba “ecosystem”. Shoppers don’t actually plunk down their Alipay card to purchase yachts and foreclosed buildings on-line, but Alibaba management apparently has the world convinced that they do.
Questionable Assets (Investment Securities, Goodwill, Intangibles, Land Use Rights and Investments in “Investees”) are now a whopping US$44 Billion (56% of the balance sheet) ….compared to roughly US$0.00 (0.00%) prior to the IPO just four short years ago. When we compare this figure to:
Amazon (4.8% of the Balance Sheet)
Tesla (3.8% of the Balance Sheet)
E-Bay (34% of the Balance Sheet)
Alibaba Management is creating financial vapor at an unprecedented pace.
Questionable Assets and Valuation roughly US$3.5 Billion (more than half of last fiscal year’s earnings) of these assets; Alibaba Pictures (US$2.1 Billion) and Alibaba Health (US$1.4 Billion); should be immediately written off if Alibaba Management were actually following GAAP and marking-to-market. It’s difficult to believe that the remaining US$40 Billion isn’t significantly goosed as well. Since none of these “Investees” seem to be generating actual earnings, the probability that these carrying values reflect economic reality is approaching zero.
Alibaba has a valuation of $19.90 of Market Cap for every dollar of Tangible Book Value (Book Value net of Goodwill and Intangibles). The ratio is 2x to 4x the ratios of Apple, Alphabet or Tesla. The only business with a higher valuation based on this metric is Amazon at $27:1.
Alibaba’s P/E ratio is 59, valued at just shy of 60 years of current (allegedly fake) earnings. If the nonsensical carrying values of the Questionable Assets were written off/down, the ratio would more likely approach Amazon/Tesla territory.
No New Customers as its Annual Active Consumers (AAC) increased to 466 million, a 3% increase QoQ and a 7% increase YoY. When we compare this slower (more believable) AAC growth to the massive (less believable) revenue growth (56% YoY) we wonder how is this even remotely possible? Did the same customers suddenly all decide to purchase 1.5x what they had been doing last year? Again, the law of large numbers tells us that AAC growth simply doesn’t track with revenue and extrapolated GMV.
No Turn Around “Investees” continue to lose US$200 Million a quarter, like clockwork (pg. 16 of the Press Release).
More Overhead Alibaba brought on an additional 7,205 employees in the quarter (Primarily related to the consolidation of InTime).
Unbelievable Cost Cutting even after adding all of these employees, and incurring all of the newly acquired overhead and losses, Costs & Expenses decreased from 75% of revenue in the March 2017 Quarter to 65% in the June Quarter. (Pg. 12 of the Press Release) A skeptic could conclude, because of the 660+ related companies in Alibaba ecosystem, that there’s a good chance that not all of the company’s distribution and transaction costs are accurately reflected in the income statement.
h/t deep throat