Thursday, November 12, 2015

The Silliness Continues....

I'll be brief....Yesterday Alibaba released it's un-audited, unverifiable, Singles Day GMV figures, which increased to US$14.3 Billion, more than 50% over last year's astounding number.  Based on the previously published "US$30 per order" metric.  Chin'a "singles" placed roughly 476 million "orders" on the Alibaba "ecosystem" in one day. (pardon all of the quotes but each of these terms has a special meaning when it comes to Alibaba)

According to China's NBS, there are roughly 110 million "single" (unmarried and not including widowed) people living in China's urban areas, acknowledged by Alibaba as their more affluent, "wheel-house" customers. By that math, in one day, despite working long hours, these hard working, busy, Singles somehow found the time to place 4+ orders each within the Alibaba ecosystem. Alibaba must indeed be an incredible marketer to achieve more than 100% market penetration on a holiday/promotion that didn't even exist a decade ago!....and they accomplished this feat in a financial crunch where there are no other significant Chinese ADR's I could find that currently have substantially increasing revenue!....Bravo!

Alibaba apparently achieved this never before seen market penetration through their cutting-edge advertising, for instance, hiring Kevin Spacey channeling his role as Frank Underwood to sell M&M's, burner phones, raincoats and disguises.  Apparently, House of Cards is HUGE on Sohu (China's Netflix).....who knew?

Before I get inundated with e-mail from Chinese shoppers telling me how much they love Alibaba and that they couldn't live without it, let me just say, I understand, I get it..  Alibaba is ubiquitous, everyone in China uses it. It's everywhere.  It's a "beloved" company.  The concept is GREAT! Conceded.  My concern has always been about shareholder value and transparency.   Unfortunately, Alibaba has neither.  People are beginning to catch on.  Here's a Video Clip on CNBC,  Pacific Square's Herb Greenberg saying the same things I've been saying for more than a year.

As I type, there are hedge funds around the globe surveying Chinese consumers just to get a handle on the veracity of these numbers.  Taken at face value, the Singles Day numbers seem absurd.  

Bold Prediction:

Right now, based on the GMV and Revenue numbers reported, Alibaba should be taking cash to the bank in dump-trucks, yet, the hard facts are that, if the numbers are to be at all believed, since 12/31/14, they've been burning through cash at a rate of nearly $2 Billion a quarter (Currrent Assets - Current Liabilities) and with the acquisitions of Youku Todou and  Suning that burn-rate will be increasing. I can hardly wait to see what happens when they try to pay their bills with "Goodwill".

Moreover, as you might recall, the primary purpose for the IPO was to "Cash Out" the consortium of US banks who had over-extended a maxed out ($8 Billion) revolving line of credit to Alibaba.  Once they figured out what was going on, the banks dumped the exposure onto American Investors via the IPO and an US$8 Billion Bond Issue in November of 2014.  As an aside, the interest rate on the Revolver was variable around 6.7% at the time of the IPO.  The bonds were issued at various rates from 1.625% to 4.500% depending on the term.  The ADS, of course, pays no dividend.  Quite an improvement on the credit/risk profile overnight I must say.

Currently, there is no significant credit facility in place, at least as disclosed in the financials. Presumably, US Investment Banks won't give them another nickel after they saw the handwriting on the wall in August of 2014, so Alibaba will be scouring the globe for cash shortly.  Again, I'll play the "if I were treasurer" game. What would I do if I had to try to fund this mess?  I'd call my US Investment Banker friends of course, and for enormous fees, I'm sure I could convince them to underwrite another bond issue, I'd probably be looking for US$5 Billion, Of course US$10 Billion would be better, but I might not want to appear greedy.  Based on my fantastic plans, incredible projections, persuasive persona and exhibited meteoric, although dubious growth, I'd convince the 30-year-old, Ivy League, wet-behind-the-ears analysts at the US rating agencies to slap a AAA rating on these bonds so I could sell them to Pension Funds, Mutual Funds, Widows and Orphans, just like we did with those wonderful Mortgage Backed Securities a few years ago.  I will have done my job as treasurer, get a huge bonus and Jack will have lived to fight another day.

The more things change....the more they stay the same.

CNBC - Herb Greenberg - Pacific Square - Alibaba Accounting Issues
https://finance.yahoo.com/video/red-flag-alibaba-greenberg-174100058.html

Kevin Spacey, House of Cards & Singles Day
http://www.usatoday.com/story/tech/2015/11/10/kevin-spacey-house-cards-china-alibaba-singles-day-frank-underwood/75552002/

USA Today - Singles Day
http://www.usatoday.com/story/tech/2015/11/11/chinas-e-commerce-company-alibaba-sells-record-143-billion-singles-day/75575434/

CIA Factbook Population Stats
http://www.indexmundi.com/china/demographics_profile.html

NBS Population Stats
http://www.stats.gov.cn/tjsj/ndsj/2014/indexeh.htm

Bond Issue
http://www.sec.gov/Archives/edgar/data/1577552/000110465914082832/a14-23964_4ex99d1.htm

SEC Public Correspondence
http://www.sec.gov/Archives/edgar/data/1577552/000119312514237452/filename1.htm

From my post on Lara Logan's CBS News Blog (December of 2014 - Also reposted on this blog)

Here's a curious Question & Response from the 6/16/14 Public Correspondence; p15 filed on the SEC site:
SEC Q: We note your statement on page 106 that you believe that your “current levels of cash and cash flows from operations and from existing credit facilities will be sufficient to meet [your] anticipated cash needs for at least the next twelve months.” However, we also note that it appears that you drew down the remaining capacity on your US$8.0 billion credit facility in April 2014. As the credit facility has been fully drawn down, please revise your disclosure accordingly.
BABA A: In response to the Staff’s comment, the Company has revised the relevant disclosure on page 116.
I guess my bigger question might be:  Why would any Treasurer max out an US$8 billion USD$ credit line when 91% of BABA's business is denominated in RMB?  Especially since there are possible PRC restrictions on using RMB to satisfy US$ denominated bank debt? There are lots of possible answers here.....none of them would be good.

Let's talk about the BABA Credit facility in a little more detail.  Of course, it's underwritten by the same players who are underwriting the IPO. All references are to page numbers in the 424(b)4
-Affiliates of Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs (Asia) L.L.C., J.P. Morgan Securities LLC, Morgan Stanley & Co. International plc, Citigroup Global Markets Inc., BOCI Asia Limited, CLSA Limited, HSBC Securities (USA) Inc., Mizuho Securities USA Inc., BNP Paribas Securities Corp., ING Financial Markets LLC, RBS Securities Inc. and SG Americas Securities, LLC, as well as DBS Bank Ltd., are lenders, and an affiliate of Citigroup Global Markets Inc. is the facility agent and security agent, under the US$8.0 billion credit facility (p314)
-The US$8 Billion facility was fully drawn down at of 3/31/14.  An additional US$3 Billion facility was put in place In April of 2014.  (p45)
-The weighted average interest rate for all long-term other borrowings for the year ended March 31, 2013 and 2014 was approximately 6.3% and 6.7%, respectively. (pF-64)
-BABA increased bank debt from US$0.00 in March of 2012 to more than US$ 10 billion as of June 2014. (27 months)
- The interest load, at 6.7%, US$670 million/yr., could break the covenants required by the facility. (p144-145) & (p45)
-If the Covenants are broken: "including by failing to maintain certain financial ratios, our lenders will be entitled to accelerate our debt obligations. Any default under our credit facility could require that we repay these loans prior to maturity as well as limit our ability to obtain additional financing, which in turn may have a material adverse effect on our cash flow and liquidity" (p45).
Again, I'll ask, why would any Treasury Officer incur that level of debt and interest expense, so quickly, in a foreign currency, potentially causing the debt covenants to be broken in the relatively near future?   The plot thickens.....stay tuned.....


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