Saturday, November 28, 2015

Bowenpress estimates 64% of Alibaba's "singles day" GMV is fake....

Bowenpress, a SanFrancisco based Chinese language news website, founded in 2004, is reporting that the 11/11/15 "singles day" is not all that Jack Ma and company make it out to be.  As my readers know, I'm not conversant in Chinese, but I have a number of good friends who are.  You can get a rough translation using Google Translator, but here are some of the more remarkable translations, per my good friends:

"On TMall's Global Shopping Festival of 11.11.2015, the platform saw 91.217 bln in transactions, of which 68.67%, or 62.642 bln, were by mobile handset. creating yet another Chinese consumer miracle.Today, the total return rate for TMall and Taobao is 64%, exposing the high rate of fake transactions on those platforms.

Deep Throat note:  At 91.2 billion transactions with US$14.3 Billion in associated GMV, this would put the GMV pre transaction at 15 cents each.  i.e.) More silly numbers prompting the question "exactly what's included in a transaction?". 

"On this topic, Jack Ma gave a surprising response: 'Double 11 will be here for a century, even if Alibaba itself is gone, Double Eleven will persist!'

"Today, the return rate from TMall and Taobao has already reached 64%,worth 57.4 bln RMB (USD$9.2 Billion) in amount returned, showing that as long as there are Taobao and TMall, there will be a lot of faked transactions.

"Industry sources say as long as there is Taobao there will be fake transactions. Take one example: If two online stores have the same products at roughly the same price, and one has made 1,000 sales and has a lot of positive reviews,while the other has just a few dozen purchases and so-so reviews, what choice will the customer make? You can believe that most customers will choose the store with more transactions and more reviews."

Caixin, the Beijing based media group, understandably, hasn't picked up this story yet, being under more government scrutiny .  The closest they've come to questioning the veracity of the numbers is to question whether "Singles Day" is really beneficial to the Chinese economy.

Of course, this is yet another source which is validating the content of this blog, as well as the questions posed by other news organizations Barron's (John Laing), Fortune (Jen Wieczner), Bronte Capital (John Hempton) , MarketWatch (Francine McKenna) , CNBC) as well as Gorgon Chang's prophetic article from 2014 citing estimates from the China Industry Research Network, Gartner and Barclays that Alibaba's GMV, as well as that of other eCommerce businesses, was roughly 25% overstated..  

I wouldn't be surprised if the Bowenpress estimates aren't at least directionally correct.  To beat the ever-higher figures from previous years and blow by analyst estimates, Alibaba would need to continually inflate their fake numbers.  There's a cottage industry that's been developed arrounf fake GMV.  It's probably becoming a core skill set!  

Question of the day:  What would happen if we found out that 64% of Walmart's or Amazon's sales are fake?  

I think I'll get on-line right now and start snapping up some of those Cyber-Monday deals!

Happy Holidays!

Original Bowenpress post URL
http://bowenpress.com/news/bowen_40416.html

Wednesday, November 18, 2015

I was talking with an analyst......

...over the weekend who is considering initiating coverage on Alibaba. The fundamental question she raised was "what's a reasonable target for the stock?" She's an avid reader of this blog and wanted my thoughts on how to "strip off the fluff" and zero in on the real value of the core business. As I had discussed in the last post, most analysts and Hedge Funds are concerned, and rightly so, about the veracity of the accounting (consolidation and asset carrying values), rapid cash burn as well as the GMV legitimacy.

We also discussed my "Bold Prediction", that Alibaba would be looking at issuing bonds soon. She revived an interesting alternative, that warrants some discussion. Jack and company might be accelerating the Ant Financial/Alipay IPO. Although, my prediction was based primarily on simplicity (They would cookie-cutter the November 2014 Bond Issue), an Ant/Alipay IPO could be much more lucrative, with estimates floated by the financial press of up to $50 Billion. My guess, after talking with friends "in country" is that the Alipay IPO is might be off the table, or at least on life support for now.

Here's why...

Based on the Alibaba IPO filing 424(b)4 filing (pg 258-267) there are several components of "Other Income, net" as reported on the financial statements.

1.) The transaction processing fees payable to Alipay/Ant(SMFSC) on Alibaba's platforms. According to the filing, this fee was running at about 4.5% of revenue and 0.14% of GMV at the time of the filing. Authors Note: Really? Alipay can perform escrow services for 0.14% of the transaction value? They must be incredibly efficient.

2.) Alibaba is entitled to 37.5% of the pre-tax Net Income of Alipay/Ant(SMFSC)

3.) Alibaba is entitled to 2.5% of the average Daily Loan balance, presumably to be accrued in the financial statements and reported in "Other Income, net".

4.) An IPLA - Intellectual Property (Royalty) agreement as well as a "Shared Services" agreement whereby Alibaba sends a bill to Alipay/Ant(SMFSC) on a regular basis. Presumably, this number is calculated by Maggie Wu calling the CFO at Alipay/Ant(SMFSC) and telling him/her what the number should be.

As is typical for Alibaba, the financial relationship with Ant/Alipay(SMFSC), namely, the transaction fees paid; the offsetting 37.5% pre-tax profit sharing; as well as the 2.5% commission on average SME loan balances, have never been disclosed since the day these line items were referenced in the IPO filing. Presumably, all of these expenses and revenues are netted/buried in "Other Income, net" line of the Income Statement.

With 900 million Alipay users and a significant financial interest/exposure/relationship, the numbers are clearly material and should be disclosed. Period.

According to the IPO filing, the transaction fees payable by Alibaba to Alipay for 2012, 2013 and 2014 were running approximately 4.5% of revenue and 0.14% of GMV at the time of the IPO. Since the transaction fees are netted against the profit sharing and commissions yielding roughly zero, we can do some extrapolation, providing there are no other "odd", undisclosed, material transactions thrown into the mix. Let's assume, for the sake of argument, that Ant financial is run like most of Jack's other businesses, i.e.) Like his own personal piggy-bank, presumably used to reward friends for their loyalty , provide a source of fun-money and fund odd, money-sucking eCommerce start-ups and acquisitions. If we assume that Alipay has no/little pre-tax profit, we come up with some interesting suppositions per the schedule below.

Per the above, based on the law of large numbers, let's say that the relationship of Alipay fees paid to revenue holds constant. When we apply the 4.52% ratio to revenue we can calculate the fees paid. We can also extrapolate and adjust Alibaba's Net Income to see what the business might look like if there was no relationship with Alipay/Ant(SMFSC). We can remove the fees (as a proxy for the Profit Sharing 37.5%, SME Loan Balance 2.5% payment and IPLA/Shared Services obligations owed to Alibaba) as well as the "Write-up/Gain" of "Deemed Disposals of Investees and other BS" as described in the financials. When we calculate "Adjusted Net Income" the exercise yields a stunning result. Namely, for an enterprise the size of Alibaba, it has no earnings/net-income to speak of . In fact, from 2014 prior to the IPO, Net Income has declined from US$3.1 Billion down to an annualized rate of roughly $2 Billion while Revenue is on pace to more than double during the same period. Again, with meteoric growth like this Alibaba should be hauling cash to the bank in dump trucks, yet they have puny earnings and are burning through cash. Perhaps Alibaba management should consider "managing to a profit margin" despite their repeated, public refusal to do so. Moreover, the above doesn't yet reflect the inevitable future write-offs of the rest of the "Questionable Assets" as described in my prior posts.

In addition, if we assume that Alipay has little or no pre-tax net income (37.5% Profit Sharing), we can conclude that the offset to the Transaction Processing fees is attributable primarily to the 2.5% payment on "Average SME Loan Balance" and calculate the amount of loans outstanding accordingly. This "SWAG" tells us that SME loans outstanding have increased rapidly from roughly US$8.1 Billion in 2014 to about $24.5 Billion today.

Credit Risk associated with Ant Financial (SMFSC)

You'd also have to be living under a rock not to have heard about the explosion of debt, "Wealth Management Products" (WMP's) and Money Market instruments in China. As we've all learned, rapid increases in debt levels, loosening of underwriting standards and easy money generally cause a corresponding increase in defaults. People/businesses get overextended and they can't pay their loans back. Who knew? Gordon Chang (Forbes) just wrote a nice piece on the acceleration of bond defaults in China referring to an eventual "debt tipping point" which might have some bearing on Alipay/Ant (SMFSC) going forward. Since nothing has been disclosed re: the financial condition of Alipay/Ant (SMFSC), as Investors we can either assume:

A.) That Alipay/Ant (SMFSC) is a button-down, smartly managed savvy financier making loans to only the most credit worthy businesses and individuals, at interest rates that protect shareholder value; or

B.) A bucket shop making bad loans at a breakneck pace to any knucklehead who walks in the door in order to show incredible top-line growth.

If I were to guess, since Alibaba management has never been shy about disclosing favorable financial metrics and we know nothing about Alipay/Ant (SMFSC) , I'm thinking the latter (B) is the more likely of the two.

What if Alipay charged "Normal" Processing fees to Alibaba?

Based on the 0.14% of GMV fee that Alipay charges Alibaba to process the escrow services, it's clear that either: 1.) The reported GMV number is silly (a distinct possibility as described in prior posts); 2.) Alibaba is getting the "deal of the century" on processing fees since the two businesses are related; or 3.) Both.

Hypothetically, let's say, for example that Alipay charges a "normal" processing fee of 2% of GMV. For the fiscal year ended 3/31/15, Alibaba's estimated processing cost increases from US$550 million to US$7.7 Billion. Adjusted Net Income (Excluding the $1.5 Billion of Asset write-ups as described in the Table above) is reduced from $1.8 Billion to a Net Loss of $5.3 Billion.

So with "real" sustainable earnings reduced from a roughly $2 Billion profit to $5 Billion annual loss, it's clear that without a fundamental change in the revenue/cost structure, Alibaba isn't worth as much as it appears. This is especially true if Alipay/Ant(SMFSC)/Jack requests a price increase.

Earnings Management

Finally, has it occurred to anyone that this construct is designed (perfectly) to manage earnings and siphon same away from BABA to Ant/SMFSC? and/or even visa versa depending on Jack's mood or which way the wind is blowing? According to the filings there are 300 +/- separate operating companies/businesses in the VIE. There's never been ANY discussion of which businesses are consolidated, accounted for under the Equity Method or how these far a-flung businesses (Movie Companies, Soccer Teams, Software Development, Logistics/Distribution, etc.) have an impact on Revenues and Expenses. On every 6K thus far, all of these diverse businesses and revenue/expense streams are reported in a big blob entitled "China Commerce". This is, of course, no accident. As investors, it's painfully clear that management has been going to great lengths to show us only the most favorable half of the puzzle.

Back to the Original Question.....

So what's the stock price target for this mess? There clearly is "some value" in a brand as ubiquitous as Alibaba. The tentacles reach far and wide. They are a "beloved" company. Everyone in China uses the Alibaba ecosystem.  I get it.

 On the other hand, all the signs of an Enron/Valeant/WorldCom/LTCM/Lehman/WAMU, etc-esque, out of control management, off the books, pervasive half-truths and financial mis-rep are all there. Given the above, the only thing I can be sure of is that the target price should be substantially below where it is today. After all of the write offs and recapitalization, the core business would probably be worth somewhere around 20x its 2013 earnings (prior to all of the Shenanigans) or roughly US$20 Billion.....so somewhere around $7 a share. Of course, current shareholders would be wiped out on the re-Cap as preference classes would generally get paid first. Unfortunately, that's just the way these things go.

Of course, there's a good chance that my calculations above could be materially in error, yet these guesses are all we have to go by. As investors, we wouldn't have to speculate and perform all of these financial gyrations if Alibaba management would simply fully disclose these numbers. But as we've seen so often in the past, subterfuge and obfuscation, describing only part of the puzzle are more the rule than the exception when it comes to financial disclosure for Alibaba and the rest of these odd eCommerce ADR's.

There you have it....like nearly every analyst out there, I'll agree......Alibaba is indeed a STRONG BUY....at $7.00 per share.





Additional Reading:

Alipay IPO
http://www.bloomberg.com/news/articles/2015-01-30/alibaba-finance-arm-said-to-plan-2016-initial-public-offering-i5je2vu0

Bond Default
http://www.forbes.com/sites/gordonchang/2015/11/15/chinas-largest-bond-default-ever-the-last-tipping-point/?utm_source=followingimmediate&utm_medium=email&utm_campaign=20151115


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.....


Sunday, November 1, 2015

One of these things is not like the others......


When my children were young we used to enjoy the little Sesame Street song  "One of these things is not like the others".  The tune asked: "can you guess which one?"  We always had lots of fun solving the puzzles and in fact, this little tune has served me well throughout my career.  Often, to this day, when I'm reviewing SEC filings trying to understand the numbers, the tune inexplicably pops into my head.  Although, over the years, the "things" have gotten a bit more complex.

Speaking of the above, I took the time to listen to Alibaba's Investor call earlier this week.  As usual, the irrelevance and subterfuge of the presentation was surpassed only by the banality of the questions asked by the analysts.  As usual, Alibaba reported meteoric GMV, huge revenue growth, and sizable increases in other, unverifiable e-Commerce metrics. The market reacted accordingly this week, pushing the stock back up over $83.00 at the time of this post.

Let's start with the obvious.   First, China is in a "stealth recession".  Despite what the NBS publishes, like the chronically unemployable, drunken uncle at the Thanksgiving table, nobody mentions it and the rest of the family pretends he's invisible as he drools into the candied yams.  Yes, I know, you are thinking, "Good old Deep Throat has lost his marbles.  Per the NBS, China is growing at 'about 7%'....Alibaba is a juggernaut!".

Well, let's all warm up our vocal cords and start singing our little Sesame Street song.  Below is a chart showing Alibaba's quarterly GMV in comparison to the quarterly revenue of some of the largest businesses in China.  The Market Cap of these seven (7) businesses is just shy of US$ 1 Trillion so the revenues should be relatively representative of China's economic activity compared to prior quarters. I've selected the five (5) largest ADRs by Mkt Cap, a Utility (HNP), another e-Commerce stock (JD) as well as a variable tracking the Shanghai/10 Stock Index.  The company data was compiled from the SEC filings.



As we can see from the above graphic,  the Chinese people have apparently fallen gonzo-crazy-in-love with Alibaba.  Even though, during the  quarter, China's stock markets crashed, falling 40%, it seems China's consumers continued to relentlessly shop, driving Alibaba's GMV up 28% YOY.  Oddly, during the quarter, they spent significantly less (QOQ) on gasoline and fuel (PetroChina -8%), financial products (ChinaLife - 30%), Cellphone Service (ChinaMobile - 4%).  Moreover, electricity consumption (Huaneng Power),  E-Commerce Consumer Electronics (JD.com) and Internet Search/Service (Baidu) revenues remained flat.  So the Chinese consumer is apparently forgoing these everyday necessities in order to shop on Alibaba?  Again, the enormity of this GMV reported as "flowing through the Alibaba ecosystem" is staggering,  It's 1.6 times the Revenue of PetroChina, the second largest Oil Business in the world (600,000 employees).  It's larger than US Walmart revenue. The annualized Run-rate represents roughly 10% of China's Consumption (NBS). (Walmart is roughly 2.5% of US Consumption)

The Investor Call

Generally, people tend to ask fewer questions when they are paid a lot of money not to ask them.  I get it. Nonetheless, the Investor Call was informative on many levels, despite the absence of any questions regarding:

1.) US$3 Billion booked in the quarter (US$7 Billion in the last 6 months)  as a "Gain on deemed disposals /disposals/revaluation of investments" and composition of same during a 40% Market Crash;
2.)The US$500 Million of Share-Based Compensation (14% of Revenue);
3.) Zero % Revenue growth in two of their most ballyhooed acquisitions, AutoNavi and UCWeb;
4.) The massive increases in "Questionable Assets" (Goodwill, Intangibles, Land Use Rights, Investment in Equity Investees, Investment Securities) of US$8 Billion in the quarter. These "Assets" are now US$29.4 Billion and represent 58% of all Balance Sheet Assets.  Again, this miraculous asset write-up took place in a quarter where the Chinese Stock Markets had crashed.

That said, there were actually three (3) pretty good questions asked.  It was the answers that, at least, to me, were a bit confounding.

Question #1:   Asked by Ming Zhao of 86Research  : Minute 28 of the call ming@86research.com.
Mr. Zhao asked about GMV Category Mix.  What types of products are being sold?  Where are the growth areas?  Daniel Zhang responded with a general (paraphrased), "Consumer electronics, cell phones, large appliances, basic necessities, food and beverage, especially fresh food, are popular on-line."  Really?  That's the product mix analysis?  I would have hoped to get a little more granularity, perhaps, for example, something like "Today, 50% of our GMV is comprised of  Industrial Goods, Real Estate, Loans and 'Bad Assets' closed off-line, outside our platform (like Craig's List), but recorded as GMV anyway; 45% is cheap clothing and chotchkies delivered randomly by 1.5 million bicycle and scooter operators; and the last 5% is illegal, counterfeit, knock-off American & European brands."  Perhaps my expectations re: transparency are just a bit out of line with management's thinking.

Question #2 - Ross Sandler of Deutsche Bank - Minute 34 of the Call. - ross.sandler@db.com
Mr Sandler asked about the macro outlook of GMV going forward, referring to China's slightly stalled economy.  Joe Tsai stepped in and commented that (paraphrased) "If China's  economy is going gangbusters then Alibaba will certainly benefit.  On the other hand, if things slow down a bit, the Chinese consumer won't be affected very much, since consumption is relatively low by Western standards and bound to increase.  Consumers have plenty of cash, savings and liquidity. Wage growth has also increased and shoppers have a high savings rate."  My comment would be that, after reviewing the revenue numbers for the businesses above, given the conservative, frugal nature of the Chinese consumer, and a decades long, ingrained pre-disposition to save and NOT shop, wouldn't you expect them to "hunker down" and slow spending in tough times?  It's unlikely, and in fact, to my knowledge has never happened in the history of modern economic science, that consumer and retail spending would somehow continue to ramp up in a slowing economy.

Question #3 - Robert Lin of Morgan Stanley - Minute 21 of the Call - rob.lin@morganstanley.com.
Mr. Lin asked (paraphrased), "Given the growth of on-line to off-line retail and that brick & mortar stores are now reporting that 25% of their volume is through Alibaba, how is GMV reported?"  He was presumably getting to the core of a potential problem where GMV, similar to what goes on at JD.com, is recorded as sales (GMV) multiple times without the product ever leaving the store.  i.e.) a stereo is sold, returned and sold again.  My sources inside China have estimated that JD.com's Revenues are probably overstated by 20%-30% because of this monkey business.   As discussed in prior blog posts, per the SEC filings, Alibaba does not report merchandise returns and/or allowances as a reduction to GMV like other e-Commerce businesses (Amazon, E-Bay, etc) do.  The response by Daniel Zhang was, predictably (paraphrased) "GMV is reported on our on-line sales".  Again, not exactly the transparency I was hoping for.

So, here's today's Thesis to be tested over time:  

Of course, I'm not directly accusing anyone of incompetence, misrepresentation, puffery or anything illegal here.  I'm just posing a possible thesis:

Is Alibaba really an unstoppable marketing juggernaut, capable of defying modern economic theory and market forces, with the ability to show double digit YOY growth forever?  Or.....is there a more obvious explanation of the numbers presented in the Investor Call.......i.e: the books are cooked.




10/27/15 - Presentation
http://www.alibabagroup.com/en/ir/presentations/pre151027.pdf

10/27/15 Investor Call
http://edge.media-server.com/m/p/htxeh3jg/r/1

10/27/15 - 6k Filing
https://www.sec.gov/Archives/edgar/data/1577552/000110465915072968/a15-21796_1ex99d1.htm

SEC Filing Search - PTR, HNP, BIDU, JD, CHL, LFC, BABA filings.  JD.com 9/30/15 Revenue from Yahoo! Finance - Analyst Estimates (11 Analysts Average)
https://www.sec.gov/edgar/searchedgar/companysearch.html