Monday, August 17, 2015

Alibaba.......the odyssey continues....

I took some time to listen to the Alibaba Investor call last Wednesday morning, reviewed the presentation materials and pulled the filing.  I must say, Alibaba management has not only surpassed anything I've seen before, but their efforts this quarter were absolutely jaw dropping.  They've exceeded my wildest expectations.  Bravo! Kudos and a rousing "are you kidding me"???

Of course, they discussed and reported the usual, expected, odd metrics : 
  • US$644 Million of Share-based Compensation (20% of Revenue) in the quarter.   Roughly 4x what it was in the QE 6/30/2014 (prior to the IPO)
  • A US$4.2 Billion Gain (127% of Revenue) on "deemed" disposals/disposals/ revaluation of investments, of course, without any details on what was disposed of, "deemed" to have been disposed of, or simply "revalued".  All of this accounting magic is taking place when the Chinese Equity Markets are in the midst of a 30% Correction.
  • The roughly US$5 Billion write-up of "Questionable Assets" (as defined in prior posts) during the quarter.  As a refresher, Questionable assets include 1.) Investment In Equity "Investees"; 2.) Investment Securities; 3.) Land Use Rights; 4.) Goodwill; 5.) Other Intangibles.  If you've ever tried to sell "Goodwill" or "Intangibles" at a liquidation, you'll understand why I refer to these assets as questionable.
As they say on late night TV infomercials..."But wait...there's more!"

Analyst Questions

The Analyst questions were, to say the least, benign, generally taking the format "Great quarter folks.....So, could you provide some additional detail on (insert odd, irrelevant, fake, eCommerce Metric here)?..."

Each Analyst, purportedly the best and brightest that these Investment Banks have to offer, was allowed two (2) questions.  I've listed a very brief summary of the questions below, along with the approximate time the question was asked during the call.  The company responses are, in my opinion, equally benign, so I didn't bother to list them here, feel free to peruse the recorded call if you are intrigued/interested.

Barklay's (min. 24:00) - Tell us about your marketplace and how you balance large and small brands on T-Mall and TaoBao.

Morgan Stanley (min.28:30) - Tell us about your mobile strategy and how the Tmall and TaoBao APPS work together.

Research Firm (name inaudible) (min. 30:00) - Questions on the monetization take-rate.

UBS (min. 35:30) - How is the Macro Economic environment in China  impacting your business?  Authors Note: This question was actually pretty good.  The answer was, of course, that short term events don't impact the long term view of the business.  Management apparently assumes that the stock market crash, Herculean government intervention, panic in the streets and all that vacant real estate is a short term condition.

Bernstein (min 37:00) - Future projections for mobile vs. PC GMV.

Deutsche Bank (min. 39:45) - The Suning Acquisition's impact on other merchant's.

Credit Suisse (min. 43:00) - Tell us about logistics and same day delivery.  Authors Note:  My ears always perk up when I hear something new that isn't in the filing.  Maggie Wu stated that they are currently delivering 30 million packages a day through their "ecosystem" now.

JP Morgan (min. 48:00) - Asked about the strategy for the Aliyun Cloud business and what Mike Evans role will be in globalization.

Merril Lynch - (min. 50:00) More on the mobile monetization and take-rate.

Analyst/Firm Name Inaudible (min. 53:00) - Cross Border Strategy Question.

RBC (min. 54:45) Question on the Suning investment with regard to logistics and what the timeframe is to build out the logistics infrastructure.  Authors Note:  Once again the "30 million packages a day" statistic was cited, this time by Daniel  Zhang.

Goldman Sachs (min. 58:00) - Question on the mobile take-rate being a possible bottleneck and a follow up question asking Maggie to describe future opportunities in prescription pharmaceuticals and the return of lottery revenue.

That was it.  Nothing more.  Based on the above, either these analysts don't have a clue as to what's going on here or they are a willing part of the mis-representation taking place.  The latter wouldn't be all that surprising since every investment bank represented on the call also took part as an underwriter on this debacle.  So it goes.

An Amazing Schedule.....

The Schedule on Page 29 of the Materials was NOT included in the 6F Filing. The only purpose I can think of for this schedule is that Alibaba Management is somehow trying to provide any information they can, showing that they have plenty of cash/liquidity on hand. Apparently, they believe, or want us to believe, that the inflated market value of closely held illiquid securities is "as good as cash". For any of you SEC lawyers out there reading this blog, I'd appreciate a reply or comment as to whether making wild valuation assertions (US$33 Billion worth) in Presentation Materials (not included in the 6F) is appropriate and/or legal.

I've taken some time to add some additional data to the right columns of the Page 29, "Strategic Investment Portfolio" slide to better describe what we really have here.

I've compared the metrics of Alibaba's Strategic Investments to Apple, arguably the most successful tech company in history, just to get an idea as to how these investments stack up.  Since Ant Financial is privately held, unfortunately there is no public data available so I've excluded Ant from the calculations.  Google Finance stock links below.  Based on the above, we can conclude the following:
  1. The Strategic Investments have a combined valuation of 20.8 x sales (APPL 3.5) and are currently burning through cash.  They've lost a combined $286 million last year.
  2. The combined Market Cap of these stocks has declined by US$14.5 Billion (43%), from the highest valuation, in the last three months.  China's stock markets are currently under severe government imposed trading restrictions.  (See Forbes and WSJ links below)  
  3. These stocks are illiquid.  Generally, under China's new market restrictions, shareholders (5% or greater) are restricted from selling shares until/unless certain business/market conditions are met.  Moreover, even if Alibaba were allowed to sell shares in these businesses to raise cash, it would be unlikely that a market would be available for large blocks of shares.  By comparison, 6% of Apple's shares "turnover" daily.  The average turnover for the Strategic Investments is  0.13%. (1/46th of APPL turnover)
My Questions

Given the above, here are a few questions I might have considered asking if I were allowed to participate in the Investor Call.
  1. Alibaba's "Net Cash" (definition on footnote 5 of the pg. 29 Presentation  Schedule) has decreased by more than US$1 Billion in the three months since the 3/31/15 fiscal year end, down to US$10 Billion.  In other words, you've spent your quarterly net income as well as an additional US$1 Billion dollars in three months.  With the recently announced acquisition of Suning for US$4.6 Billion as well as the US$4 Billion stock buyback, presumably requiring most of Alibaba's existing Net Cash......how will these transactions be financed?
  2. How are the July 31st Regulations proposed by the PBOC going to impact the Alibaba eCommerce business and Alipay?  It's my understanding that the regulations apply relatively low daily and annual transaction limits to individuals making payments through third party processors, like Alipay and Tenpay.  Union Pay transactions are, as you know, exempt from these limits.  Since you are including the Ant Financial market cap in your Strategic Investments I'd think a significant government limitation on this business would be a relevant topic of discussion.  You also mentioned that 37.5% of Ant Financial's pre-tax profit is included in the Alibaba Financials.  Could you tell us what that number is since there doesn't seem to be any material line item reflecting this income?
  3. Both Daniel and Maggie referenced "30 million packages a day" being delivered through the Alibaba ecosystem.  Based on this quarter's GMV of US$108 Billion (90 days = 2.7 Billion packages) that would put the GMV per package at roughly US$40.00.  If this is correct, what's caused the change (doubling) from the reported US$20 GMV per order (US$296 Billion GMV with 14.5 Billion Orders) as described on page 3 of the 424(b)4 IPO filing in less than a year?   
My hunch would be that if any of the analysts asked questions like this during the call, that half way through the question they would develop phone problems and resemble a dial tone in short order.  I doubt that we'd ever hear from them again.  I guess I'll just have to put my future career as an Investment Bank Analyst on hold for now. 



Weibo
https://www.google.com/finance?q=NASDAQ%3AWB&ei=U5TQVcnPMcKxmAGEt4WACA

Alibaba Pictures
https://www.google.com/finance?q=HKG%3A1060&ei=DJbQVfGVMtWzmAGPhIv4Dg

Alibaba Health
https://www.google.com/finance?q=HKG%3A0241&ei=Bp_QVbnJGYHpmAGevavICw

Youku Tudou
https://www.google.com/finance?q=NYSE%3AYOKU&ei=JaHQVfGGN9aimAHg7YyoCQ

Apple
https://www.google.com/finance?q=NASDAQ%3AAAPL&ei=iMnQVZK8BsKgmAGyu7CoDA

Forbes - PBOC Regulations
http://www.forbes.com/sites/gordonchang/2015/08/09/china-crippling-its-online-financial-industry/?utm_source=followingimmediate&utm_medium=email&utm_campaign=20150809

WSJ - On-Line Payments - PBOC
http://www.wsj.com/articles/china-proposes-to-keep-online-payments-in-check-1438593958

Forbes - Stock Market Restrictions
http://www.forbes.com/sites/gordonchang/2015/07/09/china-making-stock-declines-illegal/?utm_source=followingimmediate&utm_medium=email&utm_campaign=20150709

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