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

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