A Comment from "Anonymous"...

I just noticed this comment on a prior post a few days ago......I would normally just reply within the thread, but this comment was so thought provoking that I felt it warranted a post of its own......here's the anonymous comment on "Oh what a tangled web we weave...":  

2 points: 

- you are using the stats for "enterprises above designated size" which only counts companies with sales more than a certain figure, which I can't remember. The relevant data point is that for the full year 2015, sales recorded at enterprises above designated size accounted for 54% of total retail sales
- the most straightforward data point, instead of us trying to guess how big China's ecommerce sales are, is from NBS as well. in 2015, China ecommerce sales were 3877 billion yuan and BABA's GMV was 2950 billion yuan. So BABA's market share is 76% of China's ecommerce, which makes sense given its ubiquituity

http://www.stats.gov.cn/tjsj/zxfb/201601/t20160119_1306103.html 

First, I'd like to thank Anonymous for calling my attention to the January 20th, 2016 Press Release re: China Retail Sales published by China's National Bureau of Statistics (NBS).  This is valuable data and I was unaware of its existence until Anonymous pointed it out to me.  Whoever you are....Thank you!

Next, I'll assume that Anonymous has a strong financial background, has knowledge and understanding of the NBS Publications (since he/she has sent this to me) and is fluent in Chinese (the link he/she provided was the Chinese version of the data)

Fortunately, there's an English version of the Press Release posted on the NBS site as well.  I'll refer to that document to avoid any translation mis-steps.

English Version
http://www.stats.gov.cn/english/PressRelease/201601/t20160120_1307123.html

Also, thanks to Anonymous for the 54% metric....I was looking for that and I didn't see it.  The Press Release shows that Retail Sales for "Enterprises above a designated size" looks to be 49% of the 2015 total "Physical Goods" (133,891/268,621) so I'd suggest that this is a more appropriate benchmark.

So now...let's examine the numbers in a little more detail....

Below is the statement and the full table Anonymous was referring to re: Alibaba's  market share being "76% of China's eCommerce".  Id' suggest that, based on the numbers, Alibaba is even more dominant than Anonymous had suggested..

In 2015, the national online retail sales of goods and services was 3,877.3 billion yuan, increased 33.3 percent year-on-year. Of which, the online retail sales of physical goods was 3,242.4 billion yuan, increased 31.6 percent; the online retail sales of non-physical goods was 634.9 billion yuan, increased 42.4 percent.

Given the above, since Alibaba, according to their filings, press releases and investor calls only participates in the sale of "physical goods", they actually have a  91% market share (2.950T/3.242T) of all eCommerce in China.  Again, based on these figures, Alibaba is nearly the entire eCommerce ecosystem in China.  Remarkable to say the least.

Here's the entire table contained in the NBS Press Release:






















Moreover, when we compare the Alibaba GMV in 2015 to all Retail Sales in China, in the physical goods categories that their filings, investor calls and press releases purport that they participate in, we see that the Alibaba's market share is the equivalent of 44% of all retail sales in China.  In other words, nearly half of all clothing, shoes, lipsticks, shampoos, refrigerators, TVs, stereos, desks, computers, couches, chairs, beds, phones, etc. are sold and delivered through the Alibaba ecosystem. Again, this is remarkable.

Alibaba's Competition

Now, let's take a look at the rest of the eCommerce businesses in China.  In the fall of 2015 China Internet Magazine released it's list of "Top 100" eCommerce businesses.

Observations on the above:

1. As we mentioned above, Alibaba is 91% of all eCommerce in China.  The rest of the businesses are relatively insignificant.  Of the top 100 eCommerce businesses, the next largest ecosystems are Baidu (Qunar & Nuomi)  and JD.com each about 6% of Alibaba's reported GMV.  To the casual observer, it might appear that the Chinese consumer just doesn't seem to be all that excited about any of the other non-Alibaba eCommerce business.
2. In just four years the cCommerce Industry in China has grown from virtually "non-existent" to 44% of all applicable category Retail Sales in China.
3. Interestingly, with the exception of Suning (an Alibaba "Investee"), there are no "brick & mortar" retailers selling a material percentage of their wares via proprietary eCommerce sites.   As an aside, in the US, once eCommerce took off, traditional retailers, Walmart, Best Buy, Apple, Home Depot, CVS, Lowes, etc. jumped into the eCommerce fray to prevent the erosion of their traditional revenue stream. This hasn't happened in China.  Presumably the managers of the "brick & mortar" retailers felt comfortable letting 44% of their category revenue walk out the door in just a few short years. Guess they just didn't see it coming?
4. Eight (8) of the Eleven (11) largest eCommerce businesses in China, the four (4) Alibaba Businesses (Taobao, TMall, 1688, Suning) JD.com, Amazon China, Baidu (Qunar & Nuomi) and VIPShop are all listed on US Exchanges.  Sadly, it seems the hard working people of China won't be able to invest and participate in this eCommerce miracle, reaping the huge financial rewards from the certain, guaranteed success of these businesses.  All the wealth will accrue to US Investors.  The Chinese people will learn perhaps the hardest lesson of capitalism, that the rich do indeed get richer. Frankly, I just can't understand how China's leadership could let this golden goose slip away.  (Author's Note: for my Chinese readers using Google Translator or some other tool, the above bullet point is what we in the United States refer to as "sarcasm".)  
5. Finally, when we compare the verified GMV (per SEC filings and Company Press releases) of the eleven (11) largest eCommerce businesses, we see that the GMV of these businesses actually exceeds the comparable total GMV reported by the NBS.  In other words, for the numbers to balance, the remaining eighty-nine (89+) businesses would have to report negative GMV of 374 Billion Yuan (US$58 Billion).  Unfortunately, like anti-matter, negative GMV (sales) doesn't exist on this planet. 

Another Odd Phenomenon

With the meteoric increase of eCommerce in China, you'd think we'd see a bit of what we might refer to as the Walmart/Amazon effect.  When a sea-change competitor enters a market we usually see dramatic shifts in the landscape.  For example, when Walmart drops a Super Center in a small community, Mom & Pop commodity-type retailers (hardware stores, department stores, grocery, etc) in a 20 mile radius suffer significant revenue loss and/or eventually go out of business.  Moreover, an eCommerce business like Amazon increases pricing/margin pressure. "Why should I buy a coat, hardware or a home theater at the local store when I can get the same merchandise on-line for 20% less?"  Industry Sales don't necessarily increase, they are shifted from one marketplace/competitor to another.  Brick & Mortar businesses must either adapt to the new paradigm or suffer accordingly.   (JC Penny, Sears, Barnes & Noble, Circuit City, Blockbuster, Borders, to name a few)

Interestingly, even with the huge expansion in eCommerce, we've not seen anything near a slowing or pullback in the growth of Brick & Mortar retailers in China.  According to Statista, in 2014 there were 87,652 retail businesses in China, compared with 58,471 in 2011, a 50% increase (about 15% per year) in just three (3) years.  I've seen nothing in the financial press reporting wholesale realignment/closing of retail units in China, despite 44% of all Retail Sales transitioning to the Alibaba ecosystem where presumably no storefront is needed.  If Alibaba didn't exist would the Retail Business growth rate be 30% per year even though the Disposable Income growth rate has been roughly 10% per year since 2011?  Anonymous, if you have anything at all on this topic I'd appreciate it if  you'd share it with me.

The Thesis....

Based on the above, I'll repeat the theme/thesis I've been describing in the blog for more than a year.

Is it more likely that Alibaba is the eCommerce miracle it claims to be, defying economic gravity, with published un-explainable, unverifiable metrics that fly in the face of logic, reality and nearly every published data point out there?  Perhaps the NBS data is just wrong?  Perhaps the house-of- mirrors NBS Survey data (self reporting with a systemic, political incentive to mis-report) is divorced from economic reality and Alibaba's meteoric growth is accurate?

Or:

Is it more probable that Alibaba and the entire "China Dream" is the greatest financial fraud, perpetrated by US Investment Banks, on naive, trusting US Investors in the history of finance?

Again, this is just a thesis.....I'm not directly accusing anyone of anything....just asking a few questions.

Finally, Anonymous, if you have anything else you'd like me to review please pass it along.  I'll be happy to take a look at it.  Again, thank you for sharing.


Additional Materials/Links

100 Top US Retailers
https://nrf.com/2015/top100-table

100 Largest E-Commerce Businesses

http://www.chinainternetwatch.com/14911/top-100-e-business-companies-q3-2015/

Caixin Article - 11/2/15
Today, Alibaba's Tmall controls 58 percent of the market for retail e-commerce sales in China, according to iResearch Consulting Group. JD.com holds second place with a 20 percent market share, while Amazon is a distant eighth with 1.1 percent.
http://english.caixin.com/2015-11-02/100869131.html

China Internet Watch - eCommerce
http://www.chinainternetwatch.com/14911/top-100-e-business-companies-q3-2015/#ixzz40Z2dsYBu

Amazon's Ecommerce in China is a rounding error on the 10k.......Caixin says it's about 42 b RMB or 1% of total China eCommerce.
http://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm

Dianping - MeiTuan Merger
http://finance.yahoo.com/news/alibaba-sell-stake-meituan-dianping-report-080342153.html;_ylt=AwrC1zHxV8ZWyzMA8RaTmYlQ;_ylu=X3oDMTEyNmo2aW9rBGNvbG8DYmYxBHBvcwMyBHZ0aWQDVklEMDVfMQRzZWMDc2M-

Baidu Financial Results - SEC Filing - 9/30/15
http://www.sec.gov/Archives/edgar/data/1329099/000119312515359040/d93806dex991.htm
Note: that the term GMV did not appear in the Baidu SEC filings until Q2 of 2015.

Retail Businesses in China
http://www.statista.com/statistics/277807/number-of-retail-companies-in-china/

China Disposable Income
http://www.statista.com/statistics/289186/china-per-capita-disposable-income-urban-households/

"Window Dressing".....

This summary is not available. Please click here to view the post.

Oh what a tangled web we weave.....

.....when first we practice to......oh what the heck....you know the rest.

I wasn't even going to post anything about Alibaba's Q3 12/31/15 fake numbers, but this is getting so over the top, so out of hand, that I just can't resist.  I took an hour of my life (which I'll never get back) to listen to the Investor call Thursday morning.  It was a mess.

Reference/Discussion Materials below:

Investor Call
Presentation
Press Release:
6K

Feel free to peruse the above for the details if you have the stomach for it.

On a semi-unrelated note....

One of the largest on-line Peer-to-Peer (P2P) lending businesses, Ezubao was shut down by Chinese authorities this week, describing it as the largest Ponzi scheme (by number of victims) in history. Nearly a million "investors" lost more than $7.6 Billion.

Here's one of the posts describing the debacle. Apparently, if you are a little old lady in China....they not only swindle you out of your money....but they rough you up when you make a trip to the company headquarters to ask a few questions about it. (See the video clip for the little old Chinese lady smack-down)
http://qz.com/606786/nearly-one-million-investors-were-fleeced-in-chinas-latest-ponzi-scheme/?utm_source=YPL

If you are wondering how this can happen, just read my post from a year ago entitled:  Alibaba....The  Ultimate Shadow Bank...."

The "Call"

Anyway, here's the opening salvo from the Q&A section of the Alibaba Investor Call.  As interpreted by the Dick Fuld BST (Banker-Speak-Translator ...patent pending)

The first question, from Carlos Kirjner at Bernstein was actually really good (Minute 19 of the call), and fielded by Daniel Zhang, CEO.

Carlos: "Could you give us the real figure for actual Gross Merchandise Value (GMV) that was actually shipped in the quarter?, net of returns, of course."

Carlos is pretty sharp.  He understands that GMV is hugely overstated, so he asked a reasonable question.  Here was the response.

Daniel: "When we look at the big picture, we have a lot of GMV.  We are very happy.  The weather was very warm so we didn't sell very many winter coats.  But it's colder now so we are selling more coats."

(pause)

Carlos: (unspoken): "Um...well OK...thank you Daniel...I think.  I really wish you understood English."

Unfortunately, though I didn't think it possible at the time, the rest of the call went down hill from there.

Bullet Points of Silliness:

So here are the main bullet points that have been building over the last year.  Most of the details/concepts have been described in each of the quarterly posts contained within the bowels of this blog:

One of these things is not like the others....
Alibaba...the Odyssey continues...
Alibaba...a year in review....
Once upon a time....

But again, the Alibaba management team continues to exceed even my most outrageous expectations:

• GMV and related Revenue are unverifiable, inconsistent and out of step with the real economy of China.  Every other Chinese ADR listed on US exchanges is reporting reduced revenues in the last half of 2015, yet Alibaba is reporting huge organic growth, 23% YOY GMV; and a whopping 32% YOY Revenue growth.  There's no other way to say this.  This is ridiculous.
• Share based Compensation continued at an absurd level $675 million in the quarter; 14% of revenue.
• "Questionable Assets" continued their meteoric increase; a currency adjusted US$3.2 Billion  in the quarter and US$23 Billion since 6/30/14 prior to the IPO,  On top of that, management blatantly flaunts a line item that I've never seen, in all my years in finance: "Gain on deemed disposals/disposals/ revaluation of investments"  This write-up is an astounding US$7.2 Billion for the nine months ended 12/31/15 and US$ 458 million in the quarter. Again, in a period where the Chinese stock market and asset values have fallen off a cliff.

Published orders/shipments/Revenue/Employee and GMV ratios, again, don't make any sense.  The law of large numbers tells us that millions of occurrences normally yield very little variation on the margin.  In other words, it takes earth-shattering events to move a needle one way or another.  Here are just a few examples:

• On "Singles Day" there were 95 million Mobile Buyers out of the 115 Million Total Buyers on that day. So all of a sudden, on that particular day, nobody in China used their desktops to buy items on Alibaba?  The Mobile Users jumped from 68% in the quarter to 82% on that particular day?  Really?
• As of 12/31/15 Alibaba had 36,465 employees, compared to 36,662 as of September 30, 2015 and 34,081 as of December 31, 2014.  So they are doing 30% more business with essentially the same headcount as the prior year?  Moreover, costs (Cost of Revenue, Product Development, Sales & Marketing, G&A) have increases 39% YOY with roughly the same headcount?  Really?
• Along the same lines, Cost per Employee (based on the above cost categories) has increased from US$162,000 per employee for the nine(9) months ended 12/31/14 to more than US$213,000 per employee for the same period ended 12/31/15.  The Share Based Compensation component of the Cost-Per-Employee for the comparable 9 month period(s) was $38,000 increasing to $49,000 in 2015.     I did this calculation several times to make sure I wasn't making a math mistake.  Where are all these cost increases coming from?  Shouldn't costs per employee decrease as fixed costs are absorbed on increased volume?  Finally, where do I get an employment application?  Jack, do you give Re-Lo packages?
• Maggie Wu mentioned there were 20,000 developers working on Cloud Computing in the Alibaba ecosystem. (min 31:30 of the call)  Who are these developers?  There are only 36,000 Alibaba employees.  Are these developers contractors?  Are they capitalizing the cost of this "development" when it should be expensed as wages?  Cloud computing only represents 2% of Alibaba's Reveune.  Ms. Wu's comment would merit significant discussion in any venue, apparently except the Alibaba Investor Call..
• Again, there is no discussion or even mention of the numerous acquisitions reported by financial press during the quarter.  Most notably, Bloomberg reoprted that Alibaba had acquired Youku Tudou in November in a $4.8 Billion deal (Deal to close in the 1st quarter of 2016)., yet there was no mention of any details of this transaction or terms in the 6k or investor call.  Are you kidding me?  Really?
• Moreover, there is no discussion (other than vague "synergy" BS re: Koubei and "cloud computing") about the consolidation of Alibaba's numerous subsidiaries.  As described in prior posts, none of these recent acquisitions', performance and/or accounting methods used to report revenues and costs are described.  
• The press release states that "On November 11, 2015, we attracted over 115 million buyers to our marketplaces and enabled RMB91.2 billion (US$14 billion) in GMV settled through Alipay on our platforms. Our success on Singles Day was a testament to the scalability of our ecosystem. Our platforms processed 467 million delivery orders during a 24-hour period.  467 million singles day  orders for $14 Billion= $30/per order.  At US$149 Billion GMV; there were roughly 5 Billion orders shipped during the quarter?  UPS Shipped 1.5 Billion Packages globally during the same quarter.  Really?
• Again, there is no discussion re: the Alipay profit sharing agreement and related "escrow fees" paid to Alipay.  Theoretically, the fees on the Alpay escrow service for settling US$149 Billion in GMV during quarter should be enormous, (i.e. est. US$1.5 Billion or 28% of Revenue at 1% of GMV) yet there is no mention of the fees or offsetting "profit sharing" agreement  in the 6K, Presentation or Press Release.  I've described the details of what should appear in the financial statements in the "I was talking to an analyst..." post on this blog.  
• Joe Tsai, defending Alibaba's odd, enormous growth metrics in the face of a well documented economic slowdown, cited that "Retail Spending in China increased 10.7 % YOY in 2015".  Since Alibaba is leading the charge in e-commerce, according to Joe, a 23% YOY increase in GMV and a 32% increase in Revenue was reasonable and expected.  Is it really reasonable to believe that Alibaba's GMV is growing at more than twice the national retail sales growth rate?  Even if the 10.7% growth rate were accurate?  In Joe's words, Alibaba "is" eCommerce in China.  In a related note, Wang Baoan, head of the National Bureau of Statistics was arrested last week on corruption charges.  I'm just sayin'....

An Interesting Schedule:

So, based on Joe's dubious claims, I pulled the monthly data from the English Version of the NBS website and put the last quarter's data in a format I could better understand.  All conversions are at 6.48 RMB = US$1.

My assumptions are as follows:

1.) According to the NBS, Retail Sales in China for the 12 month's ending 12/31/2015 for "Enterprises Above a Designated Size" accounted for US$2.066 Trillion in Retail Sales last year (about 60% of all retail sales).  The thinking is that data provided by these larger enterprises is more accurate and takes out the variation that might be attributable to small, mom & pop retailers.  Since Alibaba is a "Large Business" by any standard, this seemed to be the appropriate data set for comparison.
2.) Alibaba, according to every conference call and filing so far, does not sell any meaningful amounts of Grain, Oil, Foodstuff, Beverage, Tobacco, Commodities, Liquor, Medical Care, Fuel, Cars & Building Materials.  (Although I've disputed this since the websites are littered with Industrial Goods, Automobiles, Real-Estate, Bad Debts/Assets, Foreclosures & Knock-Offs, reasoning that including sales of these categories is the only way they could possibly get to the allegedly fake GMV levels they are reporting). Therefore, I've adjusted the NBS Data to reflect only the Categories that Alibaba claims to sell on their websites.

URL - NBS Retail Sales - Large Businesses  - US$2.066 Trillion in 2015

http://data.stats.gov.cn/english/tablequery.htm?code=AA0511

So based on the above, here are my observations for the QE 12/31/15:

1.) According to Alibaba's filings; their ecosystem is "involved in" the equivalent of 79% of the Category Sales.  The equivalent of eight (8) of every ten (10) "large business" retail transactions that take place in China is handled by the Alibaba ecosystem.....Really?
2.) "Singles Day" apparently has no real impact on Retail Sales in China. In fact, Retail Sales in December were actually greater by US$27 Billion than in November.  Yet, "Singles Day" is a GMV bonanza for Alibaba.  Who knew?
3.) The Published NBS data doesn't actually "add up".  Perhaps that's why they arrested Wang Baoan?  He couldn't do rudimentary math?  Perhaps the books weren't cooked well enough?
4.) Petroleum & Gasoline usage was down sharply in the quarter.  Since pricing is government controlled and relatively constant, the bulk of the Retail Fuel Sales decline is most likely due to reduced volume/gallons not price. With all of this eCommerce delivery going on, shouldn't gasoline/fuel usage be on the rise?
5.) China's Retail sales (as reported by the NBS) are increasing at roughly 9% YOY for QE 12/31/15 (Not 10.7%).  If Alibaba's GMV increased by more than 23% in the quarter it would stand to reason that Alibaba's competitors suffered significant sales declines. Although it's possible that their books are cooked as well.  Apparently, 2+2 = 437 in Chinese financial circles.
6.)If Alibaba's GMV continues increasing at 23% YOY and China's Category growth remains constant, by next year Alibaba's Reported GMV will be greater than all of China's "Retail Sales from  Businesses above a Designated Size".  The sum of one part will be greater than the whole.  That will be one heck of a trick

So what are we left with?

We have increasingly more outlandish claims made by Alibaba management.  We have odd metrics, inconsistent with economic reality at every turn. It's as though Jack just scribbles some numbers on a piece of paper and gives them to Maggie and Daniel to read to the analysts like some sort of twisted bed time story. We have fraud and graft running rampant in the private sector, which anyone with a pulse should have seen coming months/years ago.  We have high ranking government officials routinely "perp walked" through the pages of China's press.  The entire Chinese economy appears to be unraveling into one, giant, white-collar crime.

Personally, I'd feel much better about all of this if it were just incompetence.

Additional Links & reference Material

Investor Call
http://edge.media-server.com/m/p/nm84bore/r/1
Presentation
http://www.alibabagroup.com/en/ir/presentations/pre160128.pdf
Press Release:
http://www.alibabagroup.com/en/news/press_pdf/p160128.pdf
6K
http://www.sec.gov/Archives/edgar/data/1577552/000110465916092294/a16-3084_1ex99d1.htm

China Retail Sales - $3,573 Trillion

http://www.statista.com/statistics/295540/china-retail-sales/