Once upon a time......

Well, I've spent some time listening to Alibaba's third quarter, fairy tale earnings call yesterday.  What an incredible, surreal experience it was.  Over the years, I've been privy to more investor calls than I care to remember, but I must say, yesterday's BABA call was one of the most hollow displays of misdirection and lack of content in recent memory.  After the call, I pulled the 6K just to get a little more lack of detail on what the "team" didn't seem to be talking about. 

Here are the bullet points:

• In his opening remarks, Joe Tsai felt compelled to comment on the government report accusing BABA of a less than committed effort to protect consumers from fraudulent sellers and counterfeit goods.  Joe began a carefully scripted, motivational rant on how Alibaba was absolutely committed to a fair and transparent marketplace. While he was talking, I pulled up the Alibaba websites and again confirmed that any knucklehead with a browser could still purchases cases of "Rolexable" watches and "Kelvin Klein" jackets for $5.00 each.  Ironic at best.
• The softball, "atta-boy" questions posed by the "analysts", all of whom, as far as I could tell were employed by the underwriters of the IPO, were largely irrelevant and congratulatory in tone. 
• The 6K was shocking in it's brevity....only 19 pages.  The IPO filing was more than 500 pages of obfuscation.  When compared to the prior filings, this was a cliff notes version.
• There was no mention (either on the call or in the 6K) of the progress made integrating the US10 Billion acquisitions/folly perpetrated in the last nine months and described in the September quarter filing. UCWeb, OneTouch, ChinaVision, Weibo, TangoMe, AutoNavi, InTime, Youku Tudou, Wasu, Evergrande, ChinaSmart, Haier, Singapore Post, Alibaba Health, & Beijing Shiji did not merit even a footnote, yet these are significant investments where the only disclosures in previous filings indicate that they are currently not producing revenue and are eroding the groups profitability.
• The word Alipay appears a total of four (4) times in the filing with no mention of either the fees paid by Alibaba to Alipay for escrow services, nor the profit sharing revenue attributable to Alibaba by the Agreement described in the IPO filing.  Since Alipay is reputed to be "the largest payment processor in China", with a significant impact on the group's results, it would be appropriate to discuss the fees and revenues attributable to this agreement, or at least describe where these figures are buried in the financial statements.
• The company awarded 4.3 billion Yuan, or 16 percent of revenue, in share-based compensation to employees of Alibaba and its payment unit, Zhejiang Ant Small & Micro Financial Services Group Co.  Really? 16% of revenue in share-based compensation?  14% YTD?  I guess they are taking a page out of the Goldman/JPM playbook?
• Finally, and to me, the most disturbing nondisclosure of the day, the Balance Sheet showed an increase in  "Questionable Assets" i.e.) Goodwill, Intangible Assets, "Investments in Investees" etc.,  of US$ 10.7 Billion with no explanation of what the amounts relate to.   This increase took place in only nine months since the March 31st 2014 audited financial statements were issued.

 

BABA 6K filed 1/29/15						3/31/14		12/31/14
(Selected Asset Classes - millions)					RMB	US$	RMB	US$	US$ Incr	Incr %
Investment in equity investees					17,666	2,848	25,864	4,169	1,321	46%
Investment securities					3,023	487	11,285	1,819	1,332	273%
Prepayments, receivables and other assets					2,087	336	3,177	512	176	52%
Property and equipment, net					5,581	899	9,028	1,455	556	62%
Land use rights					1,660	267	2,963	477	210	78%
Intangible assets					1,906	307	6,803	1,096	789	257%
Goodwill					11,793	1,901	40,677	6,556	4,655	245%
Current Assets
Loan receivables					13,159	2,121	23,679	3,817	1,696	80%
Total "Questionable Assets"					56,875	9,167	123,476	19,901	10,734	117%

• GAAP Net income available to Ordinary Shareholders for the 9 month period was US$ 3.4 Billion. If the above "Assets" (or a portion thereof) were properly expensed (which they eventually will have to be) Alibaba would have posted a Net Loss of US$ 7.3 Billion for the 9 month period ended 12/31/14 rather than the US$ 3.4 Billion Net Income reported. Even if a portion of these "masked" expense capitalizations are legitimate, Alibaba is still, in actuality, losing significant amounts of money. Earnings growth has not only slowed, these unaudited figures suggest that earnings never existed in the first place.

 

 

To the casual observer, the above level of mis-rep would be nearly comical, but after this weeks US$ 30 billion reduction in Market Cap, I doubt that Alibaba investors are amused.  Unfortunately, in this fairy tale, it looks like Alibaba investors aren't going to live happily ever after. 

 

1/29/15 Investor Call: http://www.alibabagroup.com/en/ir/earnings

SEC Filing:
http://www.sec.gov/Archives/edgar/data/1577552/000110465915005216/a15-3356_1ex99d1.htm