Friday, November 2, 2018

Off the grid....

I skipped the BABA earnings call this morning as I'm pressed for time.  I'm catching a flight to India  shortly and am going to be off the grid (intentionally limited/spotty access) for a couple of weeks.

That said, I can't resist taking 20 minutes and review a few things from the Press Release that absolutely jumped off the page at me.  I'm sure, because of my limited time, I've missed some excellent comedy, nevertheless, I'll forge ahead.

Press Release:
https://www.alibabagroup.com/en/news/press_pdf/p181102.pdf
Presentation:
https://alibabagroup.com/en/ir/presentations/pre181102.pdf 
Webcast:
https://edge.media-server.com/m6/p/8fd6emny

Here are the Bullets:

A.) The format of the presentation has been completely updated!  Lots of pictures & graphics.  Sophisticated Investors LOVE pictures and graphics!  Nice work!

B.) On page five (5) of the Press Release, they reduced guidance giving the following rationale:

"In light of current fluid macro-economic conditions, we have recently decided not to monetize, in the near term, incremental inventory generated from growing users and engagement on our China retail marketplaces. We expect this decision to benefit SMEs on our marketplace platforms."

Again, I didn't get a chance to listen to the Investor Call Q&A, but I'm hoping that at least one of the analysts asked something like "exactly what the hell does that mean?"

C.) They've somehow managed to really tighten their belts, keeping Share-Based Compensation (SBC) at only US$1 Billion for the quarter, constant at 8% of Revenue from the same prior year quarter. (Pg. 10 & 11)  This is, of course, down substantially from the June 30th 2018 quarter where SBC topped 20% of revenue.  I'm not sure how the management team and the all those elite with their hands in the cookie jar can possibly scrape by on this pittance, but I'm sure US Shareholders are grateful.

D.) Equity Investees are continuing to be consolidated (hidden from view) yet the businesses in the catch-all category of  "Other Investees" have somehow, in aggregate, turned their fortunes around, booking a profit (increased valuation) of US$282 Million in the quarter.  Thank goodness they've finally got these undisclosed, money losing boondoggles under control.

E.) "Questionable Assets" (Investment Securities, Equity "Investees", Intangibles and Goodwill) now sit at US$71 Billion (59%) of the balance sheet, up from 51% of the Balance Sheet at the March 31st 2018 Year End and up from zero (0%) at the time of the 2015 IPO.  I'm sure these businesses are worth every penny of their current book value.  Balance Sheet (pg 24)

F.)  They also posted yet another "Gain on deemed disposals" of US$771 million in the quarter.  They are "deeming" asset write-ups and gains all over the place.  Seems odd when Chinese Stock Markets are in the dumper. (Pg 29)

G.)  The most amazing pronouncement in the Presser was that the self-proclaimed E-Payment juggernaut, Ant Financial actually lost money "net" in the quarter. (Pg 14)  Here's what they said.

"The loss was primarily due to net loss sustained by Ant Financial during the quarter as a result of its investments in user acquisition, product innovation and international expansion. In the September 2018 quarter, Ant Financial strategically stepped up its investment to acquire more users and capture growth opportunities of the offline payment market by leveraging its technology for financial service industries. During the quarter, domestic annual active users exceeded 700 million, almost 70% of which used three or more categories of Ant Financial’s services." 

Interestingly, Alibaba is (by far) Ant's biggest Customer.  If I'm reading this correctly, this "net" loss is the loss incurred after the processing/escrow fees incurred, accrued and paid by Alibaba to Ant.  So what was the processing/escrow fee actually incurred by Alibaba to Ant?

If they are indeed losing money "net" we'd be hard pressed to justify the US$150 Billion (monopoly-like) valuation indicated by the completion of the insider led Series C US$14 Billion funding round they trumpeted in the June Presser/Filing.

Ant/Alipay, by all accounts is as close to a state supported monopoly as it could be.  Incurring a loss on this business is tantamount to Rockefeller calling J.P. Morgan, at the height of the Standard Oil Trust empire and opining "Yeah....we had a really bad quarter...I just can't figure out how to raise prices!"

There are only three possible explanations for this:

    1.) Ant Financial management is the most incompetent management team on the planet.

    2.) The losses are actually due to all sorts of ill-advised, undisclosed, non performing SME loans (see "incompetent management" in #1 above)

    or:

    3.) Alibaba/Ant, most likely at the behest of the CPC, has built an amazing electronic payment system using the benevolence of US Shareholder philanthropy.  Chinese consumers and by extension, Alibaba (and US Shareholders) must be paying minuscule, unsustainable escrow/processing fees, inflating Alibaba net income, presumably to support the stock price.  It's the essence of earnings management.  It looks like yet another effort to move cost out of the BABA "ecosystem" reflecting a much higher economic value on the business than it deserves. Salivating US investors have continued to take the bait (until recently), piling in as CPC insiders have been bailing out at ever higher valuations.  American investors, as the world well knows, have always been generous souls, giving much and asking for little in return.  It's what globalization is all about. 

If you'd like some more in depth "comedy gold" on the evolution of these concepts, feel free to check out my 20-F analysis from the March 31, 2018 Year End.

https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html


Anyway, that's all for today.....I'm off to India.....

All the best!





2 comments:

  1. Enjoy your time off!
    I know you mentioned repeatedly its not the time to short BABA (yet).
    But with the Big Man Ma gone, reduced guidance, tech mania tailwind abating, China macro deteriorating, etc. etc. Don't you think it may be time to ..you know!

    ReplyDelete
  2. "Chinese consumers and by extension, Alibaba (and US Shareholders) must be paying minuscule, unsustainable escrow/processing fees, inflating Alibaba net income, presumably to support the stock price."

    The math wouldn't make sense otherwise. If Alibaba pays a "typical" 2-3% of transaction costs for bank/card fees (and I would imagine it would be more since you have online risk and interchange alone is 1.67%), then for 2017 they would see ~$35-50 billion in merchant sales. They seem to say the same for "core retail" revenue, except they should only see 5-8% of that in their own revenues. So a real core retail revenue closer to $7 billion (where are the other $30 billion coming from??)

    Simple solution though. Mark as revenue and push the money they owe the merchants onto AP!

    Next, delivery... at 812 million packages for 11/11/2017 (assuming 30% on singles day, like Black Friday or Boxing Day), that means they deliver about 2.5 billion packages annually. They paid Cainiao a solid $500 million for a grand total of 25c per package. I've read that a letter will cost you 11c to send domestically and a postcard a bit more. 2.5 billion packages averages to $20 per package, I'm pretty sure it costs them more than your average postcard.

    The only answer is a loss on shipping and card fees as you say (pushed into Ant Financial and Cainiao) that is outweighed by marking up Cainiao 10x when they increase their investment by 4% and Ant Financial that is marked up to 2x PayPal with 1/2 the processing volume and pushing all losses there. Even if they are making a tiny bit of money (and with these off-income statement and off-balance sheet I'm doubtful) that's how you get positive net income. Thus you get:

    https://chi-nese.com/5-powerful-money-spells-that-really-work/

    ReplyDelete