Wednesday, January 25, 2017

Alibaba - 1/24/17 Q3 Earnings Call....20 seconds of magic...

Rather than do an in-depth analysis of the earnings call, I'l just refer you to my analysis of the Q2 call "Just when I think....".  The numbers are a bit different but the content and direction is essentially the same.

Here are today's links:

Call

Presentation
Press Release
SEC 6-K Filing

The company continued to show enormous fake, organic revenue growth (54% YOY).  The market has responded accordingly, up $2.00 yesterday on the whisper numbers and $3.00 on the actual....the Analysts were salivating, using adjectives like "Tremendous", "Great", "Very Strong!"

....I'd actually like to add "unbelievable!" to the list.

I also won't take the time to ask how a "law of large numbers business" like Alibaba could:

1.) Increase Revenue by 45% year over year with only a 9% increase in Annual Active Buyers.
2.) Increase Cost of Sales (Excluding SBC) by 6.6% over the September quarter.  
3.) Continue to pay $500 Million +/- in dillutive Share Based Compensation (SBC) every quarter, including that which goes to employees of other "ecosystem" businesses.
4.) Continue to "buy" revenue indefinitely, consolidating the likes of Youku Tudou, Lazada and other money-sucking businesses into the pool of sludge.  InTime, another "strategic" acquisition, will most likely be consolidated next quarter.
5.) Increase PP&E US$407 Million in the quarter with no explanation.
6.) Increase Revenue guidance from 48% to 53%, implying continued, gigantic, organic growth.

Even though a discussion of the above would be entertaining.  I'd rather go a different direction today. 

Let's discuss the "20 seconds of real magic" in the investor call that merits dissection.....When Eddie Leung of Merrill Lynch finally asked a question I had always hoped someone would ask.  He wanted to know if Alibaba's merchant product mix had changed over time (Minute 29:40 of the call).  For his effort he received a rambling, confusing (at least to me) discussion from Daniel and Maggie about business segments.  Maggie also reminded Eddie and re-emphasized that they still disclose GMV, but will only disclose annually (and apparently also on "Global Shopping Day" with great fan-fare as described in the filing.) To his credit, Joe Tsai recognized the disconnect and stepped in (Minute 33:20 thru 33:40) :

"With regard to the eCommerce segment product mix, the big categories, soft goods, apparel, electronics, FMCG...those categories, the mix has not changed over time."

That's AWESOME!  He didn't mention any of the Wealth Management Products, Bad Debts/Loans, Industrial Products (Pipe/Steel/Fuel Oil, etc.), planes, Yachts, counterfeit liquor or any other of the weird things anyone can find by doing a quick search on any of the Alibaba sites. 

Since the IPO, Alibaba has never disclosed product mix.  Other than Daniel's occasional, odd, rambling discussions of "winter coats and cold/warm weather", investors have no idea which product categories and quantities are sold by Alibaba/TaoBao/TMall merchants.  They never have.  Like presidential tax returns, this information is apparently a closely guarded state secret.

Now, per Joe Tsai, we do know with certainty, that the mix has stayed the same, yet, the actual GMV breakdown has never been disclosed.  You'd think, since Alibaba is a super-duper-high-tech-big-data-cloud-computing-giant, they could just push a button and generate detailed and summary GMV data by SKU, vendor, region, product class/category, etc.  Yet, to date, they've not done so.  The only discussion of product mix I know of appears in the initial IPO filing:

Product Mix 424(b)4 IPO - pg 167
https://www.sec.gov/Archives/edgar/data/1577552/000119312514347620/d709111d424b4.htm

Pg. 164 of the filing states that China's 2013 Consumption as 35.8% of GDP.
Pg. 165 of The filing states that China's 2013 GDP was US$9.5 Trillion.
Therefore Total Consumption in 2013 was US$3.4 Trillion, per the filing.

Pg. 1 of the filing states Alibaba's 2013 GMV was US$296 Billion.

Here's the silly little chart describing what Alibaba sells compared to China's consumption (Pg. 167)





So we can see that the sandbox  ("Orange slices" above) that Alibaba played in back in 2013 (just prior top the IPO) amounts to roughly 16.6% of China's consumption or US$566 Billion (16.6% x US$3.4 Trillion).   Alibaba's 2013 GMV was  a remarkable US$296 Billion or 52.3% of total China Consumption for the "Orange slices" at the time.  Makes sense?

Per Joe, there has been no change in product mix.  Therefore, almost all of Alibaba's GMV is still comprised of Clothing, Footwear, Electronics, Home Appliances, Household Goods and Services.

The NBS, another repository for amazing fake data, describes that total Online Sales of Physical Goods in 2016 (Bullet #4) amounted to 4.194 Billion Yuan or US$612 Billion (CNY6.83/$1.00).


In 2016, the online retail sales reached 5,155.6 billion yuan, an increase of 26.2 percent compared with last year, among which the retail sales of physical goods was 4,194.4 billion yuan, up by 25.6 percent, accounting for 12.6 percent of the total retail sales of consumer goods, or 1.8 percentage points higher than that in last year.

So presumably, based on a simple extrapolation, in a few months Maggie, Daniel and Joe will report a GMV number somewhere north of US$650 Billion.  Alibaba's GMV will have grown from a gigantic figure, $296 Billion (52.3% of all Clothing, Footwear, Electronics, Home Appliances, Household Goods and Services), just three years ago, to significantly more than all of the on-line sales in China as reported by the NBS. 

Clearly something is amiss.  The above, of course, isn't possible.

I'm beginning to believe that Joe, Maggie and Daniel are, as we say in finance, "just making this shit up".  It's as though a few weeks before the quarterly call, they sit down with an Excel spreadsheet, plug in the last quarters numbers and do some "what-ifs" as to what they think the investors might like to hear.  They come up with a script, muted only by what they think they can get away with, and put on their quarterly show.   

Obviously, if they disclosed detailed category mix data, it would be a relatively simple exercise to survey a statistically appropriate number of merchants and consumers, determine exactly what they are selling/buying, compare it to management's published figures/ratios and calculate, with great accuracy, the precise level of bull-shit being pedaled by these folks.


The SEC to the Rescue

As I mentioned a month ago in my post "Holiday wishes from a born again Investment Banker...." our new administration was about to appoint "the worst SEC Chairman in history", without my knowing anything about who was destined to be appointed.  It's not that I had anything against the unknown appointee at the time, my point was that the new chair, by default, would be the equivalent of a "goat trotting clueless into a mine field".  I have to say, now that the goat has been selected and the appointment has been made public, my expectations have been exceeded by a country mile.  The only thing you need to know about Jay Clayton, the new SEC Chair, is that he was one of the architects involved in the Alibaba IPO.  Moreover, not only has he never been a regulator, but he's spent his entire career representing the folks that he will now be regulating.  As I mentioned in my post (before I knew who the new Chair would be), Mr. Clayton will be the perfect "laissez-faire, less-government, figurehead who will spend his/her tenure making a few speeches, hobnobbing with corporate royalty and playing golf."  Yup....we picked the right guy. 

That said, I'd guess that the Alibaba and Yahoo! SEC investigations will be quietly closed without fanfare in the relatively near future.

Finally, I for one have to say that I'm absolutely thrilled that the SEC is finally going to stop bothering executives and management with these pesky investigations and let businesses finally get back to the task at hand.  Business people need to concentrate on the big, important things, like generating jobs for the "little people", creating shareholder value and of course, enormous insider wealth. The type of wasteful, time consuming administrative folly that the SEC has been engaged in must come to an end.  It stops here and it stops today.  

Like, for example a few years back, I recall how a now bankrupt, goofy Hotel & Casino group had tried to goose earnings by writing up the leasehold improvements of a failed coffee shop....could you imagine!.....and the SEC was all over them!....what a pain.  How's a guy supposed to make a buck? Here's the link to the hilarious, time-wasting investigation and "cease & desist" order.  I'm glad to know that, for the sake of the American people, that we can finally put this type of government harassment and injustice behind us.

With Mr. Clayton's appointment, Management will finally be able to put whatever numbers they'd like on filings without repercussion.  Executives can focus on improving their financial statements, making unverifiable claims and working naive shareholders into a frenzy with their impossible business models that have virtually no chance to succeed.  They'll be free to discover new fake revenue sources, nonsensical metrics-du jour and sprinkle misrepresentations anywhere they choose, like seeds upon the fruited plains.   To paraphrase Masa Son....the SEC will be "spreading happiness" all over the globe. 

Eventually, it will be impossible to tell whether Joe, Maggie and Daniel are committing Securities Fraud or just presenting "Alternative Facts" to keep their investors enthusiastic about the business.  

.....and apparently, nobody will care.


Additional Reading

NBS - 2016 Data 
http://www.stats.gov.cn/english/PressRelease/201701/t20170120_1455922.html

THRC  - SEC Cease and Desist
https://www.sec.gov/litigation/admin/34-45287.htm

Jay Clayton - Washington Post
https://www.washingtonpost.com/news/wonk/wp/2017/01/04/trump-to-tap-wall-street-lawyer-jay-clayton-to-head-sec/?utm_term=.8daf155b9e4a

BABA - Investor Call
http://edge.media-server.com/m/p/25qobdq7

BABA - Presentation
http://www.alibabagroup.com/en/ir/presentations/pre170124.pdf

BABA - Press Release
http://www.alibabagroup.com/en/news/press_pdf/p170124.pdf

BABA - 6-K
https://www.sec.gov/Archives/edgar/data/1577552/000110465917003802/a17-3083_1ex99d1.htm

11 comments:

  1. I was again anxiously awaiting your take on BABA’s quarterlies and once again, I do believe you hit the nail on the head. I’m surprised that there was no mention at all about the 100,000 cars sold on singles day, “equivalent of the typical sales volume of 1,000 Chinese auto dealerships in one month”. I would think that would have allowed bragging rights for Alibaba on the CC as well as their product mix. It shouldn’t be long now before BABA does 10% of all of China’s GDP. What an amazing company I say!

    I just find it odd that this has continued as long as it has without being exposed as there is a significant amount of money to be made by exposing this possible deceit. But as you pointed out, a few million in SBC that’s in US dollars would be quite a motivation to keep the gravy train rolling. I just wonder how many loans there are to Chinese nationals against their BABA stock holdings. As Jack Ma has stated, “I’m not selling my stock, I’m just getting a loan against it”

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  2. LOL....yup....they are 6% of GDP now....$650B/$10.8T. As long as everyone is making money these things can go on for a long time. BABA Stock financing is a cottage industry in Hangzhou...

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  3. I, too, think BABA's ture profitability is most likely much lower. The unconsolidated Cainiao is probably where they hide operating expenses. Its accomplices are paid generously in unexplained CapEx and BABA stock, which is why that SBC line is getting so big. (BTW, 20-F p. 116. Not sure why the 16B SBC included 5.5B share awards paid to BABA employees by Ant Financial, which BABA Group Holding doesn't own).

    However, you might have underestimated BABA's dominance in China's online retail market. JD.com, the 2nd largest online retailer, is about 5-6% of BABA's size in term of GMV. Personally, I don't remember I purchased any physical goods from other e-commerce websites.

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    1. Alibaba is ubiquitous...there's no question. They are huge. I've never implied/said they weren't. But their financial structure, controls and statements exhibit all the signs of a gigantic, systemic fraud. As you can see by my posts, I'm staking my reputation on it.

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    2. I just think that comparing BABA's GMV with NBS's online retail data doesn't lead to any definitive conclusion. BABA is likely the 1st one on NBS's survey list.

      BTW, take a look at ZTO, one of BABA's accomplices. Absurdly high margin there as well and very little hard assets. It always amused me that everyone in the BABA scheme claims to have an "asset-lite" business model. So who in the world is holding the hard assets and earning below cost capital return?

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    3. Agreed, the comparison isn't definitive, but as you say, if Alibaba is the first company on the NBS survey list (and there are myriad Chinese eCommerce companies....I think I provided a list of the top 100 in a prior post) shouldn't their GMV be a fraction (probably a large fraction) of the NBS number? Rather than significantly larger than the entire category? You've described ZTO appropriately....they are simply an accomplice. If you ever get a chance to tour a "distribution hub" you'll be aghast...it's piles of packages, bicycles, scooters and tuk-tuks....the aforementioned "capital" is "donated" by "independent contractors" working for next to nothing in the "ecosystem"...they search through the piles... ...looking for a package addressed to an address they might be able to find....and somehow it gets delivered....sounds like a pretty labor-intensive, un- sustainable business model to me....

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  4. At this point, you'd have to really wonder why Jack is doing this, if he's the one really behind it. I mean, it's like BABA as a stock is this piece of Chinese advertisement for the world.

    I reckon Jack's going to be having more and more problem loans pop up with the ANT Financial platform. The bond insurers and underwriters can only insure so much. So who's going to be taking responsibility if there's social unrest from this platform? It may very well end up being a political issue.

    Though he's a multi-billionaire, he cannot escape the clutches of the CCP. In the end, it's the CCP that owns Alibaba and Jack Ma. I've never heard of any private business person say that they'd be willing to sacrifice their company to make sure there's continued free trade.

    They've made him to be somewhat of a spokesperson for China in terms of new age thinking, entrepreneurship, etc. But you can tell this guy is not doing it because he loves the attention. He knows that his house is built on quicksand. Much face will be lost in the future.

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    1. Look at it this way.....Jack Ma is a state sponsored Robin Hood. His mission is to scour the globe looking for naive investor capital. Robbing from the rich, redistributing the capital to politically connected Chinese elite. Joe, Maggie, Daniel and the fee thirsty Western Investment bankers are his "band of merry men". He's simply using "Alternative Facts" rather than a long bow and arrows to accomplish this heist. When this is over....the CPC will give him a medal.

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  5. This comment was initially posted by an avid reader who did not intend to post in his own name. We've deleted his/her initial post and are re-posting his/her comment anonymously, per his/her request.

    "Is there any chance that one of Alibaba's investments eventually pays off big enough to provide underlying value for its stock price? Berkshire Hathaway is maybe not the best example since it's equity portfolio holds real, prosperous companies, but as a percentage of Berkshire's stock price, the equity portfolio underpins approx. 20% of its stock price. Or can Alibaba evolve into a truly profitable company faster than the house of cards crumbles? You've mentioned in the past that the scheme can persist for a long time and that it's impossible to time. As Alibaba 'grows' does it become stronger or does the house of cards get bigger? This is unclear to me. I think I see a growing train wreck, but it can be intimidating to see things like Alibaba acquiring companies at such a rapid pace. Isn't it possible that they provide seed capital to the next Google and end up sitting on a gold mine? Thanks for the terrifically entertaining and educational blog."

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  6. http://www.zerohedge.com/news/2017-01-23/chinas-carl-icahn-hedge-fund-billionaire-sentenced-five-and-half-years-prison
    Maybe there is still hope..... "When this is over....the CPC will give him a medal"

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    1. LOL.....My guess is that Xu committed the greatest financial crime of all.....he didn't bribe the right people....

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