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
