What can I say.....It just keeps getting better and better.
Here are the links:
Webcast
http://edge.media-server.com/m/p/wnauw9sh/r/1
Press Release
http://www.alibabagroup.com/en/news/press_pdf/p160811.pdf
Presentation:
http://www.alibabagroup.com/en/ir/presentations/pre160811.pdf
SEC Filing:
https://www.sec.gov/Archives/edgar/data/1577552/000110465916138896/a16-16621_1ex99d1.htm
My history of the Alibaba growth phenomenon is chronicled in "It's Like Deja Vu ....all over Again..." I won't bother rehashing how we got here, but this Investor Call was even more entertaining than the last.....here are the bullets:.
1.) Astounding Revenue Growth (59% year over year for the quarter ended). No other (real) large business or economy on the planet is experiencing this type of growth. Businesses all over the world are generally treading water right now, looking for direction and sanctuary, Global growth, even though supported by extraordinary levels of Central Bank stimulus can best be described as stagnant, yet Alibaba's reported growth story is somehow immune to macro-economic factors.
2.) Even though Alibaba's GMV growth has slowed to just 24% YOY, if we have some fun with ratios, we can extrapolate that Alibaba's GMV this year, with a "conservative" 24% annual growth rate will be just short of US$ 600 Billion (Using this quarter's slowing 24% GMV growth rate applied to the 3/31/16 YE numbers). This extrapolated number now becomes 125% of Walmart's annual sales. If Alibaba's projected GMV were GDP, Alibaba would then be the 34th largest Economy on the planet, right behind the United Arab Emirates. They've somehow accomplished this economic miracle with 35,000 employees, a few computers and an "ecosystem" of undisclosed, odd partnerships that somehow get these goods from point A to point B. Truly amazing.
3.) Share-Based Compensation (Stock Grants & Options) slowed a bit to $556 million for the quarter, but continue through the roof at 11% of FQR (i.e. Fake Quarterly Revenue ). Since FQR increased 59% this naturally drives the SBC ratio lower. Math is a wonderful thing.
4.) The creation of "Questionable Assets" also accelerated dramatically during the quarter. Questionable Assets (as defined in prior posts) increased by US$ 8.4 Billion during the quarter and now comprise 2/3rds of the Balance Sheet.
As an aside, did they really convert US$ 8.4 Billion in cash to financial vapor in just three months? Again, there is no discussion re: the details/components of this gigantic write up/purchase in the Investor Call, Press Release, Presentation or 6K filing. They've increased these same "Questionable Assets" a whopping $30 Billion in just two short years (since the IPO), fueled primarily by increased bank debt, bond issues and the IPO money. How is this even possible? At some point, these investments (aka boondoggles) will have to be written down/off. This is indeed a milestone quarter for Alibaba. It's the the first quarter where "Questionable Assets" have exceeded Shareholder Equity. If I'm indeed directionally correct about the "real" value of all of this intangible fluff, Alibaba is un-officially insolvent as I type.
5.) For the first time the Group has reported Segment data. (pg 7 of the Press release). All of the acquisitions generally since the IPO, described as Cloud Computing, Digital Media & Entertainment and Innovation Initiatives contributed operating losses of US$ 581 million. BABA's share of losses for its' "Equity Investees" (Koubei, Youku Tudou, Cainiao, et al.) came in at US$ 221 Million, more than doubling the loss for the prior quarter. (pg 15 of the 6K) From a purely cash flow perspective, these businesses are providing about as much utility as a steaming turd on a hot August sidewalk.
6.) Costs are skyrocketing. Quarterly Expenses excluding Share Based Compensation (SBC) increased by US$1.29 Billion on an absolute basis, or an additional 7% of Revenue YOY. (pg 11 of the 6K)
7.) Borrowing has also, of course, increased significantly in the quarter. Liabilities are up by US$5 Billion, of which US$ 3 Billion is Non-Current Bank borrowing. (pg 22 of the 6K)
8.) They are burning through cash like drunken sailors. Despite all of that additional borrowing, Cash & Equivalents declined US$ 3.7 Billion. (pg 24 of the 6K). US$ 2 Billion was used to Repurchase (support) BABA shares from Softbank at US$74.00 per share, ostensibly to help Mr. Son, an Alibaba director, out of his own self-inflicted mess.
9.) Again, there is no detail provided for the required Alipay/Ant Financial profit sharing accrual and "processing fee" offset. Presumably, since there is no discussion of the net profit-sharing amount, it stands to reason that there must continue to be no significant profits in Alipay/Ant. Perhaps they have adopted the Lending Club (NYSE:LC) model. (i.e.) Make under-priced loans to un-bankable businesses and hope for the best. It might look good for a while, but as we learn repeatedly, it's hardly sustainable.
10.) Finally, in my mind the most important figure, the FNI (Fake Net Income) decreased Q over Q from US$ 4.6 Billion in 2015 to US$ 1.1 Billion in the quarter just ended (pg. 26 of the Press Release). It's actually relatively flat after the elimination of the absurd prior year US$ 4 Billion "Gain on deemed disposals/disposals/ revaluation of investments and others" (Authors note: That description still cracks me up whenever I read it. You just can't make this stuff up.) This Net Income number (albeit fake) is shockingly small for a business which purportedly has cornered the e-Commerce market in China, (US$125 Billion GMV in the quarter) shares profits with the preferred payment method of every Chinese Consumer (900 million registered Alipay users) and holds estimates of up to US$ 200 Billion of the Hard-Working-Chinese People's money in related, off the books investment funds. Moreover, Alibaba's demonstrated, unquenchable thirst for cash is far from typical of a business that, by Alibaba's own account has a virtual monopoly on eCommerce, and all that is on-line in the "World's Second Biggest Economy". With reported dominance like this, one would think that Alibaba treasury personnel should be driving to the bank daily with dump trucks full of cash to deposit, rather than scouring the globe for more sucker capital lurking under any remote off-shore rock they are fortunate enough to overturn.
Sarbanes-Oxley
All that said, to jump off on a tangent, some of my readers have been opining that, for some reason, Sarbox doesn't apply to Alibaba since it's an off-shore ADR. I'm not sure where this is coming from and I've addressed it privately via email. Sarbox absolutely applies to Alibaba management. I've also attached a link to the Alibaba Audit Committee Charter spelling out the committee's Sarbox Responsibilities as they apply to the signors, Daniel and Maggie. Again, even though the Sarbox sanctions, penalties and fines apply to them, my assertions that they are "safe in China"would seem reasonable. Like the financial equivalent of the Nuremberg trials, they could only be prosecuted in absentia, as I doubt their lawyers would advise them to get on a plane and defend themselves in an American court room. If you are reading this and have any additional insight, or work in the world of Sarbox, please fill me in, I'd enjoy hearing your thoughts. Fascinating stuff.
Last Words....
Moreover, and again I need to emphasize this, Alibaba's audit work-papers and supporting data for their bizarre, incomplete, fragmented financial statements have never been available for regulatory review. Regulators continue to clamor for access, but oddly, are stymied every step of the way. When domestic businesses refuse to comply, regulators have lots of hammers available and never hesitate to swing them. For whatever reason, with Alibaba, regulators are either reluctant or unable to do their job. Which, of course begs the question, how could a business like this have ever been allowed to list on a US Exchange in the first place?
On the other hand, Mr. Market seems to think all is peachy, driving the Alibaba stock price up another 5% after they reported today.
Finally, given all of the convoluted discussion above, I have to hand it to them. Just when I think Alibaba management couldn't possibly report anything sillier than they already have, they go ahead and do something like what we've seen today.........and totally redeem themselves!
More Relevant Reading
Alibaba Audit Comittee Charter - SARBOX Responsibilities
http://docs.alibabagroup.com/assets2/pdf/Audit_Committee_en.pdf
CIA - World Fact Book
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html
Alibaba WSJ Comments prior to the Earnings Call
http://www.wsj.com/articles/analysts-seek-clarity-on-alibabas-accounting-practices-1470774166
Alibaba - WSJ - Auditor Limitations
http://www.wsj.com/articles/u-s-regulator-expected-to-get-access-to-alibaba-baidu-financials-1470377222
Your analysis is so low quality. I'm out...
ReplyDelete