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.









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 months . PWC 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. 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.Finally, in an, I'm sure, unrelated matter, PWC, Alibaba's auditor,PWC 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 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.

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.

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

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.