Monday, February 5, 2018

Alibaba's 12/31/17 Financials & the 2/1/18 Quarterly Investor Call.....

I've taken a few minutes to post the video clip from Alibaba's recent, 2/1/18 investor call for your review.  As always, the Q&A was really entertaining......Alibaba is an amazing, fascinating business and...... Oh Crap!.....


I'm sorry.....that's the wrong clip.....I've got to pay more attention to what I'm doing. 

Anyway, I see that there's no video of the call available, so I've posted links to the usual materials they have actually provided to investors, in lieu of anything relevant, below.

Press Release
Presentation
Webcast
Filing (6K) - Quarterly Results
Filing (6K) - Ant Financial "Equity Conversion"
Filing (6k) - Ammendment To Share and Asset Purchase

Unfortunately, I had scheduled a conflicting dental appointment, thinking it would be less painful than the investor call, so I missed the live session.  But from the filings and the recording, I must say, I'm really proud of "My analyst friends".  They've stepped up.  Although it's just an initial attempt at objectivity, the enthusiastic, congratulatory tone which was omnipresent in prior calls, was gone.  For the first time ever, they, as a group, seemed to have taken my advice and turned their attention to the more relevant aspects of the presentation, largely ignoring the "fluff".  We have a long way to go, but we're on the right track.  Baby steps.

The analysts who asked questions on the call, Eddie (Merrill), Alicia (Citi), Alex (JPM), Piyush (GS), Youssef (Suntrust), Grace (Morgan), Greg (Barclay's)  seem to have taken my advice (A Helping Hand.....) to heart.  Even though Alibaba Management has saddled us with the same old, incomplete schedules, funny numbers and nonsensical, opaque inter-company relationship discussions, the analysts' simple, straight-forward questions got right to the heart of the matter.  I feel like a proud Papa!  Go get 'em kids!

One of my readers put it best in a recent comment:

As a younger professional in finance (<35), I recently finished re-reading on of my favorite books, The Smartest Guys in the Room. In what I can only describe as serendipitous, I stumbled across your blog a few weeks ago. 

- Opaque financial statements: check
- Massive use of SPE's/SPV's in offshore jurisdictions: check
- All major financial institutions turning a blind research eye because the I-banking proceeds are too lucrative: check
- Regulators and rating agencies content to take the company at its word: check
- Management creating new "metrics" by which the company should be valued and success measured: check
- Anyone who asks tough questions "just doesn't get it" and lacks the intellectual purity to see what the company visionaries are creating: check

I read your analysis on BABA and on so many different levels this screams "Enron 2.0". The similarities are uncanny. But it's actually worse than that. It's Enron on steroids due to the fact that the Chinese government and regulatory bodies are likely aware of, and support the companies shenanigans, both implicitly and explicitly. If BABA is able to fleece American investors for billions of dollars in exchange for what will ultimately be worthless (or near worthless) equity, all the better. The average analyst/fund manager on Wall St. is likely too young to remember Enron as it happened in real time; even fewer of the older professionals who do remember could explain in depth how the company manufactured their financials and the machinations involved. Once again, history seems doomed to rhyme, if not repeat.

Same-Old-Same-Old....

So here are the metrics we've been discussing since the IPO, as described in the 12/31/17 materials/filings.

1.) Fake Revenue: Incredible 56% revenue growth last quarter.  Most of this growth is likely just "fake" consolidation revenue masquerading as "organic" growth. (i.e. If Ebay bought Macy's and consolidated same, Ebay's revenue would jump 400% YOY in the consolidation quarter.)   That's probably what's going on here (Intime, Cainiao, SunArt, Hema, Lazada, etc.).  The "New Retail" model that management has been referring to (buying up brick and mortar) would have a much lower gross margin, and consequently, a much lower Price/Revenue ratio.  Management has also, yet again, increased their "guidance".  It's presumably much easier to forecast growth when you can go out and "buy" it.  Unfortunately, since Revenue is, and has always been, reported as one big "Blob" we have no idea what it's comprised of.  (i.e. "Organic" e-Commerce vs. "Purchased" Brick & Mortar Revenue)


2.) "Questionable Assets": (Investment Securities, Goodwill, Intangibles, Land Use Rights and Investments in "Investees") are now a whopping US$56 Billion (51% of the balance sheet), up $9 Billion from $47 Billion in the prior quarter.....compared to roughly US$0.00 (0.00%) prior to the IPO just four short years ago.  Alibaba Management continues to create financial vapor at an unprecedented pace.

3.) "Questionable Assets" - Valuation:  I've long opined that IFRS accounting rules had required Alibaba Management to write down their interest in Alibaba Pictures and Alibaba Health by roughly $3.5 Billion because the publicly traded value simply didn't support their carrying value. (See: Finding Inner Peace in Dharamsala .....and thoughts on the Alibaba 20-F....  )  Good news! ....this quarter they've finally written off $2.8 Billion on Alibaba Pictures!.  We're making progress!......Oh....but wait....when they consolidated the money-losing-dog-turd Cainaio "junk delivery by tuk-tuks & scooters ecosystem" business, they somehow reported a $3.45 Billion gain on the consolidation....more than fully offsetting the Alibaba Pictures write-down!  The really impressive thing about this transaction is that management was compelled to skip over any of the confusing, yet presumably painful calculations and disclosures relating to the gain.  Again, this transaction was disclosed (buried) as one big "Blob".  I'm sure this math is just too complex for us mere mortals to understand.  Moreover, even though Cainaio has been losing $40 Million (or much more) per quarter, like clockwork, for as long as they have been disclosing/reporting profits/losses, there is no discussion of carrying value of this newly consolidated asset.  We can presume it's significantly higher than the $3.45 Billion gain booked on the quarter.  They are accounting wizards!

4.) No New Customers: Annual Active Consumers (AAC) increased to 515 million, a 6% increase QoQ and a 16% increase YoY.  When we compare this slower (more believable) AAC growth to the massive (less believable) revenue growth (56% YoY) we wonder how is this even remotely possible?

5.) More Overhead: Alibaba brought on an additional 4,237 employees in the quarter (Primarily related to the consolidation of Cainaio).  The footnote was almost identical to last quarter's footnote, except it was 7,205 additional employees due to the consolidation of InTime last quarter.  Wouldn't it be nice to have at least some disclosure as to how these two, brand new consolidated businesses are doing?  Proforma P&L's and Balance Sheets would be appropriate.


6.) Share Based Compensation (SBC): Alibaba issued and incredible $786 Million (6% of "goosed" Revenue) of SBC in the quarter. ($2.1 Billion YTD)  I don't know of any other "mature" business, in the history of finance, that's even come close to giving away that much equity in the form of SBC.

7.) Significant Cost Increases:  Overhead (Including SBC) increased from 61% of Revenue last year to to 69% of Revenue this year (pg. 11 of the press release).   In absolute terms this is a $3.7 Billion increase over the same quarter last year.  Youseff Squali (Sunrust-Robinson-Humphrey) asked a wonderfully simple, insightful question in minute 48:00 of the Call.  He asked about the forecast for organic growth versus "acquired growth" and the resulting compression in margins.  Of course, what he was getting at was the "if Ebay acquired Macy's" phenomenon described above.  Maggie's paraphrased response that "Our revenue growth is way up.  What would you rather have?  60% of an apple?...or 40% of a watermelon?" Though interesting, thought provoking and entertaining, Maggie's response failed to answer Youseff's question. 

8.) Professional Standards:  Finally, in an, I'm sure, unrelated matter, PWC, Alibaba's auditor, seems to be setting new records for regulatory fines every couple of monthsPWC was also recently banned, for two years, from auditing publicly listed companies in India, allegedly for failing to detect a massive fraud.  Of course, PWC is appealing the ruling, arguing, under the legal theory of "complicitus moronius" that they did nothing wrong.  I'd imagine that this is just another in a long string of horrible coincidences for PWC. I'm sure everything is just fine at Alibaba.


Interesting Puffery

Here is an interesting comment from the press release:

Tmall recorded 43% year-over-year growth in physical goods GMV during the quarter, reflecting robust growth across all major categories including apparel and accessories, consumer electronics (mobile phones) and FMCG.  Tmall continues to be the platform of choice for the world’s top brands, with Givenchy, Giorgio Armani Beauty and Volvo establishing Tmall flagship stores and Longines, Hennessy, Dom Perignon and Baccarat joining our Luxury Pavilion in this quarter.

My first thought was that it would have been nice to see what the actual sales dollars (GMV) were for these brands.  It would have taken only a few minutes to list these presumably huge sales figures right next to the brand name.  I'm sure the sales are impressive.  But as usual, Alibaba management saw no need to brag about their success.

My second thought was to take a peek at TMall and see what types products these luxury brands were selling. (2,157 items came up for Givenchy alone).  Many were $40-$100 items with Givenchy logos emblazoned on them (lipstick, t-shirts, cologne and jewelry).  I also took a few minutes to check out the primary "Flagship Stores" selling Givenchy products on TMall.  Below are screen shots for three (3) or the more prevalent Givenchy "Flagship Stores", (Para, Lynx and Peacock Plume)






Interestingly, the products and descriptions available on the TMall "Flagship Stores" didn't look very much like those on Givenchy.com   I suspect, as usual, things are different in China.  In an attempt to get to the bottom of this, I've emailed Givenchy asking them to comment on whether Para, Lynx and Peacock Plume stores are actually authorized Givenchy distributors.  They said they'd get back to me in five (5) business days.  I'll let you know what I find out.

So there you have it, the more things change, the more they stay the same.  I really miss Ken, Jeff and Andy.....they were really fun to watch, but Jack, Joe, Maggie and Daniel are doing their best to fill their shoes.


"Hey...Investors....look over here" More Good News! ... 

Finally, let's discuss the "Shiny-Ball Acquisition" of 33% of Ant Financial.  There's a lot here, and I'll be working my way through the 86 page, virtually unreadable filing when I get some time this week, but after an hour or so of struggling with this, here are my initial thoughts/bullet points:

  • The deal, as described in the press release, is that this is a non cash transaction.  Alibaba will transfer or "sell" certain intellectual property and forfeit their 37.5% share of Ant Financial's pre-tax profits, in exchange for a 33% equity interest in Ant Financial.  Sounds simple....doesn't it? 
  • It's not clear, again, from my preliminary review of the agreement, exactly what's being transferred, where this intellectual property will be held and what the specific roles of the above parties might be.  What are the "holding companies" holding?
  • There is no monetary value or "selling price" assigned to the property described in the agreement.  I'm sure they'll figure out the accounting in due time.
  • As I recall, the main reason Alipay was spun off to Ant prior to the IPO was that the Chinese government ostensibly deemed it to be "illegal" for an "offshore" (Cayman's) business to own a mainland financial firm.  But now, with no fanfare or description of the implied regulatory approval or negotiations, somehow, "offshore" ownership of mainland financial firms as of February 1st, 2018, is suddenly just fine and dandy.  This announcement, to my understanding, was a surprise to everyone who follows BABA.  In the Investor Call, Piyush Mubayi asked a really important question (min. 45:00) "Does the Ant stake mean that the Hong Kong path for foreign ownership is open?", followed up with, "Will you invest more into Ant to own more of it?".  Of course, I wasn't anticipating yes or no answers, but the responses were even more opaque than I expected.  Maggie simply explained that, paraphrased, "there is no IPO planned and the 33% is what was in the 2014 Agreement."  Mr. Mubayi presumably wanted to zero in on the legality and regulatory approval of the agreement as well as management intentions going forward.  I'd consider the question "unanswered".
  • The other, presumed purpose of Mr. Mubai's question above was "So how big will the write-up/gain be and what will your carrying value of this brand new Investee be?"  Again, this was not discussed.  The general modus operandi for these Alibaba step-acquisitions is to purchase money-losing, "dog-turd" businesses from politically connected friends, at increasing values, write them up, and book valuation gains on the prior purchases.  This is the genesis of the $56 Billion in "Questionable Assets" currently on the books.
As I mentioned, I'll be reading through this agreement over the next week or so.  At some point, we should all be able to figure out exactly what it says and means. My guess is, that this is just another accounting shenanigan that management is using to lever-up, create "fake" Enron-esque asset values and book related valuation gains.  Stay tuned.  



51 comments:

  1. I strongly believe that Alibaba Pictures and Health were written down per your request ! Keep it up !

    Looking forward for the book and the movie in a couple of years .

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    1. Thanks....I'm but one voice in a growing chorus.....I think Brad Pitt would do a nice job with the "Deep Throat" character..... LOL

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  2. "money-losing dog turd" ???

    here in Palm Beach we don't talk about that

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    1. LOL..you're right....this is a family friendly blog......going forward I'll try to clean it up.....but in this particular circumstance, it seemed to fit...

      Thanks for reading my work Peter.....

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  3. Wow!! I have traded in and out of BABA for the last year and had no idea this crap was going on. Thank you for opening my naïve eyes. I have to find out how to access your blog. This came up as a news item on thinkorswim platform on BABA page. Pls. email me where to find your blog. thughes1111@gmail.com Thanks--- Terry

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    1. Thanks Terry. You can google "Deep Throat IPO" and it will come up. If you'd like, I can add you to our email distribution list.

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  4. So long story short BABA is a fraud, ultra manipulated for a price of $185.25 today at closing. The real value of BABA in your opinion is a little over $0.15
    HA?

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    1. Sounds absurd doesn't it?
      https://www.begintoinvest.com/wp-content/uploads/2016/02/enron-stock-chart.gif

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  5. How do you get on the dist. list?

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    1. Just send an email to Deep.Throat.IPO@gmail.com. Thanks for your interest in my work!

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  6. "So excluding Cainiao, total revenue growth would have been 14% year-over-year."

    Does this make sense? I have to be missing something?

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    1. Hmmmm.....Where do you see that? Cainiao revenue is only $600 million for the quarter....about 5% of quarterly revenue.

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    2. ex-new biz, like Cainiao and other retail rev, growth was 39%.

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    3. I've not done the calculation(s) but 30%-40% is probably about what we can glean from the financials. I don't see where they actually calculate "organic" vs. "purchased" revenue growth. If anyone can point me to the cite in the filing, let me know.

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    4. My quotation above — came from the transcript.

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  7. Hi, what's the update from Givenchy on the authenticity of those merchandises?

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    1. No response yet....they told me "5 business days"......I'll be happy to post whatever they tell me verbatim as soon as I get a response.

      btw - I think you meant to say "that merchandise" rather than "those merchandises". I admire your effort, I'm pathetic with language....my Chinese friends get a chuckle when I try to speak/repeat even the simplest phrases...but it's all in good fun.....

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    2. Thanks!
      I looked thru the screen shots, and found these listings are priced around $4-500 a piece. Usually fake ones should be priced rather cheap to attract buyers. I think maybe these are the real goods from Givenchy designed for Chinese customers. I don't know exactly but would love to get updates from you.
      You know, Taobao is the largest online "flea" market so I wouldn't surprise there are still lots of fake goods listed in it. No wonder the US Dept of Commerce puts it back to the black list, despite of the "good chemistry" between Trump and Jack.

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    3. They might be real.....some of them might be real, or some might be fakes sold at "real" prices. I'd still like to hear from Givenchi and Armani whether Para, Peacock Plume and Lynx are "authorized distributors".

      If you go to the Givenchy site they mention all of the stores/locations in China where Givenchy is sold...Beijing, Chengdu, Chongqing, Guangzhou, Hangzhou, Shanghai, Shenyang, Shenzhen, Tianjin, Wuhan, etc. TMall is not mentioned.

      https://www.givenchy.com/america/zh/storelocator

      Similarly, when we search Givenchy on Amazon or Google we see "expected" US stores, like Barney's, Neiman Marcus, Nortstrom, etc. with a plethora of suspect listings for Givenchy "affiliates", all located overseas, shipping discounted "authentic" goods to the US, UK & EU...Again, none of these "affiliates" or channels are described in any Givenchy press releases or materials.

      Anyway....thanks for your thoughts....if you see anything else...let me know.

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  8. "Unfortunately, since Revenue is, and has always been, reported as one big "Blob" we have no idea what it's comprised of. (i.e. "Organic" e-Commerce vs. "Purchased" Brick & Mortar Revenue)"

    Actually, it's pretty easy to break out organic vs. inorganic revenue.

    Cainiao's revenue is broken out separately now that it is consolidated. Intime/Hema are listed in the "Other" bucket under "China Commerce - Retail". If you want to figure out what the organic growth rate for China e-Commerce is, look at "Customer Management" and "Commission" revenue. It's in the press release. The growth rates here for Q4 2017 were 39% and 34% YoY, respectively.

    Lazada is part of "International Commerce - Retail". It grew significantly this quarter, almost doubling to 4.7 billion RMB.

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    1. Sure....we can spend time calculating ratios and making guesses as to what's included, where it is, looking for clues in the narrative. I'd argue that, as Investors, we shouldn't have to guess and "figure things out". Financials should be transparent clear and concise. Ref: the pro-forma proposed schedules in "A Helping Hand". BABA financials fall woefully short on transparency.

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    2. I share your frustration. I also think the lack of "disclosure" is the key issues in other big tech stocks. Wouldn't it be great if Google can tell us the revenues of Youtube, or Amazon shares the # of Prime Members and their ARPUs?

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    3. Agreed....if you look at AMZN & GOOG filings they are surprisingly sparse. I believe AMZN lists Prime Members in their filings. Not sure about ARPU. I'll have to check when I get a chance. GOOG discloses very little. The difference is that Bezos, Pichai & management are within the reach of US regulators and potential sanctions. Jack & company, and for that matter, management of any foreign stock listed in the US, are not.

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  9. Hilarious "rebuttal" attempt here..

    https://seekingalpha.com/article/4145619-alibaba-dear-muddy-waters-responses

    Think you're on to something here Mr Throat ;)

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    1. I saw that...the relevance escapes me. If I were Mr. "Alt Perspective" I'd mortgage the farm & go all-in on BABA.....I truly hope it works out for him.

      In any case, it's clear that the outrage at my commentary and the resulting defense of the nebulous truth and funny numbers is continuing to gain momentum. I'm being roundly referred to as a "dooty head" in Chinese financial circles. Thanks for reading my work!

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    2. The author in that article appears to rebut each of your points. Any response?

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    3. Sure....He seems like a really nice guy. I think it's great that in America everyone has a voice and can be heard. That said, I took a minute to click on Mr. Alt Perspective's "Show your support" link. I sent him the $5 he was asking for through PayPal. I hope my contribution makes a difference in his life. I like to help when I can.

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  10. Here's a reddit thread with some discussion/debate over the piece, if you're interested:

    https://www.reddit.com/r/SecurityAnalysis/comments/7vejoz/commentary_on_alibabas_recent_conference_call/

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    1. Thanks Munger Fan....I always enjoy a healthy debate..."facts" can be really confusing.....

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    2. hah thanks for your work!

      It's been my experience that most people who reject your blog just say "no, you just haven't seen how big Alibaba is over here", or say "their investments must be working out because Alibaba has really talented people and is a tech giant", variations on that. It's unbelievable.

      Hadn't seen the seeking alpha rebuttal but man was it weak. I almost stopped reading after points 1 and 2 but it only got worse after that... Thanks for your work!

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  11. Hi Deep Throat,

    Was just wondering if you have looked into the loans made to Simon Xie before? Simon Xie being the only other owner of the VIEs that Alibaba uses. As with most of this company, it is extremely dodgy...

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    1. I've mentioned the Simon Xie connection several times. A $1 Billion loan to lever up and buy WASU? Unbelievable! There's also SEC correspondence referencing the impropriety of the Xie transactions. If Jamie Dimon or Warren Buffett took $1 Billion of shareholder money and paid it out to a buddy to speculate on stocks and real estate there would be congressional investigations.....with Jack & Simon, it's business as usual.

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    2. Sorry to trouble you but would you have a link to the SEC correspondence referencing the impropriety of the Xie transactions? Great work here btw, i thoroughly enjoy your work.

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    3. No trouble at all.....the cites are in my June 2016 post under "SEC Process"

      https://deep-throat-ipo.blogspot.com/2016/06/follow-up-thoughts-on-i-would-never.html

      I forgot how much fun I had writing it....thanks for reminding me!.....here's my "BST" commentary for your pleasure:

      Alibaba Respondent: - BST "Ohhhh!.....I see what you are getting at. You've got it all wrong. Here's what's really going on. The loan to Simon isn't a 13(k) 'personal' loan....it's a 'business' loan! See, even though the money is going to him, Simon is going to take the money and contribute it to a partnership that he and Jack have cooked up, and once the money is sufficiently laundered, the partnership is going to 'invest' it in Wasu Media, since Wasu media has a strategic relationship with Alibaba. Jack isn't getting the money (It's going to a partnership) so he's not in violation of 13(k) either! That's why we did it this way!....That way, Jack and Simon get a billion dollar loan, they can do whatever they want with the proceeds, maybe invest in Wasu, maybe not. Moreover Simon isn't a qualifying executive under 13(k)...he's not a director or 'senior' manager.....we just want to give him a BILLION DOLLARS since he's a good guy.....he's just one of five 'strategic' vice presidents! Who knows, if this works we might give all five of them a BILLION DOLLARS each! US Shareholders are really generous that way. That way all of the VP's can get access to Billions of US Shareholder Dollars, for 'strategic purposes', pay the interest from loan principal until the investments pay off (or not) and nobody is the wiser! Isn't this an AWESOME IDEA! If you guys sign off on this one we will be actively looking for homeless people to start partnerships with Jack. We understand that in America you can go to jail for things like this, but in China it's SOP. We're sure glad you understand how this works now. Thanks for asking about it."

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    4. I'm sorry......I'm cracking up while I'm reading what I wrote back in 2016. I forgot all about it & I have to re-post here...same citation, the June 2016 post....Love the "Dick Fuld Bankerspeak Translator" BST.....it's just so silly....

      Here's a follow up on pg 7 of the same August 12th, 2014 Document.

      SEC: Please address in this risk factor any potential material conflicts of interest between you and Simon Xie and expand this risk factor to discuss any potential material conflicts of interest resulting from the manner in which you plan to invest in Wasu Media Holdings Co., Ltd. It appears that the disclosure required by Item 6.A of Form 20-F is applicable to Simon Xie. In this regard, we note your apparent dependence upon Mr. Xie based on his role as one of your founders and as a member of your management, as well as his equity interests in Alipay, your material VIEs, and the partnership through which you plan to invest in Wasu Media Holdings Co. Please provide the disclosure required by Item 6.A of Form 20-F and in doing so disclose Mr. Xie’s roles and responsibilities in your company and where Mr. Xie falls within your management structure.

      SEC - BST: "So you are making the loan to the partnership owned by Simon, Jack and Yuzhu Shi? The partnership is going to buy the stock of Wasu media? That's the same Yuzhu Shi, the guy who went bust trying to build the tallest skyscraper in China (that was never actually built) and then took a video game company, Giant Interactive public on the NYSE, raised $1 Billion on the IPO, milked it for all it was worth and took it private in China at a deep discount with US Shareholders left holding the bag? .......is that the same Yuzhu Shi that you are jumping into bed with on both Wasu and Yunfeng Capital?? And you don't see any conflict of interest here? Really?"

      Here's the BST version of the Alibaba Response:

      Alibaba Respondent: - BST "Wowww....you guys are really sharp! You've actually read through the whole filing and you know your securities law to boot! Ok, here's what's really going on. You think that Simon actually works here and that his employment would make him an employee 'upon whose work the company is dependent' as defined in Item 6.A of Form 20-F. Again, you've got it all wrong. Simon, is a peon, a nobody, he pushes a broom around and occasionally opens the mail....that's it! In fact, if you don't let us structure this deal this way we're going to fire his sorry ass so that there is absolutely no conflict under 13(k). Of course, we're still going to give him a Billion dollars, just 'cuz we want to and you can't stop us. Moreover, Yuzhu Shi is a wealthy visionary and great man. He was able to amass a tremendous fortune by creating fake businesses out of nothing, pulling all of the cash out of them and selling the decaying shells to suckers....uh....I mean fortunate investors. Anyway, all of these people are safe in China and you have no jurisdiction over them. So mind your own beeswax."

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    5. Hah I remember this post, but did not remember Shi Yuzhu. From a quick google search, looks like he's recently bought into OKcoin, a cryptocurrency exchange! I haven't looked to deeply into this at all but if it's true LOL

      http://bitcoinist.com/chinese-billionaire-and-giant-network-ceo-invests-tens-of-millions-acquires-10-stake-in-okcoin/

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    6. He's a visionary....LOL! Could you imagine what might happen to BRK if it was announced that Buffett "invested tens of millions" in Bitcoin?

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    7. One more thing, a paragraph from the 2014 SEC correspondence regarding Simon Xie that you translated to BST:

      "With regard to the language of Item 6.A of Form 20-F requiring disclosure of certain information concerning “employees such as scientists or designers upon whose work the company is dependent,” the Company respectfully submits that this requirement applies to employees whose specific skills or technical expertise make them indispensable to a company’s operations and where the loss of such an employee (who, by the nature of his skills and expertise, is not readily replaceable) would materially affect a company’s ability to engage in its core business. A plain reading of the language of Item 6.A, which refers to scientists and designers as the representative examples of such employees, as well as a review of past comment letters issued by the Staff in other transactions confirms this view. The functions Mr. Xie serves cited by the Staff, including his function as a minority VIE equity holder, are roles that could be filled by any trusted long-time employee, and these are not roles, such as those of a key scientist, engineer or designer, that involve a unique skillset or high level of training that render the Company “dependent” upon such employee. As one of five vice presidents involved in domestic China investments, his role is to identify and execute investments, but he cannot be called someone upon whom the Company is dependent."

      Note the last sentence. I think this important point was lost in your still excellent BST translation. How can a man who was one of Alibaba's 18 founders and whose "ROLE IS TO IDENTIFY AND EXECUTE INVESTMENTS" NOT be someone on whom the company is dependent? Does Alibaba not depend on the success of Xie's investments?

      If we take Alibaba at their word, Xie's investment abilities are so run-of-the-mill that he could be replaced by a monkey and Alibaba would be no worse for wear. If this is true, what does this tell us about the quality of Alibaba's investments in China that so many BABA "investors" are so willing to believe are phenomenal even in the absence of coherent financial statements (Xie "serves as a vice president on the Company’s domestic China investment team and is involved in projects related to the Company’s domestic China acquisition and investment activities.")? And if it's not true that Xie could be replaced by a monkey (or more realistically a janitor as you suggested), why isn't this a violation of the law?

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    8. The most important thing that you've indirectly touched on is: The SEC stands back and does nothing. Their position, by default, must be that they are no longer a regulator. They are a facilitator or capital formation. They step in to clean up the mess right after they learn about it on the front pages of the NYT or WSJ.

      The SEC will ask a few questions about the filings and that's it. They believe that's enough even though nobody reads filings anymore. Mr. Market somehow believes, for whatever reason, that every listing has an SEC/regulatory stamp of approval. Nothing could be further from the truth. I've mentioned this many times now, but when these things (ADRs/Stocks listed on US Exchanges) blow up, as they invariably do, the SEC and the FBI don't get on the first plane to Beijing or Guangzhou and put people in handcuffs.... The foreign managers and promoters walk away with the cash and US Investors are simply hosed. To turn it around....why would anyone expect ANYTHING to be truthful in these filings?

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    9. Yes that appears to be the case. Not comforting.

      And sorry to blow up the comments, but another infuriating blip of information:

      Just one month, ONE MONTH, after Alibaba submitted those answers about Xie to the SEC, arguing that he is a nobody (in a letter cc'd to future SEC Chairman Jay Clayton), Reuters ran this article:

      https://www.reuters.com/article/alibaba-group-ipo-xie/insight-simon-xie-jack-mas-unassuming-lieutenant-at-alibaba-idUSL1N0RC0A820140914

      Excerpt: "But for investors in Alibaba Group Holding Ltd’s potentially record initial public offering, Simon Xie, a co-founder and vice president, represents one of the e-commerce company’s most important figures: he’s the only individual besides Executive Chairman Jack Ma who owns the domestic Chinese companies and holds the operating licenses that underpin Alibaba’s corporate structure.

      Alongside Ma, who holds the lion’s share of those domestic firms, Xie wields full legal sway over the onshore entities and the critical contracts that link them with the New York-listed vehicle.

      Yet much remains unknown about Xie, and the unusual shareholding arrangement has puzzled even high-level insiders. Some employees, said a former executive who worked closely with Xie, jokingly refer to the unassuming 45-year-old as shoufu - or “top millionaire” - even though he is not among the very top Alibaba shareholders."...

      “Simon Xie is clearly the most important person in Alibaba who is not part of the steering committee,” said Fredrik Oqvist, the Beijing-based founder and CEO of ChinaRAI, a consulting firm that advises hedge and mutual funds. “He pops up everywhere, yet he’s elusive.”

      The rest of the article basically says Xie is not ambitious so was passed over as a top leader, and that he is unswervingly loyal to Ma.

      Hmmm. A pliant, elusive lieutenant who "pops up everywhere", and whose role is clearly lied about to the SEC. Doesn't seem fishy at all.

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  12. Amazing.....I had not seen that...

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  13. Hi Deep Throat, Thanks for sharing your concerns. I have penned my thoughts on them here: https://seekingalpha.com/article/4145619-alibaba-dear-muddy-waters-responses

    Appreciate your feedback, if any. Cheers.

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    1. I saw that....thanks!.....did you get the $5 I sent you on PayPal?....say hello to Carson for me!

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    2. Deep Throat, I thought ALT Perspective's response was rather unconvincing and the vast majority of comments were the sort of "boosterism" one would expect to see for a $480 billion market cap company with non-transparent disclosure and dubious accounting.

      Thank you for your hard work to read all the filings and to shed light on the potential wrongdoing. If you are correct this case will be one for the ages. If the era of QE / Easy money is coming to an end it would be rather fitting to go out with a bang watching billions of market capitilization get vaporized when investors realize they have been fooled.

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    3. Thanks for reading my work.....I actually hope, for the good of the global economy that I'm wrong. I'm secretly hoping that these are just goofy, honest people who don't know how to write financial statements and are clueless when answering investor questions and/or running a business... but none of the evidence is pointing in that direction.

      When this blows up, given all of the incestuous global interrelationships, it will make 2009 look like a picnic in the park.....Luckily, Jay Clayton, one of the chief architects of this mess, now the top cop at the SEC, will be there to put the hammer down.....you really couldn't make this stuff up.

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    4. Your "secret" hope is no longer secret ;)

      I can't help but think of the expression that history may not repeat but it certainly rhymes. The Madoff scandal was approximately $60 billion in size (smaller when counting recouped payouts) and the Enron meltdown was also of similar magnitude. What is really surprising about this case is the total market capitalization is so massive. I know the share ownership is concentrated with some very large holders but still any meltdown would be an epic loss of paper wealth.

      I am a relatively new follower of BABA and it is interesting to go back and read all the questions and suspicions that were being raise back in earlier years. Even when the share price was in the $100/share range there were some rather serious concerns. And yet here we are at $180/share about a year later. Has the company really added that much value over the past year or is it the momentum and easy money causing the price to go up? I think we both know the likely answer to that.

      There is a really interesting disconnect where China has so much overcapacity in so many areas. Profit margins are incredibly low and many businesses would be unprofitable if commodity prices were not artificially boosted by excess debt and Fixed asset investment. Somehow we are to believe the companies like BABA are able to maintain huge profit margins and positive free cash flow and that it is sustainable for the long term? I think the answer is that profits for shareholders in any "private" company only remain to the extent that company does the bidding of the government masters. If the CCP says you need to invest cash in to XYZ company you better do it or face the consequences. The corporate governance structure is basically set up to deny foreign investors any real "fair" oversight and control over the cash. They will maintain the illusion of profitability as long as they can but ultimately it is a foundation of sand unless the underlying businesses are profitable.

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    5. After just glancing through a series of rambling, merit-less "you ignorant China Basher" comments this afternoon and chucking same in the e-waste bin.... this is refreshing commentary Mr. PA Investor.

      The only thing I'd add to your comments above, since through this blog and the resulting relationships I've developed along the way, I feel I've really gotten to understand Chinese management/financial philosophy. I like to think I offer a unique perspective.

      At a high level, and I'll gird my loins for all of the hate mail I'm about to receive, I really don't think China's "elite" truly understand (or care about) the difference between what I refer to as "accounting earnings" and "economic earnings"..

      Simply put, "Accounting Earnings" are what the financial statements say...."Economic Earnings" reflect the intrinsic value of the endeavor to investors and society. In theory, they should be equal, but in practice, they often are not.

      That said, Chinese managers seem to do everything they can to goose the financial statements (Accounting Earnings) and spend relatively little time on actually developing the business (Economic Earnings). The lion's share of their effort is spent raising capital in the belief that borrowed/raised money is the same "earned" money. They make no distinction.

      Why should they? Throughout their careers they've never had to worry about making a payroll or providing "real" earnings....they goose the financials, put out a press release and go to the bank or debt markets where a fellow party official is more than happy to fund the folly. Over the last decade US/EU/Swiss IB's have joined in the fun....for a reasonable fee of course.

      I'm not sure how long you've been following my work, and not to toot my own horn, but I thought I described the macro phenomenon pretty well in my "Theory of financial relativity" post a couple of years ago...

      https://deep-throat-ipo.blogspot.com/2016/08/the-theory-of-financial-relativity.html

      The moral hazard of continually funding global financial folly still exists...and always has....but the question I pose is "can we truly kick the can down the road forever?"....so far...we sure can!

      Thanks for taking the time to read my work.....I think you'll really enjoy my next post...I've been working on it for a while now.....the "China Dream" gets sillier by the day...

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    6. I have not read all of your posts but I did read that one and some others thanks to a shout out from Christopher Balding and his blog on http://www.baldingsworld.com. Comrade Balding has a great twitter feed. Economic commentary combined with cigars and bourbon and children's stories. That is a great combination! I went back and re-read that "theory of relativity" and it was worth the time.

      Back to the comments in your reply, I certainly agree. On one hand I think it is remarkable the degree to which China has developed over the last 20 years but at a very significant cost that has yet to be paid. Capitalism enables the creation of vast concentrated wealth when it is not managed by a responsible government. The power of "creative destruction" serves as a check on excess profits because new entrants tend to find a better/cheaper way to provide a similar product or service and substitution reduces demand for expensive things. In theory the final customers are able to capture the majority of the economic benefits of competition. However when you have single party rule that is absolute the normal checks and balances of political and economic power don't happen. You almost inevitably end up in a situation where capital is allocated on the basis of political connections not economic merit and that distorts the normal price signals and behavior that would otherwise occur.

      I don't think anyone knows exactly how/when this will play out but I certainly know that I do not want to be scrambling for the exists along with everyone else. I am definitely prepared to give up upside in order to avoid the downside which will be very ugly. I'm even willing to make reasonable wagers buying out of the money puts because I think the downside is currently under-priced. Optimism is just way to high in so many respects.

      I look forward to your next post. Thanks again for sharing your time and thoughts with the rest of us!

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    7. Here is a link to some commentary from Janus Henderson on a recent trip to China. The comments on Alibaba are particular relevant to this discussion.

      https://blog.janushenderson.com/em-equities-notes-from-road-china/?utm_campaign=Blog_EM_China&utm_medium=Social&utm_source=LinkedIn&utm_content=Markets

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    8. PA Investor.....I don't know who you are....but based on your commentary there is a good chance that we are "twin brothers from different mothers". I'll look forward to perusing Mr. Henderson's commentary....

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