Deep Throat: 2014

http://www.cbsnews.com/team/lara-logan/

DEEP THROAT December 28, 2014 5:15 PM

The 6-K filing (Financial Exhibits, 99.2 filed 11/13/14) also details the acquisition of twelve (12) additional businesses, transactions closed from June through September, that were also buried in the IPO filing (p114). Moreover, there's little/no discussion of the allocation/determination of purchase prices of these acquisitions. Even the most rudimentary financial information for these acquisitions/businesses (Income/Loss, Revenues, etc.) is not disclosed. From the limited information disclosed, it looks like they've invested/wasted US$6.8 Billion on these acquisitions, over and above the US$4.1 Billion spent on UCWeb, OneTouch and ChinaVision. BABA's Investment Bankers must be putting in lots of overtime. The total spent on these acquisitions brings the total to US$10.9 Billion (30% of the Balance Sheet) during the six month, post audit period ending 9/30/14.. Again, per the company disclosures, these acquisitions will produce no short term revenue/sales and significantly increase BABA's overhead and cash requirements. The acquisitions are described on pages 15-18 of the filing. Each of these acquisitions has it's own peculiarities. I'll address a few of these in subsequent posts....stay tuned.

The additional acquisitions are:
(Business Name; Operation; %Owned; Purchase Price)

Weibo (Social Media; 30%; US$1 Billion)

TangoMe (Mobile Messaging; 20%; US$ 220 million)

AutoNavi (GPS Mapping; 100%; US$1 Billion)

InTime (Department Stores/Malls; 26%; US$700 Million)

Youku Tudou (Internet TV; 16%; US$1.1 Billion)

Wasu (Digital Media; US$1 Billion Loan to Insiders as described below)

Evergrande (Soccer Team; 50%; US$200 million)

ChinaSmart (Supply Chain Mgmt; 48%; US$700 million)

Haier (Appliances & Distribution; 10% of Subsidiary; US$360 million)

Singapore Post (Parcel Post; 10%; US$240 million)

Alibaba Health (Medical Product Tracking/Software; 38%; US$120 Million)

Beijing Shiji (Hotel Mgmt; 15%; US$460 Million)

DEEP THROAT December 18th, 2014 11:50 pm

Here's a BABA comment in response to SEC questions re: the source/validity of the third party GMV figures presented in the IPO, specifically, whether BABA paid a fee or commission to have any of the reports prepared. "Staff" refers to the SEC lawyers posing the questions.

p2 & p3 - BABA - "The Company advises the Staff that none of the reports referenced in the Registration Statement were commissioned by the Company. The Company further advises the Staff that, with respect to the “IDC GMV Report” referenced on the table of contents page and pages 1, 86 and 132, among others, IDC undertook an industry study of GMV upon the request of the Company. The Company paid a fee in connection with this report. IDC prepared the report independently. Because of the independent nature of the report, IDC does not view it as a commissioned report. The Company understands that IDC has made the report publicly available for a subscription fee and that going forward, IDC will continue to regularly update and publish this report or similar reports. The Company has clarified the foregoing on the table of contents page and has filed IDC’s consent as Exhibit 23.4 of Amendment No. 1."

My Comment: BABA asked IDC to prepare a GMV report for a fee. The report didn't exist prior to BABA's request. The report was prepared in May of 2014, it's 3 pages in length, is available on the IDC website for a fee of $500 and hasn't been updated since it had originally been prepared. Somehow, BABA doesn't view this as a commissioned report? The fee paid by BABA to IDC is, of course, not disclosed. The proper answer to this question should have been "Yes, we paid a fee in the amount of US$xxxxx to have this report prepared."

DEEP THROAT December 15, 2014 0:12AM

The 216 page SEC correspondence Q&A filed June 16th 2014 is a wealth of information re: the process surrounding the development of the BABA IPO disclosures. There has been much press/speculation re: the validity of BABA's published GMV (Gross Merchandise Value) figures and the possibility that they are significantly inflated. The correspondence discusses BABA's GMV disclosure failing to reflect incomplete transactions, returns & allowances.

p5 - SEC - "You indicate that a limitation of calculating GMV is that it does not take into account how, or whether, the buyer and seller settle the transaction. Please tell us why your calculation of GMV does not include only settled transactions and tell us how GMV provides material information about changes in your results. For example, we note from your disclosures beginning on page 84 that commission revenue is earned from fees based on a percentage of settled GMV. "

BABA Response - "The Company respectfully advises the Staff that, among e-commerce companies, it is the industry standard to calculate GMV without taking into account the actual settlement of transactions." They go on to cite eBay's 1/31/14 10k.

My Comment: BABA's representation re: GMV is only half correct. eBay also discloses Returns and Allowances, "Take Rate" as well as "Net" Merchandise Sales in addition to GMV. ( Described on 10k - p63) BABA does not disclose these statistics, nor do they disclose "settled" GMV .

Again, as is consistent throughout the document, BABA's responses illustrate a continuing effort to obfuscate their true operating and financial performance.

DEEP THROAT December 11, 2014 6:6PM

Here's my analysis re: the prior post (6-K, 11/13/14 - Financial Exhibits 99.2; pg 17) In April 2014, just after the BABA audit was completed and financial statements were issued, Jack Ma, Simon Xie and Yuzhu Shi created a PRC general partnership (Hangzhou Yunxi Investment Partnership Enterprise) established for the purpose of acquiring a 20% interest in Wasu Media Holding Co Ltd, (000156:CH) an Internet TV Company. Simultaneously, in April of 2014, BABA loaned Simon Xie US$1.1 Billion to be repaid in 10 years. Mr Xie, apparently contributed the US$1.1 Billion to the partnership, Jack Ma contributed US$15,000 and Yuzhu Chi's contribution was not disclosed.. In April 2014, the deal was announced that the partnership would purchase the 20% stake in Wasu for US$1.1 Billion. (See Reuters, etc) Interestingly, Mr Yuzhu Shi is the founder of Giant Interactive (NYSE:GA). He took the company public in 2007 at a Market Cap of US$3.8 Billion. Apparently things hadn't gone as well as hoped so he took the company private again in July of 2014. At that time the Market Cap had decreased to about US$2.8 Billion and US Shareholders had lost roughly US$1 Billion in value. According to Bloomberg, Wuzu currently has a Market Cap of US$6.2 Billion, putting the Partnership's 20% stake at US$1.2 Billion. The P/E is 109; Revenues are $400 million and earnings are $55 million for the trailing 12 months. This valuation is relatively expensive/risky, even for Tech start-ups. That said, I would suggest that if the CEO of a US listed company took US$1 Billion of Company/Shareholder funds and made a personal loan to some friends so they could jointly make a "Heads I win tales you lose" bet on a Tech start-up, that there would be at least some level of inquiry or concern. Yet, here it is in the footnotes and Mr. Market seems to be just fine with it.

DEEP THROAT December 10, 2014 11:11PM

I started reading BABA's September 6-K filing (11/13/14 Financial Exhibits 99.2) tonight and was even more flabbergasted......here's some more "Accountant Speak" From pg 10 - What they are saying is that: "We've acquired lots of cool businesses, increased head count by 33% and the businesses currently have no sales or revenues.....really....we couldn't make this up if we tried. So in only a few months after the audit our head count has gone from 22,000 to 29,400, we've incurred a ton of additional overhead and there's no additional revenue!...so our numbers are going to look terrible going forward."

Here's the text:

Strategic Investments and Acquisitions. We have made, and intend to continue to make, strategic investments and acquisitions to expand our user base and add complementary products and technologies. For example, we expect to continue to make strategic investments and acquisitions relating to mobile, O2O services, digital media and category expansion as well as logistics services. Our strategic investments and acquisitions may affect our future financial results. For example, our recently completed acquisitions, including UCWeb, OneTouch, Alibaba Pictures and AutoNavi resulted in an increase of approximately 7,400 additional employees but are not expected to materially increase our revenue in the short term. Moreover, we expect acquisitions of entities with lower overall margins than our margins will have the effect of lowering our margins.

DEEP THROAT December 9, 2014 0:12PM

Senator Bob Casey's letter to the SEC dated 7/8/14, re: the inherent risks associated with the Variable Interest Entities (VIE's), transparency, and the "sheer number of fraud cases involving Chinese companies", specifically addressing concerns about the Alibaba IPO and the associated "significant risks" seems almost prophetic. I'll be happy to forward a pdf of the publicly available letter to CBS News, or just search for "Senator Casey VIE" and it will come up.

DEEP THROAT December 9, 2014 11:11AM

As described below (summarized version), there may be significant issues with BABA's post audit acquisition accounting (ASC-805). Let's say we adjust the "per share" values of the OneTouch, UCWeb and the ChinaVision acquisitions from the un-audited per share values back down to the audited per-share values described on the 3/31/14 Year End Financials. (see below for details) The net effect of this adjustment would be to write down the carrying value by US$2.85 billion. Net income available to shareholders would be negatively impacted by the same amount.

Simply put, if we apply the audited values to these acquisitions and ignore the un-audited "write-ups", reported (un-audited) Net Income to Shareholders for the six months ended 9/30/14 would be reduced from roughly US$2.5 billion to a Net Loss of $350 million.
I doubt that BABA investors are taking this adjustment into account.

DEEP THROAT December 8, 2014 0:12AM

Well, here's another big BABA asset write up. The more I read, the sillier this gets. (F-93 & F-94 of the Prospectus). BABA owned 66% of a company by the name of UCWeb at the time of the 3/31/14 audit. BABA purchased the remaining 33% of UCWeb in June of 2014. Quite an acquisition right after the audit was completed I must say. Here's my "Accountant Speak" Interpretation of the footnotes: "Well, we owned 66% of UCWeb carried at US$720 million on the balance sheet. When we bought the remaining 33% of the company we realized that UCWeb's value increased to US$2.4 billion in just a couple of months! This company is a gold mine! How could the audited number be so far off? So of course, we booked a US$600 million gain and increased "Goodwill and Intangible Assets" (aka air) to US$2.2 billion on the un-audited June financials. You'd have to be crazy not to jump into this IPO with the ability to generate instant asset values and gains like this!...and all it took was one acquisition and a couple of journal entries!" Here's the footnote:

(i)A gain of RMB3,593 million was recognized in relation to the revaluation of previously held equity interest related to the step acquisition of UCWeb in interest and investment income, net in the interim consolidated income statements for the three months ended June 30, 2014. The fair value of the previously held equity interest was measured using an income approach determined by the Company. As UCWeb is a private company, the fair value of the previously held equity interest is estimated based on significant inputs that market participants would consider, which mainly include revenue growth rate, operating margin, discount rate and adjustments for lack of control.

The rationale for this transaction is to enable the Company to increase user acquisition and engagement. The Company believes the acquisition will help to provide the Company with access to mobile users. Goodwill arising from this acquisition was attributable to the synergies expected from the combined operations of UCWeb and the Company, the assembled workforce and the future development initiatives of the assembled workforce to enhance the mobile offerings of the Company beyond e-commerce.

Pro forma results of operations for the acquisitions described above have not been presented because they are not material to the consolidated income statements, either individually or in aggregate.

Again, there is no information re: the profitability, financial position or operating metrics of UCWeb. BABA seems to have, again, arbitrarily and improperly increased income by writing up intangible assets. Moreover, BABA doesn't believe that the aggregate value of these multi-billion dollar write-ups should be explained as they are "not material". This really isn't very funny anymore.

DEEP THROAT December 7, 2014 11:11AM

More enlightening "Accountant Speak" (F-92- pg 411 of the Prospectus) My interpretation of BABA's language: "On our 3/31/14 audited statements we were carrying our 65% interest in "One Touch" at US$32 million. In May 2014, we purchased the remaining 35% interest for US$130 million in cash and additional "contingent" cash consideration. Of course, we applied US$650 million of "goodwill" to this gem, booked a gain of US$450 million and are now carrying this "investment" at US$800 million on our unaudited 6/30/14 financial statements. So in just two months we've turned an "audited" US$32 million asset into an "unaudited" US$800 million asset. We are accounting wizards! This should make our IPO look GREAT". Here's some of the fine print.....

(i)Acquired amortizable intangible assets have estimated amortization periods not exceeding five years and a weighted-average amortization period of 4.5 years. The amount of the contingent consideration will be determined based on a formula tied to certain future operating targets of OneTouch for the year ending March 31, 2017, which will not exceed RMB3,420 million. The fair value of the contingent consideration included in the total purchase price represents a probability-weighted outcome based on the Company’s analysis of the likelihood of the various scenarios underlying this arrangement. A gain of RMB2,719 million was recognized in relation to the revaluation of previously held equity interest related to the step acquisition of OneTouch in interest and investment income, net in the interim consolidated income statements for the three months ended June 30, 2014.

This is most likely not GAAP and may significantly distort the underlying value of OneTouch, with a material impact on the financial statements. Details regarding operating, income and growth metrics of OneTouch were, unfortunately, not disclosed as far as I could tell.

DEEP THROAT December 7, 2014 0:12AM

Thus far, there is relatively little correspondence from the BABA underwriters made public by the SEC. The only recent document I could locate at this time is the 9/16/14 underwriter request to join in the "Acceleration", along with notice that they've distributed 39,352 copies of the preliminary Prospectus to"underwriters, dealers, institutional investors and others". The signers of this request are:

CREDIT SUISSE SECURITIES (USA) LLC, By: Anthony Kontoleon, Managing Director

DEUTSCHE BANK SECURITIES INC. By: Joseph P. Coleman, Managing Director & John Reed, Director

GOLDMAN SACHS (ASIA) L.L.C. By: D. Binnion, Managing Director

J.P. MORGAN SECURITIES LLC By: Mike Millman, Managing Director

MORGAN STANLEY & CO. INTERNATIONAL PLC, By: Crawford Jamieson, Managing Director

CITIGROUP GLOBAL MARKETS INC., By: James Perry, Managing Director

These are really, really smart, experienced people. I'm no journalist, but I'm thinking that, based on the information below, someone at CBS News might want to contact a few of these folks and ask them some tough questions about the Prospectus, perhaps starting with.... "Have you read it?"

DEEP THROAT December 5, 2014 4:4PM

Sorry......just taking a page from the BABA playbook....please revise the comment below to read: "cause our June Quarter results to go from an Adjusted Net Income of US$1.1 Billion down to US$200 million".

So, even after the ChinaVision/Alibaba Pictures write off, they still would have made money (before all of the other future write-offs to be determined, that is.)......., I was actually thinking of the US$500 million September Quarter Income number.....My appologies.

DEEP THROAT December 5, 2014 3:3PM

Here's another interesting footnote from the Prospectus (buried on F94 - p413 of the doc). In "accountant speak" what they are saying is: "We bought ChinaVision/Alibaba Pictures for US$900 million and are carrying it as an asset at that value. In August, we found out that the stock has about the same value as your Lehman shares (delisted), but we don't want to write it off because that would cause our June Quarter results to go from a profit of US$500 million to a loss of US$400 million and that really wouldn't very look good. So we will write it off next year, after we have the IPO money safely in hand"

iii) The Company made reference to the traded market price of the shares of Alibaba Pictures in measuring the fair value of the noncontrolling interest. However, with the consideration of the announcement of Alibaba Pictures on August 14, 2014 relating to possible insufficient provision for impairments of certain assets and possible non-compliant accounting treatments for accounting periods prior to the completion of the acquisition of Alibaba Pictures and the suspension of trading of the shares of Alibaba Pictures concurrent with the announcement, the Company determined that the traded market price as of the acquisition date did not appropriately reflect the aforementioned circumstances which had already existed as of the acquisition date and therefore was not a reliable estimate of the fair value of the noncontrolling interest. Alternatively, the Company believes its investment in the newly issued ordinary shares of Alibaba Pictures was an arm’s length transaction which provided a more reliable basis to estimate the fair value of the noncontrolling interest. The accounting for this acquisition will be finalized within a 12-month period from the completion of the acquisition and the Company will retrospectively adjust the provisional amounts recognized above to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

This "writing style" is prevalent throughout the prospectus.

DEEP THROAT December 4, 2014 4:4PM

Hypothetically, and I'm just thinking out loud here, just some random thoughts..... what if you were a young investment banker in Asia and you were part of a consortium that established a multi-billion dollar credit facility for a high-flying, well known company. Then one unfortunate day you suspect that maybe you've been a little hoodwinked by this company and everything was not exactly what it appeared to be. Your credit facility looked like it would quickly evolve into one gigantic bad debt. Astonished and depressed about how you and your fellow bankers had been taken advantage of, but also being a member of this enterprising, resourceful consortium, you were able to hatch out a plan where you would quickly "securitize" this bad debt and sell it to unsuspecting mutual funds, index funds, funds of funds, pensions, widows and orphans, etc., just like you did with those excellent CDO's a few years back.....AND you would make a boatload of money in the process! If your new IPO was big enough, you could provide enough funding for the company to survive for years. Unfortunately, the company's business model would eventually suffer a few bumps along the way (implode) and the business would be re-valued by Mr. Market. No one would be the wiser. Unfortunate market forces at work. Really a bad run of luck.

The beauty of this hypothetical scheme is that EVERYTHING would actually be disclosed on the Prospectus, albeit in a ridiculous Rubik's cube format that only a forensic accountant could possibly decipher.....but it's disclosed. Better yet, all the representations are made by BABA executives (and they are safe in China with a boatload of money). Moreover, there's not one representation from a single Investment Banker made in any of the correspondence sent to the SEC.....perhaps as a clever Investment Banker, you may have never even seen the Prospectus!. "Yeah....that's the ticket....that's what I'll say under oath....this can't be my fault".......and you are off the hook! Genius!

NAAAAHHHH!.....that could never happen ........again.....

DEEP THROAT December 4, 2014 4:4PM

Ok...let's recap what we have in the BABA file (all documented and cited in the thread below):
1.) Questionable non-GAAP Accounting practices & methods.

2.) 290 "related" operating entities in the VIE.

3.) An understaffed Audit firm (PwC HK) barred (appealing) from practice before the SEC.

4.) A director resigning stating that she will "not be responsible" for the registration/filing.

5.) Meteoric increase in Bank Debt to US$10B in 27 months.

6.) Delivery/order/shipment/growth metrics that are improbable.

7.) Accelerated Registration and incomplete responses to SEC correspondence.

8.) "Magical" write ups of Goodwill, "Investee Valuations" and intangible assets.

9.) Maxed out Credit Facilities which would have been nearing Covenant restrictions prior to the IPO.

10.) The Underwriters who put the Credit Facilities in place are the Same Underwriters who put together the IPO.

Sounds like a "blue chip" offering so far?

DEEP THROAT December 4, 2014 1:1PM

Here's another curious document. BABA's Acceleration Request filed Sept 16th is also available on the SEC website. The document requests the acceleration of the IPO to be effective as of 9/18/14. This request was made, and granted despite,as far as I can tell from the filings, numerous, incomplete, unanswered, open items in the SEC/BABA Correspondence. The Acceleration Request contained the following language:

The Company hereby acknowledges the following: 1.)should the Securities and Exchange Commission (the “Commission”) or the staff of the Commission (the “Staff”), acting pursuant to delegated authority, declare the filing effective, it does not foreclose the Commission from taking any action with respect to the filing; 2.)the action of the Commission or the Staff, acting pursuant to delegated authority, in declaring the filing effective, does not relieve the Company from its full responsibility for the adequacy and accuracy of the disclosure in the filing; and 3.)the Company may not assert Staff comments and the declaration of effectiveness as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

BABA discloses this on the First Page of the Prospectus (like most IPO's do) that:

"Neither the United States Securities and Exchange Commission nor any state securities commission or any other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense."

So really....what's the rush here? Why wouldn't you wait until the SEC gives you at least some indication that they are satisfied with your filing? Why incur all of that nasty "de-listing risk"(p-61-62 424(b)4)? Why would you accelerate your effective date to be prior to the September 30th reporting period, rather than simply answer the SEC's questions fully, completely and truthfully? There must be a good reason for all of this urgency.

DEEP THROAT December 4, 2014 11:11AM

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.....

DEEP THROAT December 3, 2014 5:5PM

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.

DEEP THROAT December 3, 2014 0:12PM

There's selected text from an SEC correspondence from the SEC to BABA posted by Professor Paul Gillis on his ChinaAccountingBlog ......per BABA correspondence to the SEC.....The audit of the BABA financials was performed by 2 partners, 2 supporting partners, 3 managers, 10 Senior Staff Accountants and an undisclosed number of staff accountants of PwC HK (Hong Kong)....apparently, this team did 70% of the work in HK and 10% in China. PwC ZT (China) did the remaining 10%..

Here's the excerpt from BABA's response:

The Company has been advised by PwC HK that the PwC HK audit engagement team is led by two core assurance partners, and supported by a quality review partner and a technical support partner who are all based in Hong Kong. In addition, the PwC HK team includes three assurance managers and a team of approximately 10 senior associates and associates who are also based in Hong Kong. Furthermore, the audit team is supported by tax specialists and valuation specialists from PwC HK.

According to PwC HK, the audit hours spent by PwC HK in Hong Kong, the audit hours spent by PwC HK in China and the audit hours spent by PwC ZT in China accounted for approximately 70%, 10% and 20%, respectively, of the total hours spent with respect to each of the audits for the fiscal years ended March 31, 2012, 2013 and 2014.

So PWC HK audited a multi-billion dollar, global business, comprised of 290 separate related entities with the above staff? IMO - You couldn't effectively audit a large car dealership with that staff.

Citations & docs available upon request. Filings/correspondence are also posted on the the SEC website.

DEEP THROAT December 3, 2014 8:8AM

Here's selected text from Jackie's resignation letter, released on the SEC and publicly available. Wonder why she resigned?

http://www.sec.gov/Archives/edgar/data/1577552/000000000014048770/filename1.pdf

We represent Yahoo Inc. ("Yahoo!"). Yahoo!'s Chief Development Officer, Ms.

Jacqueline D. Reses, was previously a member of the board of directors of Alibaba Group Holding Limited ("Alibaba"). Enclosed please find a letter of resignation from Ms. Reses that has been delivered to Alibaba informing it that she has resigned as a member of the board of directors effective immediately prior to the effectiveness of the Alibaba's registration statement on Form F-1 and that Ms. Reses will not be responsible for any part of such registration statement.

This letter is being furnished to the Securities and Exchange Commission pursuant to

Section 11(b) of the Securities Act of 1933, as amended, on behalf of Ms. Reses to disclaim any responsibility by Ms. Reses for any part of Alibaba's registration statement filed on Form F-1 (including any amendments thereto). Yahoo! can be reached by writing to Yahoo! Inc., 701 First Avenue, Sunnyvale, California, 94089, Attention. General Counsel or calling (408) 349-7853.

DEEP THROAT November 29, 2014 3:3PM

My favorite footnote of all time (p22): Apparently, BABA recognized $1 billion in income after writing up the value of an "equity interest" during the June 30 Quarter. In other words, some investment(s) they owned increased $1 billion in value in the three (3) month period after the year end audit? Really? Was this adjustment just "missed" during the audit? At no time does the Prospectus describe what was written up or why.... Are you kidding me?.....we are talking about $1 BILLION DOLLARS here.......

"Including a net gain of RMB6,251 million (US$1,008 million) from step-up acquisitions arising from revaluations of previously held equity interest. See note 4 to our unaudited interim condensed consolidated financial statements for the three months ended June 30, 2014."

DEEP THROAT November 28, 2014 5:5PM

Hypothetically, lets say the PWC workpapers fully explain all of the non-GAAP presentations, the missing line items, the incomplete footnotes, the $5 billion in "disappearing" equity in 2013 and the mysterious reappearance of same in 2014, the "magical" multi-billion dollar increases in "investee value", Goodwill and Intangible Assets, as well as the numerous "curious" ratios and intercompany transactions between Alipay and the other 290 related entities, as described and documented in my prior posts.

Given that, why would PWC/BABA refuse to hand over their workpapers to the SEC and risk being barred from practice?

Workpapers are simply documents which support the financial statements. Why would the workpapers and supporting audit documents be considered "state secrets" by the People's Republic of China (PRC) and the financial statements not? You'd think the release of all documents would fall under the "state secrets" rule.

Oh....that's right.....without the financial statements, even those that look like they've been prepared by an intro-accounting class, they couldn't issue the $30 billion of stocks and bonds that are now working their way through the US financial system.

I guess, if I lived overseas, and someone came to me and said......"just put some huge numbers on a sheet of paper and I'll give you $13 billion....the worst thing that can happen to you is that you might not be able to visit the United States anytime soon".....well, I guess, when you put it like that.....where do I sign?

DEEP THROAT November 26, 2014 3:3PM

Just for holiday entertainment, feel free to go to the Aliexpress or Alibaba websites and type any luxury brand you can think of in the search box.....the results are hilarious!......it's a 95% off sale!

I wonder if the Underwriters of the IPO ever actually visited the website(s)?

HAPPY THANKSGIVING!

DEEP THROAT November 25, 2014 8:8PM

More on Alibaba.....let's discuss the three(3) month 6/30/14 Financial Statements. Page Ref (x) are to the Prospectus: 1.)There is no Statement of Cash Flow. FASB 230; 2.)There's no separation of Current v. Long Term Assets & Liabilities. FASB 210; 3;) BABA borrowed $3.5 Billion from banks and purchased $3.5 Billion of "Goodwill" during the 3 month period prior to the IPO. (p23)...in accounting circles we refer to it as "cash for air"; 4.) BABA increased its investment in Securities and "Equity Investees" by $1.1 Billion during the period. (p23). Not sure what "Investees" are...let's hope it's not the "Friends & Family" plan.

Again, basic math goes out the window with BABA.... Assets-Liabilities do not = Equity. (p23) Nothing carries forward from the prior period. The math simply doesn't work.

If you take the time to do your own statement of Cash Flow you will find that: 1.) Total Equity "magically" increases by $1.5 billion in three months.; 2.) Total Liabilities "magically" increase by $1.2 billion in the three months.; 3.)Total Assets "magically" increase by $900 million in the same period prior to the IPO quarter.

None of the above are discussed in the footnotes. These are gigantic numbers and inconsistencies that I've never seen in a Prospectus before......ever. Again, I'm not saying that any of the statements in the Prospectus are untrue. I'm saying that the math is wrong and the disclosures, in my opinion, are incomplete.

DEEP THROAT November 25, 2014 8:8PM

More..........BABA's public accountant, Price Waterhouse Coopers China(PWCC), is not regularly inspected by PCAOB as required by US Law (p61) The disclosures (p61&62) also describe the January, 2014 ruling which bared PWCC from practice before the SEC, subject to appeal, as well as the operational consequences to BABA, including "delisting" should PWCC be unable to practice before the SEC. I wonder if Jack would give the $13 billion back if that happened? He seems like a nice enough guy.

DEEP THROAT November 25, 2014 8:8PM

Today's fun fact about Alibaba.......even though Revenue has increased 3x from FY 2012 thru 2014 (p20), their head count has remained relatively constant at 22,000 employees. (p212) In other words, they are doing three times as much work with the same staff ! ......another amazing example of Alibaba's almost unbelievable productivity!

DEEP THROAT November 24, 2014 0:12AM

Continued from prior post.....

The ratio of Revenue to GMV holds rock solid at 3% for FYE 2012, 2013 & 2014. It drops to 2.2% for the QE June 2014. (p94 & p99) a 26% decrease, with no explanation. There's that pesky "law of large numbers" thing again.

6.1B packages shipped on 14.5B orders (p163). Average Package GMV = $49USD & Ave. Order GMV = $20 USD. UPS processes 4.1B packages globally.(163). They actually cited UPS as their global distribution system "ecosystem". Interestingly, BABA has the same global capacity as my business.

BABA describes its delivery "ecosystem" as having 1,100,000 employees working for 14 "strategic partners" (78,000 employees per partner). (p163) It would be interesting to know who these partners are since FedEx, DHL & UPS don't have a domestic presence in China. BABA's international GMV is only 9% of their total volume. (p94) I hope they aren't including UPS,FedEx or DHL in their "ecosystem employees". That would be a little silly.

UPS has 395,000 employees and ships 10,400 packages a year per employee globally. The BABA "ecosystem" has 1,100,000 employees and ships 5,500 a year primarily domestically in China. It looks like UPS is a tad more efficient.

Interestingly, even with all of this growth, BABA head count has remained constant at roughly 22,000 employees. (p212) They must be getting really efficient.

It would have been nice to see info on Returns & Allowances, canceled and/or unfulfilled orders, OTR statistics and/or other material logistics metrics. The 400+ page document is silent on these statistics. Cute pictures though. (p180-p197)

At $68/share the IPO provided funding of $8B to BABA; $13B to Jack & friends & $261m in fees. (G) There’s also an underwriting allotment of an additional 48m shares - $3B. Nice work if you can get it.

The tangible book value per share of BABA prior to the IPO was $1.00 USD per share. That's correct, 100 pennies, After the IPO the projected BV is $4.99 USD at an issue price of $68. (p75). The stock is somehow trading at $110 today.

Well Lara, now that I have reviewed the Prospectus and have all the facts straight, again,please disregard my previous posts. As I've said, I would never accuse anyone of making untrue statements in a Prospectus. I would be committing a "crime", as described on the cover page of the filing. I'm just a concerned citizen asking a few questions that, based on the current share price, apparently were never asked.

Well Lara, our good friend, Mr. Market seems to be in a real pickle here........hope you found my input valuable.

Deep Throat

DEEP THROAT November 24, 2014 0:12AM

Continued from prior post.....

In your interview, Jack mentioned he had "900 million registered Alipay accounts". Annual GMV per account would be $864 USD.(p163) BABA has 279 million annual active buyers.(4). Annual GMV per active buyer would be $1,060 or the equivalent of 15% of per capita GDP. If every US Citizen spent 15% of his/her per capita GDP on eBay products, they would spend $7,800/yr.

Alipay’s escrow fee charged to BABA post spin-off is 0.19% of GMV (pg259) or 4 cents per $20USD order.....(almost nothing) BABA handles 14.5 Billion orders(p163) Over FYE 2012 thru 2014 plus QE June 2014 Baba paid Alipay et al fees of 6,042MM RMB (0.2%) (p259) on GMV of 2,978B RMB (3,919B x 76%) (p99) I might question whether Alipay et al could profitably process this GMV and perform the required escrow services at these fee levels without better understanding Alipay's financials. Unfortunately, these numbers aren't provided in the prospectus.

Oddly, re: The Consolidated Balance Sheet (pg98); Total Equity goes from 34B RMB in 2012, down to 500M RMB in 2013 and magically back to 30B RMB in 2014. There’s a curious footnote #3 that vaguely references the firm’s entire equity balance “missing” and then "reappearing" the next year. More remarkably, the math isn’t correct. throughout the form. Assets - Liabilities do not = Equity for BABA. There are math errors on nearly every column, randomly, in millions of RMD. Perhaps they do math differently in China. Check it out.

BABA has 290 operating subsidiaries in the Variable Interest Entity (VIE) (p88). It’s extremely complex. I have no idea how I’d audit this, especially with accountants that apparently aren't very good at math.

Revenue and Net Income increase consistently at about 40% per year from 2010 through 2014 (p94), remarkably, the revenue growth rate slowed dramatically after the IPO...see the 9/30/14 earnings release…. Unfortunate…..but as Jack says…”this is a most dangerous time”……

BABA processed $5.8B USD (254M orders) $23/order for "Singles day" in 2013.(G) The published numbers for 2014 were $9.3B USD (278m orders) $33/order. The law of large numbers would render this increase in dollar value possible, but unlikely.

Continued.....

DEEP THROAT November 24, 2014 0:12AM

Continued from prior post.....

Interestingly, "Other Income, Net" (p119) represents, among other things, the Profit Sharing payment to BABA from Alipay. (p110) If we assume the entire line item is attributed to the agreement, which it's not, the Profit Sharing Amount would represent, 0.05%, 0.08% and 0.15% of Gross Merchandise Volume (GMV) (p99) for the FYE 2012,2013 & 2014. I would think this Profit Sharing figure should be much larger, but it's a not much more than a rounding error when compared to GMV. "Other Income, Net" is about 4.5% of Total BABA revenue for FYE 2014.

Put another way, for the 12 month period ending June 30th, Alipay processed $778 Billion GMV (p99). BABA was paid a profit sharing amount of $475 million for the same period.(p119) Alipay's Pre-tax profit would have been $950 million, or 0.12% of GMV. If I were running Alipay I'd be looking to raise prices.

Alipay processed $778B in transactions (p163). Online transactions represent 8% of China’s consumption (G) . Even if Alipay were the only processor, which they are not, this would yield a total Consumption of $9.7 trillion USD or 100% of China’s GDP. (p165) Per the World Bank, China's consumption is 34% of GDP or $3.3T.

29% of Alipay's Gross Merchandise Volume (GMV-$225B USD) is processed by Alipay. (p163) Or put another way, Alipay provides escrow services for 76% of BABA's GMV ($225B/$296B) as expected BABA is "all in" with Alipay as an escrow/payment processor.

Continued......

DEEP THROAT November 24, 2014 0:12AM

Lara, my apologies, I thought I was done posting Re:your Alibaba piece, but some of the assumptions I had made in this thread re: Alibaba were simply wrong and I’d like to correct them. My bad. I pulled the BABA Prospectus/filing 424(b)(4) dated 9/22/14 over the weekend since I wanted to get the facts straight. This usually works well since I wouldn't think anyone would ever tell a fib in a Prospectus. That would be illegal. All page refs:(#) below refer to filing page numbers. (G) refers to a cover graphics . Here are the big items. There’s much more. It’s actually much more interesting that I had initially thought.

The Alipay Business wasn't contained in the IPO; it was spun off to Jack Ma et al in 2011(FYE 2012). (p 257). It should have been a huge transaction. (Values not disclosed) Balance sheet (p98) and P&L (p94) doesn't seem to reflect it, unless, of course, Alipay had no assets, liabilities, income or expenses at the time of the spin off. I would have expected to see much larger/different numbers on the Balance Sheet and P&L for 2010 and 2011 The footnote, of course, says it’s properly accounted for.

The relationship between BABA & Alipay is described (p257-261) Basically, BABA pays Alipay a transaction fee and Alipay pays BABA a profit sharing amount of 49.9% (p261) of Alipay's pre-tax income per agreement. Alipay is functionally owned by Jack Ma through various entities. This structure would seem to allow earnings to be effectively "managed" between the entities.

You would expect to see a large income/fee line item for FYE 2012 thru 2014 representing the 49.9% of pretax income from Alipay/SAMFS/Junhan/Junao. (p258). This should be a significant number based on the reported size of Alipay.

Continued.....

DEEP THROAT November 20, 2014 11:11AM

Well Lara....there you have it.....the greatest news story of the decade dropped right in your lap. I'm hopeful you will take this thread to the myriad financial resources & minds available to CBS News and try to take a look at this from my minds eye. I believe you'll come to the same conclusions I have.

What I've hoped to establish in this thread is the high probability that Alibaba's revenue is significantly overstated and they have a means to cover it up. Means, motive and opportunity abound.

So I ask again, is it more likely that this Company, started by a man who wasn't smart enough pass a college entrance exam, became one of the greatest, most valuable businesses in the world in just a few years?.....or is it more likely that the books are cooked?

It's up to you and your crew to finish the work before BABA stock ends up in the pension funds of retirees, widows and orphans around the globe. The fate of the Nation is in your hands and the hands of CBS News.

Signing off......

Deep Throat

Omaha, NE

DEEP THROAT November 20, 2014 11:11AM

So, here are the financial Implications if BABA is indeed the greatest Ponzi scheme in the history of Finance:

(for those new to the thread you might want to start from the bottom and work your way up)

According to the September 13F's, hedge funds (Viking, Soros, Paulson, Shaw, Third Point, et al) owned tens of billions of BABA; Yahoo's Market Cap is comprised almost entirely of $44B BABA stake it owns. The rest of the BABA stock (and soon bonds) is slowly making its way into Index Funds, Retirement Plans and Individual accounts.

When this scheme is discovered, the results will be devastating. BABA stock will be worthless. Yahoo will be out of business. The current Market Cap of Chinese ADR's including BABA is just north of $1.5T (US& Dual Lists included). They will all get an indiscrimanent, overnight 50% haircut, causing a liquidity crisis the likes of which we've never seen. What happens next is anybody's guess.
Have a nice day!

DEEP THROAT November 20, 2014 10:10AM

Lara, more silly fun facts/guesses about Alibaba:

US GDP is $17T vs. China's $8T, per capita is about $52,000 v $6,000 USD

-The population of China (>15 & <64) is about 990 million and are apparently all addicted to the Alibaba sites.
-Ebay is the only US business model similar to Alibaba (transactional only - no inventory/distribution)
-Ebay's "transaction value" (total goods through the system)at a "commission" of 5% would be $320B (about 1.8% of US GDP)
-Based on the financials, BABA's "transaction value" of the goods and services using the same ratio would be about 1 Trillion USD (about 1/8th of China's GDP....silly, but that's what the numbers say)
-Neither eBay or Alibaba do construction, manufacturing, transportation or energy. They are websites.

The "escrow" business model of Alipay would provide sufficient float (customer money)to effectuate an significant Ponzi scheme. One months float on $1T ($800B) would easily provide enough money to pay off unwitting (or witting) investment bankers, auditors, public officials, etc. and would be easy to cover up. There would simply be an accounting entry for "loan for business development" charged to the escrow. Everything would balance. Of course, the money would be gone. I learned a long time ago that people tend to ask fewer questions when they are being paid a lot of money not to ask them.

DEEP THROAT November 19, 2014 2:2PM

Lara, if you or your staff, have managed to wade through my previous posts you are probably asking yourself “How could this happen?”….I asked myself the same thing many times over….here’s how this could happen:

1.)There are woefully ineffective accounting controls in place to prevent this sort of BABA-esque misrepresentation. Ref: the great work of Professor Paul Gillis on his ChinaAccountingBlog.

2.) There’s little/no affiliation/oversight between Chinese public accounting firms and US Firms. i.e.) PricewaterhouseCoopers Zhong Tian LLP has no financial or reporting relationship to PWC New York. The firms operate independently and are more like franchises or clubs than subsidiaries. Ref Gillis

3.)By my count there have been more than 100 "forced"de-listings of Chinese ADR’s over the last few years. Nice summary regulatory inadequacies and the repercussions of same in “How they fell: The collapse of Chinese cross-border listings” as detailed in a December 2013 McKinsey report.

4.)The SEC is extremely limited in what it can and can’t do once a firm is listed.

5.)Chinese Public Accounting firms treat audit work papers as protected under the “state secrets” laws and respond to SEC requests citing same.

6.)It took the SEC decades to catch Bernie Madoff and he had an office in Mid-Town. Could you imagine what he might have done if his business had been “Made in China”?

DEEP THROAT November 19, 2014 0:12PM

Lara, loved your interview with Jack Ma a while back......so JM saying that Alipay has 900 million registered accounts......So the equivalent of 3/4 of the population of China, with a per capita GDP of $6,000 USD have an Alipay account?...really?

By contrast, American Express, a 165 year old company, the largest card issuer in the world by purchase volume, has 110 million cards in circulation.

Alipay is also not accepted at POS or ATM's.....state owned UnionBank has a monopoly.....so the only place Alipay can be used in on line......what value is an Alipay account again?

A recent Fortune article below says that "Alipay handles 1/2 of the estimated $900 billion in on-line payments"

More "back of the envelope" calculations:

Even if BABA gets a 5% cut of the $450B in transactions......which is hugely generous.....they would have revenue of $22.5B........they reported revenue of $52B last year.....

If Alipay has 900 million active users, each user provides about $58USD ($52B/900M) in revenue.....at a 5% transaction value, that would mean that every Alipay account holder spent $1,160 or 20% of their per capita GDP on Alibaba affiliated cites.

Again, these figures are not believable....none of these ratios make sense. The consequences of this will be devastating.

cites/sources available on request.

DEEP THROAT November 19, 2014 11:11AM

Here's a back of the envelope visual..... I've been to India, have business & friends there & have several friends who do business in China. We refer to the distribution system as "organized chaos". Deliveries are made by small trucks, vans, tuk-tuks & bicycles. There is no "tracking", "next day service" or "Guaranteed" delivery that I'm aware of. I think my math below is close.

Alibaba's estimated numbers for Singles Day: 278 million orders; 565 million packages, 250 million single people in China (> age 15); Average pkg wt. 10 lbs.;

Apparently, every "single" person in China ordered 2 packages from Alibaba & affiliated sites on Singles Day.If each delivery/order address were a seat in MetLife Stadium you would need to deliver 2 packages to each seat in 3,400 MetLife stadiums. (278 million seats in total)If the packages were delivered by small vehicle (1,000 lb. load - 100 x 10 lb packages.) you'd need 5.65 million small trucks at one load per day traveling in Chinese traffic.

The orders would need to be broken down to bike messengers upon arrival (to get the packages to their stadium seat address) @ 10 packages/day per bike messenger. You'd need 56.5 million bike messengers.I'm visualizing what traffic would look like if you were to ship from Mid-town to 3,400 surrounding MetLife stadiums.....you'd put an additional 5.65 million small trucks and 56.5 million bicycle couriers on the road......wowwww....and I thought NYC traffic was bad now......Luckily, according to their press release, BABA is shipping lots of goods to Russia and South America......I'm sure that's much easier.

e-mail me for cites/sources

SOREKNEES2493 November 11, 2014 1:1PM

Deep Throat

Sunday, December 28, 2014

The "Valuation Problem" - Additional/Current Data

My posts Re: Alibaba on Lara Logan's CBS News Page.....Enjoy!