Monday, February 1, 2016

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

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


5 comments:

  1. CAN YOU PLEASE DISCLOSE YOUR POSITION IN ALIBABA? ARE YOU SHORTING THE STOCK?

    ReplyDelete
  2. 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

    ReplyDelete
    Replies
    1. Very interesting thoughts....there's much to ponder here. I'll take a look at the data. Thanks for the info & feedback!

      DT

      Delete
  3. "Maggie Wu mentioned there were 20,000 developers working on Cloud Computing in the Alibaba ecosystem." I think these developers are people who are using the Cloud Computing system to develop their own applications. For example, I would be counted as a developer if I signed up on Microsoft's Azure platform and started writing programs on it.

    ReplyDelete