Friday, November 24, 2017

A Thanksgiving Miracle.....


I was looking at the stats on my blog on Wednesday and wondered why my page views skyrocketed.....10x my usual daily volume and accelerating.....I followed the trail of referring sites, really not understanding what was going on, and here's the question I couldn't come to grips with:

What are the odds that three years ago, an Insurance Agent in Cleveland, Ohio (me) would research a Chinese Internet stock (Alibaba) in contemplation of buying some shares.  His (my) research would prove to be so fascinating to him (me) that he (me) would start a blog about this rabbit hole, starting relationships with wonderful, enlightening smart, talented people all over the world.... and eventually (earlier this week), Mark Cuban would read it and cite it as his sole source to begin a dialogue with the White House on global financial/systemic risk.

I'd thought the odds of something like that happening might be roughly zero.....until I confirmed, with Mr.Cuban, that it actually happened.

https://www.bloomberg.com/news/articles/2017-11-22/mark-cuban-asks-trump-if-he-knows-about-alibaba-s-impact-on-u-s

















I've also posted Tim Culpan's analysis of the Tweet.  I enjoy Tim's work and he seems to enjoy my take(s).  We've tussled with this before, but Tim, as an investor and an analyst, when I see misrepresentations as silly as Alibaba's, how can we be sure that anything (Revenue, Carrying Values, etc.) are even remotely accurate?  As an Auditor, I've never felt the urge, after quantifying and documenting a significant, material misrepresentation, to say "well...that was just one error......I'm sure the rest of the financial statements are Ok."  I always look further....and nearly always find more issues.   Anyway, food for thought....

https://www.bloomberg.com/gadfly/articles/2017-11-23/mark-cuban-is-right-but-a-tweet-s-not-enough?utm_source=yahoo&utm_medium=bd&utm_campaign=headline&cmpId=yhoo.headline&yptr=yahoo


The Alibaba Response

Apparently, the Alibaba PR machine got wind of this and pumped a ton of effort into making sure that the Bloomberg page on which Mr. Cuban initially made his comment, is now filled with Jack Ma & Alibaba PR videos.  The initial article simply had a the above stock photo of Mr. Cuban sitting in a chair wearing a dark sweater.  That photo from the original  Gerrit De Vynck "Mark Cuban Asks Trump If He Knows About Alibaba's Impact on U.S." piece is long gone.

Going further, the Alibaba PR Department presented their stunning explanation (again through Bloomberg) on Wednesday.  Apparently this GMV hullabaloo is all a huge misunderstanding.  It's all about the definition of  "Fast Moving Consumer Goods" (FMCG).   They provided a link to a Taobao auction which clears things up.  They recently sold two (2) "broken" 747 Jumbo Jets (4 engines included), apparently sight-unseen, for the bargain price of just US$ 24 million each!  To the chagrin of US Aviation enthusiasts, the auction just closed, so if you were in the market for a deeply discounted Boeing 747 Jumbo Jet as one of your Black-Friday stocking stuffers, you are out of luck.

The inescapable logic here is that, Jumbo Jets are  really "fast moving" (600 mph) and they are purchased by a "consumer", so they, of course, by definition, are "Fast Moving Consumer Goods".

The value added by Taobao to this transaction must be enormous......without Taobao how would potential buyers around the world even know that there are not one, but two "broken" 747's for sale?  A "broken" Boeing 747 could be hiding just about anywhere.

The article also mentions how the website has lots of "bad assets" like real estate, industrial equipment and repossessed vehicles.   I really wish they would have explained this a little better in the Investor Call and the filings.  I don't remember them discussing "Broken Jumbo Jets", "Bad Debts" and "Foreclosed Property" at all.  Honest mistake I guess. 

https://www.bloomberg.com/news/articles/2017-11-22/alibaba-s-taobao-just-auctioned-off-two-boeing-747-planes






















As an aside, an "un-broken" 2016 747 Cargo Jet, if purchased directly from Boeing would cost about US$500 million depending on options, so $24 million for a "fixer-upper" is quite a deal.  I'm just hoping, based on the way this deal was put together, that neither of these two potential flaming meteorites find their way into US Airspace.

So Let's Dig a Little Further....Oh Look!....There's More.....

If we examine the above we see two (2) more excellent categories for boat-loads (or should I say Jumbo Jet loads) of even more great GMV.   These categories are, of course "Litigation Assets" and "Monetary Assets" (i.e. foreclosures, bad loans, etc.)

Here are a few of the 561,680 "Litigation Assets" that are out there.  The "asking price" is, presumably included in GMV when it's listed, as per the SEC filings discussed in the prior "Blob" post that started this whole discussion.  The asking price of each of these are millions of US$.
https://zc-paimai.taobao.com/list/0_______56950002_6.htm?spm=a219w.7474998.miniNav.2.dUtufm&st_param=1&auction_start_seg=-1























Let's drill down into the second listing above.  RMB 198.8 Million.  or US$30.6 Million asking price (at RMB 6.5 = US $1.00).  Sadly, it's yet another failed development project.    Unfortunately, this listing also closed a while ago, so if any of you US construction company managers were looking for additional overseas work to keep your crews busy over the holidays, you were too slow on the trigger.  In the new global economy it's important to snap these deals up without even thinking about it.  After all, you'd have the full faith and credit of Alibaba and the Chinese Judicial system behind you.  What could possibly go wrong?

https://sf.taobao.com/sf_item/527253527706.htm?spm=a219w.7474998.paiList.2.iu1Vg2





















When we dig into it, this was yet another amazing deal that US Investors missed out on.  The original developer managed to complete 50,000 sft. (82 Residential Units) that were either sold or seized.  The remaining 3.8 Million sq. ft. is just waiting for an enterprising, industrious, well-capitalized developer to jump in, complete and sell off at a huge profit.  It's a shame that the original developer could only complete 1% of his dream before he went bust.....they must have made an error two on those tricky cash flow projections, but hey, that happens.  Here's a snippet from the Court Announcement per Google translator.  The full order/announcement is still available on the site, at least for now......you should probably look at it quickly since once the Alibaba PR department sees this post, I'd imagine that this listing will disappear as quickly as the developers equity did.

Auction notice (real estate)

      Fourth Beijing Intermediate People's Court will be held at 10:00 on March 2016 to at 10:00 on March 2016 8th 9th stop (except for delays) in Beijing Fourth Intermediate People's Court carried out judicial auction network platform Taobao public live auction action, now announced as follows:
      First, the auction target:
      Located in No.77 Wulihe Street, Heping District, Shenyang, No. 81 Wulihe No., No.348 Youth Avenue and construction in progress, it is located in the core of Shenyang City with convenient transportation and complete supporting facilities. This auction excludes the gross floor area that has been sold and seized by other courts. After deducting 82 units sold (with a gross floor area of ​​5131.62 square meters), 6 sets of waiting-to-be-checked building area of ​​409.81 square meters.
      The auction total construction area of ​​429902.57 square meters.
      Among them, the total ground floor construction area is 319,808.57 square meters (including 134968.57 square meters for houses, 183840 square meters for commercial buildings, 1,000 square meters for office buildings, property houses and event rooms).
      Underground total construction area of ​​110094 square meters (including 19300 square meters of underground business, garage, equipment and other space 90,794 square meters); share of construction area of ​​41570.46 square meters.
      Starting price: 1981586800 yuan, margin: 100000000 yuan, price increase: 500000 yuan.

Keep in mind that this is only one (1) of 561,680 listings. I selected it because it was one of the biggest (by dollar value) out there and thought, after reviewing a few of these, that it had a sufficient amount of detail to effectively describe what's really going on here.  Also, it is indeed a holiday weekend, so family events, visits with friends and turkey dinner(s) prevented me from reviewing all 561,680 listings to document the oddities and anomalies that I'm pretty sure I'd find.  As always, I invite all of my readers to "click away".  If you find something interesting feel free to let me know.

I've also received many comments from readers, similar to Tim's take above, that Alibaba is a media and advertising company and GMV just doesn't matter that much.  In other words "So what if it;s overstated?"  My last two posts focused almost exclusively on GMV, primarily because the representations in the Investor Call and the filings are just so outrageous when we compare them to what's actually being sold and reported.  I'd again refer you to my "Finding Inner Peace in Dharamsala..... and thoughts on the Alibaba 20F" where I describe the laundry list of things I'd be digging into if I were the SEC or a PWC auditor.  Again, when I find one cockroach, I don't immediately assume that "that's the only one."

A Final Note

I'd of course like to acknowledge and thank the Alibaba PR Machine (through Bloomberg) for their presumed contribution to this post.

As an aside, and you, my readers, can do this too, I typed "747", "Jumbo Jet", "Litigation Assets" and "Monetary Assets" into the EBay and Amazon search boxes and nothing relevant was returned.  Oddly, you can indeed by a 747 brake drum and lots of books on bankruptcy on Amazon/Ebay, but no "real" planes, failed construction projects or bad loans.  That's so weird!.....how can Amazon and Ebay possibly survive without these huge money making FMCG categories?

Finally, since Mr. Cuban cited my blog, I've been inundated with replies/comments that, to put it mildly, disagree with my analysis.  If you disagree with me, that's fine, I always enjoy hearing alternative points of view.  I'm happy to post any relevant content.  However, based on the amount of work this is causing me, I feel compelled to repeat my rules for posting reader comments:

1,) No profanity.  This is a family friendly site.  i.e.) if your comment is simply "You are a F-ing moron" or something similar, your comment will not get through and you've wasted your (and my) valuable time.

2.) You MUST tell me why you believe I am a moron.  The correct format is: "You are a complete moron, and here's why".....followed by your non-profane take and applicable citations.


HAPPY THANKSGIVING!
















16 comments:

  1. Your analysis is so low quality. I'm out...

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    1. As always, thank you for your insight "Im out". I hope you'll come visit me in the states someday. Perhaps I can swing by the Alibaba PR department when I'm in Guangzhou and you can show me around? All the best...

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  2. It's pretty clear from your anonymous blog you have never been to China. Did you know China’s bad loan ratio is 1.7% versus India's which is 9.6%? Did you also know there is 1.4 billion people in China where 80 million are under the poverty line while India has 270 million with a total population of 1.3 billion? Also BBC recently wrote an article titled "Two Boeing 747 jumbo jets sold in China Taobao auction" for USD48 million bought by SF Airlines. The Alibaba platform is different  from Amazon and JD.com. It is asset light because it does not own any asset heavy logistics platforms or inventory which is why the company can be so profitable. On top of this, the Chinese are getting wealthier and spending more, for example there were 135 million Chinese travellers in 2016, spending US$261 billion while overseas. I think it would be smarter for the United States to welcome Chinese tourists and get their tourist dollars instead of losing out to the French and British which have strong tourism programs targeting Chinese tourists. It is easy to catch bees with honey than with a stick. So in quick summary I'd like to comment that you write anonymously because you know what you write is very low quality analysis and I find it funny that Mark Cuban would cite your blog which shows how little he knows as well. If this was an episode of Shark Tank this blog would be an immediate "I'm out".

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  3. RE: negative comments on this blog, I've noticed a trend (at least the ones not deleted)- exceptionally poor English! Coincidence? I think not!

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    1. I'll email Zuck...I think it's the Russians... :)

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    2. Yes the comments in your previous post are definitely paid trolls.

      Great job so glad you’re finally getting the attention this blog deserves!

      Delete
  4. Here's a cut & paste from an email I just received from a good friend. I have permission to repost:

    Great post. You might want to point out that Alibaba has a whole site dedicated to selling non-performing assets: https://www.taobao.com/markets/paimai/zc_npl?spm=a213w.6688509.0.0.fhERXC

    The screenshot says "Marketplace for collateralized assets. Recommended by banks! Starting from 50% off."

    You can buy financial assets, real-property collateral, or valuables like cars and watches (https://paimai.taobao.com/?spm=a219w.116665.a214uxf.9.879aa89TjPtx4), participate in court-organized auctions (https://sf.taobao.com/?spm=a219w.116665.a214uxf.8.879aa89TjPtx4 today the featured offering is discounted parking spaces), or buy goods seized by Customs (this site causes me to longer--why would you seize nylon fiber? I get the wood, given all the illegal timber cutting in Siberia, but Liberation trucks? Those are made in China. Paraffin refined by Sinopec? Ethylene? Wheels for office chairs? https://www.taobao.com/markets/paimai/haiguan?spm=a219w.116665.a214uxf.4.879aa89TjPtx4

    I thought I'd buy some paraffin but I just didn't dare put the 270,000 RMB through my debit card.

    In case you didn't know, these auctions are publicly listed in order to set a price that can be booked or, sometimes, transacted. Roughly 0% of the actual transactions occur publicly. They must be posted on Alibaba because it's free and meets the regulatory requirement.

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  5. This is great! Congrats on the exposure and go Badgers

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    1. Yup..big game Saturday....going up against my 2nd favorite team....the Buckeyes....should be a good one!

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  6. Here's an email I received from "a friend", posted with permission, of course:


    I lived and worked in China for more than a decade. I have seen all sorts craziness happen there and I went from loving everything about China to being frustrated by normal life there. It is truly an amazing place but the frustration just builds. With ten good years in China I am obviously gutted that I did not flip an apartment, or two, but I simply found it too risky. In fact, I can't believe that the market has not crashed yet. About the stock market; back in 2015 my Chinese wife thought she was a stock market wizard all of a sudden. Every stock she was holding went up, some by 10% per day for weeks in a row. Even I got caught up in the craze and we ended up having more than half of our savings invested. About a month before the crash I told her we needed to get out. During that month, oh man, the amount of crap I had to listen to from my wife, as well as her being asked by her Wechat group stock market wizard girlfriends why she married such a dumbass... it was a serious stress on our relationship. As the market, inevitably, crashed that damn Wechat group went silent... and I was again happily married. Clearly some of your content is a bit of a stereotypical representation of the Chinese people. There is still a ton of poor people in China but many people have been brought out of poverty and a very large middle class amassed. My own in-laws live in a small town just a three hour drive from Shanghai and it is dirt poor there. GDP has increased tremendously in China but the wealth is still sitting on the hands of relatively few, well connected, people. On Alibaba, it is everywhere in China, especially with Taobao, Wechat, Alipay. Every time someone makes a purchase on Taobao they hold the cash until the buyer releases it. I dare not guess how many billions in cash flow they gain on that. WeChat is the same, with their wallet. Everyone uses it for payments in supermarkets, transfers to friends/family, red pockets, etc. I left China and I still have around 500 bucks on my account. Multiply that by a very conservative 10% of the population... that is a lot of interest free cash just sitting there, or rather which is probably being invested in various high risk WMPs. Btw, the Taobao drivers are not homeless people. They are immigrant workers trying to make ends meet. Actually, compared to being a waiter in a restaurant these drivers/delivery guys make a pretty decent buck. It is a very advanced delivery system and you need to sign when receiving packages, otherwise they will not leave the goods. If you are not home the delivery guy will call you and only leave the package if you instruct him to do so. Otherwise they drop off the package at the property management office in the compound. Trust me, I have experience with this... we had daily deliveries from Taobao and Hema, which also belongs to the Alibaba Group. Brilliant system really that I actually miss after having left China. About Jack; the Chinese love his humble and wise personality but in reality he is a bit of a puppet. Behind him is people related to former government officials. Not just some local or provincial government but the real deal. Without such guanxi you will never make it in China. That is the case for all industries. Anyway, I truly enjoyed the read and I will become a regular visitor on your site. Keep up the good work.

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  7. Here is the definition of GMV from the IPO prospectus. According to this, the transactions you've highlighted from the Paimai auction website would not be included in the GMV calculation.

    “GMV” are to the value of confirmed orders of products and services on our marketplaces, regardless of how, or whether, the buyer and seller settle the transaction. Unless otherwise stated, GMV in reference to our marketplaces includes only GMV transacted on our China retail marketplaces. Our calculation of GMV for our China retail marketplaces includes shipping charges paid by buyers to sellers and excludes vehicle and property transactions with list prices exceeding RMB500,000 (US$80,432) and any other products or services with list prices above RMB100,000 (US$16,086), as well as transactions conducted by buyers who make purchases exceeding RMB1,000,000 (US$160,865) in the aggregate in a single day.

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    1. Yup..saw that....I believe Paul Gillis posted that a couple of weeks ago as well. Read differently, it says that "vehicle and property transactions under $80,432 ARE indeed included in GMV. Purchases by a single buyer, in a single day under $160,865 ARE also included in GMV. That seems like a lot of toasters, coats, socks and underwear to me. I still wonder why they don't mention any of this in their filings or investor calls? Also interesting that Amazon and Ebay don't handle these types of transactions....

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    2. JD recently changed its definition of GMV to correspond more with Alibaba and its GMV figure grew significantly. The reality is that GMV is an imperfect measure and most smart money investing in Alibaba realizes this. For example, GMV does not account for returns. Alibaba's biggest category is apparel (vs. JD's which is electronics). Anyone who buys clothes online (especially women, just ask your wives/gfs) usually buys $1 worth of stuff only to return 80 cents back to the retailer. So in those cases GMV would be inflated by 5x. There is nothing fraudulent or insidious going on here - it is the industry norm. That's why the "G" stands for "Gross".

      GMV is therefore not comparable to GDP and consumption because the GDP (i.e. economic value add) as a percentage of Alibaba's GMV is going to be a significant discount to that figure.

      I only use GMV to look at YoY trends and even then you need to take it with a grain of salt.

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    3. Thanks Mak. Agreed....the representations are "Gross". Whichever term you choose to apply, "Insidious", "Fraudulent", "misleading", "Ridiculous", "Absurd", etc., any adjective you'd like to use is fine with me. The point is that the filings are riddled with misdirection and incomplete disclosure. All of which are intended to show meteoric growth and profitability where it doesn't exist.

      The line between "Sell Side Analysis" and "Aiding and Abetting" indeed gets blurrier by the day.

      As you imply, GMV, as unsophisticated Investors understand it, may be overstated by 5x. Investors have no way of knowing. So you've been long for a while? You've done very well....congrats!

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  8. From my experience DeepL is much better than Google Translate.

    https://www.deepl.com/translator

    ReplyDelete
  9. From my experience DeepL is much better than Google Translate.

    https://www.deepl.com/translator

    ReplyDelete