Tuesday, February 17, 2015

So what does the smart money think of Alibaba?.......

To contextually paraphrase Steve Martin..... "The New 13Fs are here!...The New 13Fs are here!"

When I was a little boy, I longed for the day when Topps would create bubble gum "Hedgie Cards" for all of the kids on the block to trade and collect....sort of like billionaire Pokemon...."Hey, I've got a Charlie Munger rookie card!"....but I digress.   That said, I've just finished reviewing a sampling of the holdings of some of my favorite Hedge Funds (13Fs filed over the weekend) and as you  might suspect, the exercise was, to say the least, enlightening.

As an investor, it's always nice to know what the smartest guys in the room are doing. Even if you don't have enough money to warrant an invitation to sit in the room and it's 45 days after the fact, the 13Fs still provide invaluable information. We get a snapshot of what the Big Dogs are thinking.  That, of course, is the quintessential benefit of the 13F to individual investors.  Obviously, we have no way of knowing what level of high-frequency-genius-folly-brilliance-silliness transpired during the quarter, but at the very least, we get a feel for where things stood when the music stopped. The table below summarizes the Alibaba investment by some of the most savvy money managers in the business. (Selected data from SEC.gov and NASDAQ.com - URLs below)

Here are my key takeaways from the numbers:

Re: the 9/30/14 13Fs.
  1. As of 9/30/14 only ten (10) of the  twenty (21) funds below owned shares in the "Hottest IPO in history".
  2. The total amount invested was US$ 3.1 Billion, roughly 0.7% of the aggregate US$ 419 Billion in total assets under management.
  3. The clear outlier was one of Julian Robertson's funds, Tiger Management LLC, with roughly 27% of it's asset value invested in in BABA. Although, another, much larger, Robertson Fund I follow (Tiger Global Management LLC) had no position in the stock at the time.

Re: the 12/31/14 13Fs.
  1. Only 8 of the 21 funds maintained Alibaba positions.
  2. Total share count reduced from 34,566,602 to 31,409,418 during the quarter.
  3. Viking sold off 70% of it's shares during the quarter.
  4. The only two funds increasing their positions substantially were Third Point (Loeb) and Tiger (Robertson).   
  5. Third Point share ownership increased from 7.2 million to 10 million shares, up to 10% of the fund's 9/30/14 asset value.  Dan Loeb's slot on Yahoo!'s board and his sponsorship of Melissa Meyer probably has something to do with the increase, but I'm a little foggy as to what Loeb might see that Jackie Reses didn't before she abruptly resigned, absolving herself of any responsibility for the IPO. 
  6. Robertson's Tiger Fund(s) ownership increased from 1,216,283 shares to 6,386,783, up to 8% of the funds' 9/30/14 asset value.
  7. If we remove Third Point and the Tiger Funds, in the three months from 9/30/14 thru 12/31/14, total assets invested in Alibaba by all other funds decreased from $2.3 Billion to $1.3 Billion (Marked-to-Market at the 2/17/15 closing value of $86.85/share), or the equivalent of 0.3% of 9/30/14 assets.  Perhaps the other Big Dogs have finally taken some time to read the IPO filing and supporting documents?
    Notes on the above:

  1. With the exception of Third Point and Tiger,  the smartest guys in the room apparently don't think all that much of Alibaba's prospects.  The Hedge Funds listed below have the ability to invest in any security anywhere in the world (at presumably favorable terms) and most chose to avoid Alibaba initially.  The others that bought-in did so at relatively insignificant levels and either reduced or eliminated their positions after three months.  This speaks volumes.
  2. Third Point and Tiger, with their outlier positions (10% and 8% of NAV respectively) are probably rethinking their strategies now that BABA is trading in the $80 range, if they've not sold out already.
  3. Highbridge Capital Mgmt., owned by JP Morgan (a lead underwriter in the Alibaba IPO) chose not to invest in the company at all ....far from a ringing endorsement.
  4. BABA has gone from $120 down to the high $80's. Short interest is about 42 million shares, or about 8% of the unlocked float.  i.e.) There seems to be significant downside sentiment.  
  5. Re: the biggest of the Big Dogs, Drilling down on the Blackrock 13F as an exercise, we note that the BABA share count has been reduced by about 60% from the prior quarter. We also see that the company has taken only six (6) other positions in Chinese ADRs:  Baidu- $290 million;  VIP Shop - $15 million; WUXI Pharma - $2 million; Qihoo 360 - $4 million; YY.com - $4 million and Trina Solar - $600,000.  Of Blackrock's $95 Billion in available, invest-able assets, they chose to deploy only $412 million (0.4% of assets) on these ADRs. Baidu & BABA comprise nearly all of this investment.  As a point of reference, as of 12/31/14 there were 107 of these Chinese Shell Company ADRs listed on the NASDAQ and the NYSE with an aggregate Market CAP of more than US$1.3 Trillion. For reasons that I'm sure will become obvious over time, Blackrock, like most of the smart money, has chosen to stay clear of these assets, at least at quarter's end.    
  6. Last Thursday night Bill Ackman (Pershing Square) and Ray Dalio (Bridgewater) engaged in a spirited "activist" v "quant" debate at Ackman's charity event, illustrating the philosophical rift between fundamentalists (Investors who read filings) and rules based program traders (Investors who don't).  Dalio described his Quant philosophy as being essentially "long or short everything.  I don't have any bias."  This describes, at least to me, how program/rules based management could inadvertently accumulate significant positions in Alibaba, or for that matter, any misrepresented ADR or stock.  Simply put, the trades can be driven by bad data. (Note: Per the 13F's Bridgewater & Pershing Square had no positions in Alibaba.) Quant decisions/rules are generally based on spreads, price movements, velocity, etc. and lots of other slick metrics that individual investors can neither access nor understand. (Only 1% of Bridgewater's program trades are reviewed/stopped by a "human" trader.)   Unfortunately, failing to adjust for conditions or correct errors where the data is inaccurate or untrue (Ray's "Truth/Reality" thesis),  tends to yield unintended consequences (Knight Capital).  Ackman and fundamentalists would argue that this is the odd, yet expected, result when investors make decisions based on data rather than the intrinsic value of the underlying business. As Ackman commented....."This is fascinating."
  7. The March 20th, 2015  "Lock-Up" expiration is right around the corner.  Another  429 million BABA shares will be available for sale. Based on the 13F activity, I don't see that the smart money is going to be clamoring for additional shares.
  8. At this very moment there are probably legions of "dumb money"....chart-mongering, double-shoulder-candlestick-worshiping, moon-phase-analyzing technical day traders looking at the Alibaba recent weakness as a huge buying opportunity....gotta buy on the dips!
Well, now we have a pretty good idea of what the smart money thinks of Alibaba   As always, the question is, what is the dumb money going to do?.....and when will they do it?

 9/30/14
 9/30/14
 9/30/14
 12/31/14
(b) 12/31/14
"The Smartest Guys in the Room" 
Holdings 
Shares of
Value Mlns US$
Shares of
Value Mlns US$
Billions  US$
BABA
$88.85
%
(a)
BABA
$86.85
%
Viking Global Investors $26.811,387,526$1,011,782 3.8%3,708,686$322,099 1.2%
Third Point $8.77,200,000$639,720 7.4%10,000,000$868,500 10.0%
Soros Fund Mgmt LLC$8.84,400,000$390,940 4.4%4,400,000$382,140 4.3%
DE Shaw & Co Inc$51.44,252,705$377,853 0.7%4,052,705$351,977 0.7%
Blackrock  Advisors LLC$95.52,378,588$211,338 0.2%935,877$81,281 0.1%
John Paulson  & Co Inc.$22.91,902,500$169,037 0.7%1,925,277$167,210 0.7%
Tiger Mgmt LLC (J Robertson)$0.41,216,283$108,067 27.0%571,183$49,607 12.4%
Tiger Global Mgmt LLC (J Robertson)$7.00$0 0.0%1.5%5,815,690$505,093 7.2%
Appaloosa  (Tepper)$7.3725,000$64,416 0.9%0$0 0.0%
Davidson Kempner Capital Mgmt.$1.7564,000$50,111 2.9%0$0 0.0%
Adage Capital Partners$41.9540,000$47,979 0.1%0$0 0.0%
Reniassance Technologies $39.00$0 0.0%0$0 0.0%
Bridgewater Associates LP$12.80$0 0.0%0$0 0.0%
Highbridge Capital Management - (JPM)$5.30$0 0.0%0$0 0.0%
Howard Capital Management $0.50$0 0.0%0$0 0.0%
Och-Ziff Capital Mgmt Group $2.10$0 0.0%0$0 0.0%
AQR Capital Management $35.40$0 0.0%0$0 0.0%
Lone Pine Capital $26.90$0 0.0%0$0 0.0%
Pershing Square  Cap. Mgmt (Ackman)$13.40$0 0.0%0$0 0.0%
Baupost (Seth Klarman)$5.40$0 0.0%0$0 0.0%
Elliott Management Corp$5.90$0 0.0%0$0 0.0%
Total$419.134,566,602$3,071,2430.7%31,409,418$2,727,9080.7%
(a) Tiger Funds Combined %
(b) Marked to Market at the 2/17/15 closing price.



Reference Codes/Links:

9/30/14 13F'as as of November 14th filing date.
12/31/14 13F'as as of February 14th filing date.
2014 low $82.81 on 10/15/14

Alibaba Securities subject to 13F disclosure:
01609W 10 2 * ALIBABA GROUP HLDG LTD SPONSORED ADS
01609W 90 2 ALIBABA GROUP HLDG LTD CALL
01609W 95 2 ALIBABA GROUP HLDG LTD PUT

*********************************
12/31 Third Point - 10,000,000
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001040273&owner=include&count=40&hidefilings=0

9/30 - Third Point - Dan Loeb -  7,200,000  shares
https://www.sec.gov/Archives/edgar/data/1040273/000108514614002342/xslForm13F_X01/form13fInfoTable.xml
************************************
12/31 Soros - 4,400,000 shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001029160&owner=include&count=40&hidefilings=0

9/30 Soros 4,400,000 shares
https://www.sec.gov/Archives/edgar/data/1029160/000114036114042212/xslForm13F_X01/form13fInfoTable.xml
*************************************

12/31 - DE Shaw 4,052,705
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001009207&owner=include&count=40&hidefilings=0

9/30 - DE Shaw 4,252,705 shares
http://www.nasdaq.com/quotes/institutional-portfolio/d-e-shaw--co-inc-63744?sortname=companyname&sorttype=0&page=5
**************************************

12/31 - Renaissance Technologies - 0
https://www.sec.gov/cgi-bin/browse-edgar?company=Renaissance+Technologies&match=&filenum=&State=&Country=&SIC=&myowner=exclude&action=getcompany&Find=Search

9/30 -Renaissance Technologies - Jim Simons - 0
https://www.sec.gov/Archives/edgar/data/1037389/000103738914000073/xslForm13F_X01/renaissance13Fq32014_holding.xml
****************************************

12/31 - Appaloosa -  0
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001006438&owner=include&count=40&hidefilings=0

9/30 - Appaloosa - David Tepper - 725,000
https://www.sec.gov/Archives/edgar/data/1006438/000100643814000008/xslForm13F_X01/Form13FInfoTable.xml
*************************************

12/31 - John Paulson
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001035674&owner=include&count=40&hidefilings=0

9/30 - John Paulson - 1,902,500
https://www.sec.gov/Archives/edgar/data/1035674/000114036114042274/xslForm13F_X01/form13fInfoTable.xml
****************************************
Ackman v Dalio
http://www.cnbc.com/id/102425102#.

12/31 - Bridgewater - Ray Dalio - 0 Shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001350694&owner=include&count=40&hidefilings=0

9/30 Bridgewater - Ray Dalio - 0 shares
https://www.sec.gov/Archives/edgar/data/1350694/000114036114041083/xslForm13F_X01/form13fInfoTable.xml
*****************************************

12/31 - Highbridge Capital Management - 0 Shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000919185&owner=include&count=40&hidefilings=0

9/30 - Highbridge Capital Management - JPM, - 0 shares - (JPM)
https://www.sec.gov/Archives/edgar/data/919185/000091918514000010/xslForm13F_X01/table13f-20140930-live.xml
******************************************

12/31 - Howard Capital Management - 0 Shares
https://www.sec.gov/cgi-bin/browse-edgar?company=howard+capital+management&match=&filenum=&State=&Country=&SIC=&myowner=exclude&action=getcompany&Find=Search

9/30 - Howard Capital Management - 0 Shares
https://www.sec.gov/Archives/edgar/data/1078658/000114036115002134/xslForm13F_X01/form13fInfoTable.xml
*********************************************

12/31 - Och-Ziff Capital Management Group  - 0
http://www.nasdaq.com/symbol/ozm/institutional-holdings

9/30 - Och-Ziff Capital Management Group - 0 shares -   (Daniel Ochs)
https://www.sec.gov/Archives/edgar/data/1403256/000140325615000016/ozm-20141231xex99xepr.htm
***************************

12/31 - AQR Capital Management - 0 Shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001167557&owner=include&count=40&hidefilings=0

9/30 - AQR Capital Management - 0 Shares
https://www.sec.gov/Archives/edgar/data/1167557/000108514614002279/xslForm13F_X01/form13fInfoTable.xml
*****************************

12/31 - Lone Pine Capital - 0 shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001061165&owner=include&count=40&hidefilings=0

9/30 - Lone Pine Capital - Stephen Mandel - TF - 0 Shares
https://www.sec.gov/Archives/edgar/data/1061165/000090266414004391/xslForm13F_X01/infotable.xml
*******************************

12/31 - Viking Global Investors - 3,708,686 Shares
http://www.nasdaq.com/quotes/institutional-portfolio/viking-global-investors-lp-72854?sortname=companyname&sorttype=0
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001103804&owner=include&count=40&hidefilings=0

9/30 - Viking Global Investors - Andreas Halvorsen - TF - 11,387,526 Shares
https://www.sec.gov/Archives/edgar/data/1103804/000110380414000044/xslForm13F_X01/Form13fInfoTable.xml
*******************************************

12/31 - Tiger Management LLC - 571,183 shares

9/30 - Tiger Management LLC Julian Robertson Jr. - 1,216,283 shares
https://www.sec.gov/Archives/edgar/data/1027451/000091957414006555/xslForm13F_X01/infotable.xml
********************************************
12/31 - Tiger Global Management LLC - 5,815,690 Shares
https://www.sec.gov/cgi-bin/browse-edgar?company=tiger+global+management+llc&match=&filenum=&State=&Country=&SIC=&myowner=exclude&action=getcompany&Find=Search
9/30 - Tiger Global Management LLC Julian Robertson Jr. - 0 shares
https://www.sec.gov/cgi-bin/browse-edgar?company=tiger+global+management+llc&match=&filenum=&State=&Country=&SIC=&myowner=exclude&action=getcompany&Find=Search
********************************************
Ackman v Dalio
http://www.cnbc.com/id/102425102#.

12/31 - Pershing Square - 0 Shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001336528&owner=include&count=40&hidefilings=0

9/30 - Pershing Square Capital Management - Bill Ackman - 0 Shares
https://www.sec.gov/Archives/edgar/data/1336528/000117266114001862/xslForm13F_X01/infotable.xml
********************************************

12/31 - Baupost - 0
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001061768&owner=exclude&count=40&hidefilings=0

9/30 - Baupost -  Seth Klarman - 0 shares
https://www.sec.gov/Archives/edgar/data/1061768/000114036114042304/xslForm13F_X01/form13fInfoTable.xml
***********************************************


12/31 - Adage Capital Management - 0 shares
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001165408&owner=exclude&count=40&hidefilings=0

9/30 - Adage Capital Management - Phillip Gross & Robert Atchinson - Harvard - 540,000
https://www.sec.gov/Archives/edgar/data/1165408/000117266114001743/xslForm13F_X01/infotable.xml
************************************************

12/31 - Elliott Management - 0 Shares
https://www.sec.gov/cgi-bin/browse-edgar?company=elliott+management&owner=exclude&action=getcompany

9/30 - Elliott Management - Paul Singer -  0 Shares
https://www.sec.gov/Archives/edgar/data/1048445/000114036114042257/xslForm13F_X01/form13fInfoTable.xml
************************************************

12/31 - Davidson Kempner Capital Management - 0
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001595082&owner=exclude&count=40&hidefilings=0


9/30 - Davidson Kempner Capital Management - 564,000 Shares
https://www.sec.gov/Archives/edgar/data/1595082/000159508214000032/xslForm13F_X01/Form13FHRInformation.xml
************************************************

12/31 - Blackrock Advisors LLC - 935,877
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001086364&owner=exclude&count=40&hidefilings=0

9/30 - Blackrock Advisors LLC - 2,378,588 shares
https://www.sec.gov/Archives/edgar/data/1086364/000108636414002620/xslForm13F_X01/form13fInfoTable.xml

*************************************************




*********************************************************************************

Saturday, February 7, 2015

The Chinese Laundry.....





I wanted to take some time to think through and discuss the odd turn of events which took place over the last week or so.  Alibaba announced earnings and the stock took a US$30 billion haircut. We all know what happened, but the most profound questions anyone can ask relate to "who, when, where and most importantly.... why?"....all page references refer to the 424(b)4 IPO filing. (Link below)

Who lost money last Friday?

Let's start with some background. There are about 2 Billion BABA shares in lock-up right now, or 81% of the roughly 2.5 billion shares outstanding. (p16-17).  429 million are due to "un-lock" as of March 21st and an additional 1.5 billion shares are set to unlock on September 20th, 2015. According to the filing, the shares involved in the March lockup expiry are largely employee and director shares. (p250 thru p255)  Institutional shareholders are generally subject to the one year lock-up period.

The chart below is a "rounded" summary of the confusing chart & footnotes described on p250-255. To establish value I arbitrarily used a $100/share because: a.) it was representative of recent activity and b.) it makes the math cleaner and less confusing.






Who Owns Alibaba?
424(b)4 - (p250-255)
(mlns)
Value (mlns) @
Shell
Insider/Locked Shares
Shares
US$100/shr
%
Domicile
(mlns) $
Jack Ma (x)
386
$38,600
15.50%
See ©
$20,400
Joe Tsai
79
$7,900
3.20%
PROC
Other Officers/Directors
51
$5,100
2.00%
PROC
SoftBank
798
$79,800
32.00%
Japan
Yahoo
401
$40,100
16.10%
US
Fengmao Inv
52
$5,200
2.10%
PROC
Silver Lake (a)
54
$5,400
2.20%
Caymans
$5,400
Yunfeng (a)
28
$2,800
1.10%
Caymans
$2,800
CITC (a)
21
$2,100
0.80%
Caymans
$2,100
Broad Sino (a)
5
$500
0.20%
BVI
$500
Prosperous WS (a)
10
$1,000
0.40%
BVI
$1,000
Evergreen Growth (a)
2
$200
0.10%
BVI
$200
Asia Alt Mgmt (a)
1.6
$160
0.10%
BVI
$160
Pavilion Cap (a)
1.3
$130
0.10%
Singapore
$130
Li Ka Shing Foundation
1
$100
0.00%
Canada
$100
Cressent Holdings
1
$100
0.00%
Austria
$100
Siguler Guff BRIC (a)
0.5
$50
0.00%
US
Siguler Guff HP (a)
0.2
$20
0.00%
US
Arctic Capital
0.1
$10
0.00%
BVI
$10
Certain Employees  (b)
67
$6,700
2.70%
PROC
Certain Affiliates (b)
18
$1,800
0.70%
PROC
Underwriters (f)
26
$2,600
1.00%
US
Total "Locked" Shares
2,003.70
$200,370
80.40%

$32,900
US Float
 US Hedge Funds (per November 13fs)
  Third Point
7.2
$720
0.30%
  Soros
4
$400
0.20%
  D. E. Shaw
4
$400
0.20%
  John Paulson
1.9
$190
0.10%
  Julian Robertson
1.2
$120
0.00%
  David Tepper
0.7
$70
0.00%
  Total
19
$1,900
0.80%

  Other Float (f)
468.3
$46,830
18.80%
Total Issued Shares
2,491.00
$249,100
100.00%
(a) Multiple entities.
(b) ESOP & employee/contractor/partner agreements
(x) Shares directed by Jack Ma in caymans/BVI Shell Corps        (APN, SymAsia, JC Properties, ASM Ltd) p251 - Note #1
(d) Pension Funds, Day Traders, Retirees, Widows & Orphans    
(f) Presumably, based on the price movement, the Underwriters exercised their purchase options.


Note the significant number of shares held by Shell Companies in the Cayman Islands, BVI, etc. Today, roughly $32.9 billion in BABA stock is sitting in these Shell Companies.  Jack Ma alone controls roughly $20.4 Billion through a series of Cayman Islands Shells (APN, SymAsia, JC Properties, ASM Ltd. & related subs)  Like most things in life, there's probably a very good reason for this.  Keep reading.

Also of note, the number 8,108,115 shares is listed three (3) times in the Prospectus.  On page 298 it's revealed that the entire lot of these shares belongs to one entity/shareholder.  For some reason this tranche (and only this tranche) was given a favorable lock-up period of only 90 days.  It would be interesting to know which shareholder was allowed to sell $800 million worth of stock only 90 days after the IPO and why they were allowed to do it. The IPO document is silent on this disclosure.

Moreover, based on the book values reported, specifically, the absence of significant Paid-In-Capital and Equity Balance, it looks like the shares issued prior to the IPO were practically given away.  The chart below illustrates the Equity Balance, Shares Outstanding and Book Value from 2010 thru 2014. (p 98)



Alibaba Book Value
2010
2011
2012
2013
2014
Total Equity (mlns RMB)
26,493
28,402
34,383
513
30,417
 
Total Equity (mlns US$)
$4,273
$4,581
$5,546
$83
$4,906
Outstanding Ordinary Shares
2,421,257,567
2,435,156,669
2,491,952,201
2,160,220,739
2,193,810,660
Book Value Per Share - US$

$1.76
$1.88
$2.23
$0.04
$2.24
 
(a) Oddly, the entire equity of the company disappears in 2013 and magically reappears in 2014.  Here's the footnote:
"The decrease from March 31, 2012 to March 31, 2013 was primarily due to the repurchase of our ordinary shares from Yahoo
in September 2012 and the privatization of Alibaba.com, partially offset by the issuance of ordinary shares to finance the repurchase."

Generally, we see that the shares outstanding remain relatively constant.  The Shareholder Equity Account (generally) tracks with the presumed increase in Retained Earnings. Unfortunately, there is no schedule analyzing the equity account(s) year over year.  The number of shares issued/retired since 2010 was not necessarily material.  Moreover, the calculated book value per share in 2010 was a mere $1.77.  Although, there are no figures available to support this, presumably most of the book value is due to the accumulation of Retained Earnings. illustrating that  the shares issued prior to 2010 must have been issued at values significantly less than today's perceived ($100 per share) economic value of the business.  At about a $1.00 per share (or less) cost basis, the insiders really don't have any skin in the game.  Put another way, if the stock drops to $10/share (which sounds about right based on the "real" financials and economic prospects of the company) the insiders would have a "10 bagger" in just a few years......nice work......of course, the US shareholders who bought at $100/share would be less than pleased.


What's all the "Hub-bub" about?

Now, lets get back to the SAIC report. (Summary URL Posted below) The content and timing of the release of this report is as puzzling as it was alarming. In a July meeting at the Alibaba headquarters, months before the IPO, the SAIC's Internet Relations Director, Liu Hongliang, presented the following:
  • 63% of the the merchandise held for sale on the platform were either illegal, non-conforming or fake.  (Author's note: No kidding?...I always thought Ralph Lauren was based in Somalia....who knew?)
  • Alibaba employees had been engaged in fraud, bribery and cover-ups.
  • Alibaba had "lax controls" over every aspect of it's listing process.
  • Alibaba participated and condoned a pattern of "False advertising" by listers.

The curious release of the SAIC report just prior to the BABA earnings conference call is likely no coincidence. Even more interesting is the odd language indicating "The meeting was not made public in order not to impact Alibaba’s IPO" .  US Securities lawyers jumped all over this and immediately began advertising for class clients.  Mr. Hongliang certainly knew, or should have known what the impact of a report like this might mean for the shareholders of Alibaba. Yet he chose to keep the report under wraps until the time was right, and post it at a most opportune time (or inopportune time for BABA). Moreover, the BABA fire-drill response was frantic (Joe Tsai's rant during the earnings call), Jack Ma's emergency trip to the SAIC resulting in the removal of the report from the SAIC website, along with a BABA press release announcing "vindication" are all indications as to how far BABA executives will go to keep their e-commerce charade alive.

Why?....this is always the tough one.

Let's talk hypothetically for a moment.  Again, I'm just speculating, posing a hypothesis, here.   I'm not naming names or accusing anyone of any wrongdoing or anything like that. This is just a theory as to "why" things like this could happen.  Anyone familiar with "the way things are done" in China understands the deep rooted system of political patronage, business networks, kickbacks and gray/black money which constitutes the pay-to-play environment  for China's political elite. Today's China is much like Post-Prohibition Chicago....with egg rolls.  Everyone (connected) makes money...and everyone gets a cut.  This is the fuel that powers the Chinese economic engine.   This is the system that "gets things done".

You may also know that China's economy is heavily regulated, but, unfortunately, the regulations are "selectively enforced".  Let's say hypothetically, that Jack Ma and/or some Alibaba execs did something to disrupt the pay-to-play system, or perhaps, someone in the patronage food chain was looking for a bigger piece of the pie.

Lets say that Mr. Hongliang, for some reason, just didn't like the way things were going at Alibaba. Maybe his monthly patronage check didn't come in?  Maybe he was cut out of the IPO?  Maybe he heard that another public official was getting a bigger cut than he was?....and for all he'd done to help protect Alibaba from political/public scrutiny!...keeping all of this illegal activity out of the limelight....it's an outrage!  Let's say that the SAIC report and it's timely release were actually a shot across the bow of the Alibaba juggernaut.  Could it be that the politicos were quick to withdraw the report once it had done sufficient damage and once they were sure that their message was heard loud and clear?  Just imagine what a headlines like "Chinese government considers nationalizing Alipay" or "Jack Ma arrested on corruption charges" might do to the stock price?

Let's also hypothesize that all of those Shell Companies are, in actuality, vehicles to get elite money out of the PROC, out of the Chinese banking system and out from under the radar of China's selective enforcement of the new Anti-Corruption Laws.  After all, there's no better way to hide money from Chinese authorities (and avert confiscation) than to keep it out of China in the first place.  It's no secret that China's elite are continually looking for better ways to move money/wealth out of the PROC.  Money laundering has become more than a cottage industry in China, it's a blood-sport. Flows of elite money leaving the country have increased geometrically over the last few years. Equity Deals, Hard to Value Assets, Cruise Lines, Underground Banks...and my favorite, “Ants moving house”: transit companies around Guangdong that offer a service, hiring a large number of individuals to carry cash over the border, relying on the legal limit of US$ 10,000 each.  Free Caribbean and Seychelles vacations offered to Chinese Nationals just to get cash out of the country.

It's no accident that there are now one-hundred-and-seven (107) US listed Chinese ADRs with an aggregate Market Cap of US$ 1.3 Trillion as of 12/31/14.  It's no coincidence that significant shares of these ADRs are owned by shell companies in the Caribbean.  It's no happenstance that all of the IPO's are done on the same boilerplate, issued by the same Investment Banks, using Caribbean shell companies, with only the numbers, charts, logos and the officer names changed.  My understanding was that the original template came from Morgan Stanley and was used for the Infosys IPO (6/1/2005) but I've never been able to confirm that.   Anyway, let's say, hypothetically, that these ADRs are not as advertised.  Let's say there's a possibility that these IPOs are not the great investments they are touted to be, opening up the tremendous growth potential of the worlds second largest economy to the US Capital Markets.  Lets say that there's at least a possibility that these "investments" are primarily vehicles for China's political and business elite to launder money.  I really can't think of a better reason for US$ 32 Billion to find it's way into Caribbean banks and brokerages.

Alibaba insiders alone have US$ 32 Billion of direct-able resources offshore.  Jack Ma personally received an additional US$ 13 Billion from the IPO.   The 107 other offshore ADRs with a Market Cap over US$ 1.3 Trillion are also locked and loaded.  All of this resource could/will  provide a virtually unlimited, untraceable war chest to fund kickbacks, bribes, payola, grease, juice and Xínghuì for China's political and business elite for years to come.

Of course, let's not forget to give credit where credit is due.  All of the future carnage has been designed and meticulously implemented by US Investment Bankers who, for huge fees, were more than happy to do the wash.   They were more than willing to provide access to all that naive (sucker) US capital for a price. 107 IPOs, billions in fees, US$ 1.3 Trillion in Market Cap/Wealth,. much of which is sitting in accounts waiting to be tapped by insiders.  When the Anti-Corruption investigator comes knocking maybe Jack can just sign over a few shares from the BVI account and the problem just goes away.  Perhaps a couple of phone calls and a stock transfer made an oddly timed SAIC report from an out of the loop public official disappear?  Poof!

Here are a few people who can probably shed some light on this phenomenon:

Anthony Kontoleon, Managing Director: Credit Suisse
Joseph P. Coleman, Managing Director & John Reed, Director: Deutsche Bank
D. Binnion, Managing Director; Goldman
Mike Millman, Managing Director: JP Morgan
Crawford Jamieson, Managing Director: Morgan Stanley
James Perry, Managing Director: CitiGroup

As far as I can tell, these men are the architects of this "Chinese Laundry".  US$1.3 Trillion in US ADR Stock Market Value at risk (Much more if you calculate the Lehman/LTCM effect).  At best, this looks like bad judgement, perhaps with a side-order of systemic misrepresentation and consistent violation of securities law.....at it's worst.... it's treason.

Now if you'll excuse me, I have to sign off.  I've just received an e-mail letting me know that my Anthem Health Care account might have been hacked by the Chinese government......as always, timing is everything.



IPO Filing:
https://www.sec.gov/Archives/edgar/data/1577552/000119312514347620/d709111d424b4.htm

Summary SAIC Report:
http://qz.com/335675/the-chinese-government-has-erased-a-damning-report-on-alibaba-but-you-can-read-it-here/