ANT Group Co. LTD….. Yet another Chinese Communist Financial-Deathmobile-FOREX-Grab

Today we’re going to have some great fun talking about some totally awesome forensic accounting as it applies to the newly released, highly anticipated, incredibly entertaining, Application Proof for the ANT Group Co. LTD, Hong Kong IPO!

In non-accountant, layman investor terms, here’s a summary of what this Deathmobile is capable of…..and what vehicles like this are destined to do to Western Financial Markets and eventually, the US Dollar.

Before we get into our analysis, it’s helpful, but by no means mandatory, that you familiarize yourself with three (3) key documents:

The Application Proof itself referencing financial disclosures for calendar years 2017, 2018 and 2019, as well as the first six months through June 30th, 2020 (674 pages):

https://www1.hkexnews.hk/app/sehk/2020/102484/documents/sehk20082500535.pdf

The most recent Alibaba 20-F for fiscal year end 3/31/20 (367 Pages):

https://www.sec.gov/Archives/edgar/data/1577552/000110465920082409/baba-20200331x20f.htm

Major Shareholders & Related Party Transactions – September of 2019 SAPA is embedded in the above.

https://www.sec.gov/Archives/edgar/data/1577552/000110465920082409/baba-20200331x20f.htm#ITEM7MAJORSHAREHOLDERSANDRELATEDPARTYTRA

The Amendment to Share and Asset Purchase Agreement (SAPA) dated August 12th, 2018 (66 Pages), amending the Original SAPA dated August 12, 2014, which was further amended on September 23, 2019 and August 24, 2020, respectively. (Note: The 2019 and 2020 amendments are not available/filed on the SEC site but it’s likely irrelevant for our discussion today)

https://www.sec.gov/Archives/edgar/data/1577552/000110465918006211/a18-5188_1ex4d1.htm

If you are pressed for time and/or don’t have the intestinal fortitude to slog through all 1,074 pages of incomplete, circular, confusing information, have no fear….I’m here to help.  This is the value I try to bring to the table, and the analysis and content that my cherished readers deserve to see.

Key Takeaways

What you are about to read is a distillation of what should be either the foundation of a graduate school dissertation, or a Federal Securities fraud complaint/indictment (your choice depending on function/preference), feel free to peruse the important topics/concepts in RED throughout this text…here are the key takeaways:

1.) We will use the above referenced documents to prove that either the Alibaba (BABA) Financial Statements/Filings, or the Application Proof for the ANT Group Co. LTD, Hong Kong IPO, or likely both, are material misrepresentations of the financial condition of both entities.  i.e.) One, or more likely, both, of these businesses is a financial mess/fraud/scheme.  I know that you are shocked and dismayed that a Chinese Communist business could possibly be a mess/fraud/scheme….the truth often hurts.

2.) We will focus on “Related Party Transactions” between ANT and BABA, what I’ll call the arsenal of “smoking guns”. i.e.) if the BABA numbers are accurate, the ANT numbers can’t be, and visa versa.

3.) The rate ANT Group charges Alibaba for escrow services is 0.16% of GMV.  Either ANT Group is selling its escrow services below cost or Alibaba’s GMV isn’t real.

4.) There is apparently No Escrow balance (Restricted Cash offset by a current Liability) on the ANT Group Balance Sheet.  5 Days of GMV at current Alibaba volume ($1 Trillion GMV) is US$13.7 Billion.  There is no “current asset” and offsetting “current liability” number even remotely approaching that figure on the ANT Group Balance Sheet.  We explore the possibilities of this oddity.

5.) We compare the financial ratios of ANT Group vs. VISA and come up with some remarkable divergences.  Somehow, in 2019, ANT Group has managed to process more than eight times (8x) the “per Active User/Account” equivalent US Dollar transaction volume as VISA ($21,751.91 vs. $2,588.24).  This figure is nearly three times (3x) China’s per capita GDP vs. just 5% of US per Capita GDP for VISA. Yet, annual Net Income per User/Account is about the same ($3.64 vs. $3.56 per year).  i.e.) Much more “work” with “not so much income”.   VISA’s International Revenue is 27% of total Revenue, indicating the VISA rate structure and brand are widely accepted around the world.  ANT Group’s International Revenue (Less than 1% of total Revenue) is virtually non-existent, indicating a global rejection of the Chinese Communist platform, currency and payment method.  Apparently, Chinese people use Visa or some other payment method when they are overseas.  Go figure…

6.) The $10.1 Billion non-cash gain/write-up  locked in amber on the Alibaba Balance Sheet, giving ANT Group a US$33.3 Billion valuation in September,2019, was booked as a $1.7 Billion Paid in Capital transaction on the ANT Books.  What happened to that other $8.4 Billion+?  Again, the books aren’t even close to “matching”

7.) 15% of Revenue and 60% of ANT Group’s Net Income is generated from Related Party (Alibaba and other anonymous Related Entities) transactions.  Related Party transactions are notoriously used by accounting “chefs” when cooking the books and managing earnings.  This is one “spicy meatball”.  The term “fair value”, another term of art used to create artificial gains and asset values out of thin air, is used 425 times within the Application Proof.  I am unaware of any condition disclosed in the document where a “fair value” adjustment resulted in a material value reduction or loss. 

8.) ANT Group Share Based Compensation (SBC) consistently runs at 4.5% of Revenue and 25% of Income.  Like Alibaba, ANT Group generosity, when it comes to money laundering, knows no bounds. – (pg 281 of the Application Proof)

9.) Virtually all of ANT Group’s Retained Earnings of ¥44 Billion (US$6.3 Billion) accumulated since the group’s incorporation in China in October 2001, were generated in the last 18 months.  During the last two and a half years (2018, 2019 and thru June 30th of 2020) “Related Party Income” amounted to ¥20.8 Billion (US$3.0 Billion) or nearly half of ANT Group’s Retained Earnings since 2001. 

10.) We explore a fun-filled hypothetical exchange between ANT Group’s Management team and their anonymous public accounting firm  as they come up with several, excellent, yet impractical ideas on how to further dress up the balance sheet. 

11.) The list of Significant Shareholders (Page 160) does not include Sequoia, Carlyle, Warburg Pincus, etc. and the rest of the “helper” firms that participated in that sham, 2018 private placement (6.6% Equity stake for $10 Billion) transaction, which became the genesis of the absurd/legendary US$150 Billion valuation for this business.  43% of ANT Group’s  increase in Equity in the last 42 months (US$9.754 Billion)  was reported to be an actual cash contribution by actual Sophisticated Investors (Temasek, Warburg Pincus, Carlyle, Sequoia, Sovereign Wealth Funds, etc.).  Hard to believe, I know.  Terms of the deal were not disclosed, but can we really presume that the capital raise was all cash, based on the press-release?  Hopefully it wasn’t some sort of hokey note-payable/deferred-contribution “there will be no money….just total consciousness” unenforceable contract, as has become all too common within the non-disclosed-bowels of these related party transactions (See Alibaba/Softbank).  For their sake, let’s hope the US Investors have made some sort of off-the-books (yet likely illegal under a breach of FARA reporting) side-deal with the Chinese Communist Party which would bail them out if/when this whole mess goes south.  Since ANT ‘s cash balance never increased (if funds were actually paid-in) the money must have been immediately spent, distributed or otherwise “invested in investees”.  I also wouldn’t be surprised that if these “helper investors” had payed (or committed to pay) $10 Billion to ANT, there was some sort of “you scratch my back and I’ll scratch yours totally unrelated boomerang contractual commitment” (again likely illegal) to turn the $10 billion back around to Warburg, Carlyle and Sequoia, just to give the deal some protection while preserving the aura of legitimacy.  Again, I make this statement with at least some level of confidence, since none of these shareholders, unless they are the real owners of some anonymous Shell Companies included, remain on the “list of 77 significant shareholders” beginning on page 160 of the Application Proof.   “Helpers gotta help”….especially when there a few bucks to be made.

12.) In 2018 we had the aforementioned “helper” fueled sham valuation calculated at US$150 Billion for ANT Group, a year later we had a related party transaction with Alibaba (BABA) set the value of this business at US$35 Billion +/-.   As recently as this week, we have our good buddy “China-Mike Bloomberg” and company disseminating bought-and-paid-for Chinese Communist Party propaganda, masquerading as “financial news” explaining to naive US Investors that ANT Group is now going to be the biggest IPO in history, bigger than even the Saudi Aramco IPO.  The Market Cap out of the gate could exceed that of Bank of America.  The Bloomberg & Company piece is sending the “you gotta get a piece of this even though you don’t understand it” message …..that the “income-lite” ANT Group juggernaut is leaving the gate at a $250 Billion valuation when it’s nothing more than a highly publicized Chinese Communist and “Related Party” Ponzi scheme.   

13.) The definition of “Related Party” is apparently anyone that the Chinese Communist Party decides needs some kickback cash, as well as their friends and family. (Related Parties: I-52, Page 427)   

14.) Even though Alibaba no longer publishes the number of consolidated subsidiaries (the 2019 20-F had 1,220 consolidated subs, but unfortunately, the 2020 20-F omitted this metric), according to the Application Proof, the roughly 1,500+ (estimated) Alibaba Consolidated Subsidiaries scattered all over the planet also qualify as “Related Parties” under the ANT Group Corporate veil.   If we extrapolate, we can also guess that these 1,500 Consolidated Subsidiaries now, are likely sufficient cover for tens of thousands of elite Chinese Communist Party “Friends and Family” suckling at the teat of this massive dollar-sucking-black-hole money laundering apparatus.

15.) We discuss probable income and equity account adjustments and restate the June 30th Balance Sheet to what we believe might be closer to reasonable.  In other words, we eliminate the biggest, bogus, fluff, accounting gimmicks which plague this Application Proof.  When we apply these adjustments, the Balance Sheet ratios look, well, pretty frightening, especially if you just spent US$10 Billion for 6% of this business.  Based on the annualized earnings over the last 42 months, the P/E increases from a disconcerting 73 to a terrifying 182.5.  a shocking number for a 20 year old Chinese Communist monopoly business about to launch a global IPO in China at the greatest valuation in the history of finance.   (See “Snowflake” SNOW:NYSE …on steroids)    

16.) So, according to the documents, the first class action targets and Congressional hearing contestants up to bat will be Citi, JP Morgan, Morgan Stanley and Ampere, accompanied by the next wave, and I’m sure, a long parade of “helpers” that feel they can make a quick buck pedaling this POS Chinese Communist Party stock to dumb-ass money managers, passive index funds, sympathetic Pension Finds, as well as retirees, widows and orphans who read Bloomberg on a regular basis.  

17.) The word “REDACTED” appears 1,329 times in the Application Proof .  I know this is just semantics, but the term “To Be Determined”, which appears just once, refers to something unknown, to be decided later.  The term REDACTED, however, means….”We know…we just don’t want to tell you.”  Just sayin’….

18.) You all know my position on these disasters.  I have no position in BABA, ANT Group or any Chinese Stock/ADR.  Moreover, and I’ve said this often, at least right now, these stocks are “un-shortable”.  IMHO…. You can’t own ’em and you can’t short ’em…unless you are a plugged-in “helper” and have access to CPC instructions/hints/trades, etc.  Because the price of these securities, and most Chinese Stocks, is manipulated by the Chinese Communist Party,  the price can go anywhere, at the whim of the Party.  (See Tesla trading volume and price movement the first 15 minutes of trading on 2/4/20 and 2/5/20).  Of course, if you are a plugged-in “helper” you are no longer throwing darts at a board.  Your bet becomes a sure thing.

19.) So why is this so important?  It’s just another Chinese Ponzi scheme dual listed in Asian Markets US Investors don’t care about…right?  Not exactly…as garbage stocks like ANT Group, Alibaba, et. al.  gain legitimacy through “helper” efforts and are added to indexes and asset allocations, forcing passive investors to unwittingly buy them, the valuations continue to be manipulated/pushed and rocket skyward.  The flow of passive money accelerates into this Chinese Junk and the “helpers” keep doing their thing.  They are secondary beneficiaries of an enormous wealth transfer for their efforts.  Since the Chinese Communist party is effectively sending buy & sell signals to the “helpers” first, ….they are also betting on “sure things”….and they cycle continues.  Tens of thousands of tax haven investment funds, at least $35 Trillion of Western Financial Assets (by my count), are anonymously controlled by the Chinese Communist Party and their elites, with likely another $10-$15 Trillion or so, controlled by the “Western helpers” (you all know who they are) who get a friendly “heads-up”  when this tsunami is about to shift course taking aim on, and wiping out phalanxes of out-of-the-loop, naive, Bloomberg-ette, Robin-Hood-ish trend followers and passive-investing villagers.  That’s why this is important….this is not some game….it’s the driving force behind the demise of democracy. 

20.) I’m shocked and dismayed that there are indeed so many “helpers” out there who are not only willing, but eager, to effectively sentence their grandchildren to a life under communist rule, just so they can make a quick buck.  They justify it by saying things like “we just need to be on the right side of this trade” and “we are just deploying capital, doing our job and maximizing returns”….again…you know who know you are….rest assured there will be a luxury suite in hell booked, reserved and waiting for you.

 

So Let’s Get This Party Started….

When evaluating the veracity of financial statements, the most scrutinized, and with good reason, financial transactions are those between “related parties”.    I might argue, with reasonable success, that ANT and BABA could be the two two most related parties in the history of related party accounting shenanigans.  In theory, the essence and purpose of forensic accounting would seem simple; when doing business, one company’s asset is the other company’s liability; one company’s income is the other’s expense, one company’s investment in the other should be the other’s “paid-in-capital” and visa versa.  Each transaction should be accounted for as though it was an arms length transaction.  Simple enough, no?  Unfortunately, complex rules are often applied as to what needs to be disclosed and what doesn’t, the lawyers, accountants, bankers, underwriters get involved, massive fees are exchanged, and suddenly, something that should be simple becomes dauntingly, intentionally incomprehensible and complex.  All of the vested interests gather together to come up with a narrative, cook the books and make things look as good as they can possibly look, justifying their actions and enormous fees every step of the way.

In other words, forensic accounting involves playing a detail oriented, relatively tedious game of “One of these things is not like the other”, researching/reconciling differences in the various numbers and trying to understand their context and why they might be “different”.

Of course, what we’re looking for are things that have run afoul of the “rules” and don’t exactly “match up”.  The debits might not equal the credits and/or income or expense is shifted from one entity to another by inflating/deflating prices charged or the value of the assets exchanged in Related Party “deals”.  If I were to take a guess, most of the frauds out there involve Related Party transactions.  Every good fraud needs accomplices.

This is exactly/likely what we have going on here between Alibaba and ANT Group.

Related Party Revenues, Expenses and Net Income

The first schedule I’ll discuss is located/buried on Appendix I, Sec 2(41)b (page 505 of the pdf) “Related Parties“,  of the Application Proof for the ANT Group Co. LTD.  Suffice it to say that the accountant or lawyer responsible for somehow letting this schedule find its way into the ANT Group Application Proof will likely be receiving an all expense paid vacation to Xinjiang for some additional re-education sometime soon.

What we’re looking to establish here is that the “Expenses” (debits) paid by Alibaba are properly recorded as “Revenue” by ANT and visa versa.

Of course, the schedule doesn’t have totals (so we’ll have to add the figures up), there is also no quarterly data, so we can’t match the puzzle pieces up exactly.  (Alibaba is a March 31 year end and ANT Group figures are represented on a Calendar year) but if we look at the last three years in aggregate (2017,2018 and 2019) we should get some idea of the magnitude of the variance in the data.  The next schedule is a reformatted presentation with totals and percentage calculations shedding more light on the ANT-BABA relationship.

When we review the above figures, we note that Alibaba seems to be a much smaller part of ANT’s business than we would have suspected.  Over the 3½ year period Revenue derived from Alibaba (Alipay processing fees, etc.) amounted to only 8% of revenue, or ¥27.9 Billion, or roughly US$4 Billion.  Income derived from Alibaba transactions came in at 16% of ANT income, ¥7.9 Billion, or Roughly US$1.1 Billion.  Again, given the massive transaction volume provided by the Alibaba ecosystem (i.e. US$1 Trillion in GMV) in the most recent fiscal year, these figures seem a bit, well, puny.

GMV and Processing Cost

When we compare these revenue and income streams to BABA GMV, assuming that ANT is the primary (or only) processor of these transactions (as has been continually trumpeted by BABA Management in every 20-F presentation since BABA’s initial IPO in 2014), it appears that ANT is “working for free”, under-charging and collecting very little revenue (an average of 0.166% of GMV) and artificially goosing Alibaba’s bottom line.  The schedule below illustrates the Payment Processing/Escrow fees reported as an Expense by Alibaba when compared to the Related Party Revenue reported by ANT over the last three years.

Note that the amount reported as an expense by Alibaba, ¥29.2 Billion (0.166% of GMV)  is substantially higher than the Revenue reported by ANT of ¥23.4 Billion (0.133% of GMV) for the same period.  Simply put, the processing fees reported as expenses by Alibaba are roughly ¥5.8 Billion (US$830 Million) or 25% greater than those reported as Revenue by ANT.  Again, these figures should “match”, yet, even accounting for a one quarter lag, they are materially off.  Why?

ANT Group vs. VISA (NYSE:V)

Now let’s compare ANT Group’s numbers and ratios (with “Chinese Characteristics”) to a large similar, “real” Financial Services Business, VISA (NYSE:V).  Note that I chose VISA as a representative comparison based solely on personal familiarity. Comparison to other large global payment processors/businesses (American Express, Mastercard, Discover, etc.) would likely yield similar, directionally equivalent ratios/conclusions, so I’d encourage you fellow bean counters out there to take a look and prove me right/wrong if you are so inclined.  The figures in the table below, along with page number references shown in each column respectively next to the value, relate to the Application Proof and the 2019 VISA 10-K and are shown in each column respectively. The more interesting figures and ratios are highlighted in RED.

As a great-big-bold-statement, based on transaction volumes reported, compared to VISA, ANT Group seems to do an incredible amount of “work” with very little return to show for their effort.  Here are the bullet points:

  • Somehow, in 2019, ANT Group has managed to process more than eight times (8x) the “per Active User/Account” equivalent US Dollar transaction volume as VISA ($21,751.91 vs. $2,588.24).  This figure is nearly three times (3x) China’s per capita GDP vs. just 5% of US per Capita GDP for VISA. Yet, annual Net Income per User/Account is about the same ($3.64 vs. $3.56 per year).  i.e.) Much more “work”, not so much income.
  • ANT Group Payments are accepted at a stunning 80 million Merchants, 99%+ of which are located on the Mainland, while VISA is accepted at a paltry 61 million merchants globally.  Yet, VISA earns six times (6x) per merchant than ANT Group per year.  ($198.36 vs. $33.21)
  • VISA’s Revenue as a % of equivalent transaction volume is three times (3x) higher (0.332% vs. 0.108%) than ANT Group. Net Income as a % of equivalent transaction volume for VISA is an astonishing eight times (8x) higher (0.138% vs. 0.017%) than ANT Group.
  • VISA’s International Revenue is 27% of total Revenue, indicating the VISA rate structure and brand are widely accepted around the world.  ANT Group’s International Revenue (Less than 1% of total Revenue) is virtually non-existent, indicating a global rejection of the platform, currency and payment method.

The explanation and conventional wisdom, supporting this odd divergence between Revenue, Income and “work” when we compare ANT Group to other large Western payment processors, is that even though ANT Group is a Chinese Communist Party monopoly, with unencumbered market control and the ability to charge virtually any amount of money per transaction that they see fit,  ANT Group Management would have you believe is that they are so efficient, they can “do much more with less”.  They don’t need nearly as many data centers, employees, assets and consequently, can accomplish much more “work” with much lower Revenue/Pricing and Net Income requirements and goals.  Everything they do is somehow, magically accomplished through unnamed, anonymous, Asset-lite, off-shore Shell Companies and “Related Parties” operating in the fog of un-required, non-disclosure.    Moreover, for some reason, this miracle has been somehow confined to mainland China, with essentially no offshore/international usage of any ANT Group products/services as a payment tool.  ANT Group management would have you believe that their success is a byproduct of every Chinese Citizen being wildly addicted to eCommerce and ANT’s on-line services, transferring money back and fourth to the tune of many multiples of their own miniscule slice of China’s relatively tiny per capita GDP.  That’s their story and they are sticking to it.

The simpler, more Occam’s razor-like explanation for these bizarre metric divergences between a “real” business like VISA and ANT Group’s published numbers and ratios is that ANT’s Application Proof is yet another steaming pile of Chinese Communist bullshit.

“Other Related Parties…”

The next thing that jumps out at us on Appendix I, Sec 2(41)b (page 505 of the pdf) “Related Parties” schedule is the significant amount of “Other Related Party” business/activity. (Besides Alibaba transactions).  These “Other Parties” are not described or listed anywhere in other than generic terms as privately held businesses and Joint Ventures (at least that I could see: elaboration forthcoming below) anywhere in the filing, yet Net Income from these “Other Related Parties” amounts to 44% of ANT’s Income over the last 3½ years.  (Please read that again and let it sink in)

When all is said and done, roughly 16% of Revenue and a whopping 60% of Net Income for ANT Group is generated by Related Party transactions (Alibaba plus “Other” combined), which are potentially less than arms-length and subject to manipulation.  The question that begs asking is, what is the true value of a business which has 60% of its earnings generated by potentially manipulated, “less than arms length” Related parties (Alibaba and “Other” combined).  The simple math is that the “real” 2019 earnings are roughly 60% less, or  ¥7,228 Billion (¥18,072 x 40%) or roughly US$1 Billion.  At a P/E of 20, which is generous considering the historically pervasive “veracity issues” which have plagued virtually every Chinese Communist Party financial statement, document and press release sold to naive Western investors since the beginning of time, a P/E of 20 would place a valuation of only $20 Billion on ANT Group, even though this beast has been marketed as a “$150 Billion Juggernaut valuationas recently as 2018 and upgraded to a $250 Billion valuation as recently as last weekend  Moreover, in 2019, we had yet another valuation established by virtue of the $10.1 “Write-Up” gain Alibaba booked in September of 2019, which set the valuation at roughly US$30-$35 Billion depending on the basis of the dog-shit assets exchanged.  i.e. $30-$35 Billion Valuation = (Basis of Dog-Shit Assets + $10.1 Billion Gain) ÷ 33%)

You see the problem here?, in 2018 we had a “helper” fueled sham valuation calculated at US$150 Billion for ANT Group, a year later we had a related party transaction with Alibaba (BABA) set the value of this business at US$35 Billion +/-.   As recently as this week, we have our good buddy “China-Mike Bloomberg” and company disseminating bought-and-paid-for Chinese Communist Party propaganda, masquerading as “financial news” explaining to naive US Investors that ANT Group is now going to be the biggest IPO in history, bigger than even the Saudi Aramco IPO.  The Market Cap out of the gate could exceed that of Bank of America.  The China Mike & Company piece is sending the “you gotta get a piece of this IPO even though you don’t understand it” message …..that the “income-free” ANT Group juggernaut is leaving the gate at a $250 Billion valuation when it’s likely nothing more than a highly publicized Chinese Communist and “Related Party” Ponzi scheme.       

https://www.bloomberg.com/news/articles/2020-09-21/jack-ma-s-ant-is-said-to-lift-ipo-funding-target-to-35-billion?sref=DWzi38c2

When the perceived value of an asset can move from US$150 Billion, to US$35 Billion, to US$250 Billion, based solely on some propaganda headlines…..That, my good friends, is quite a problem…..

The IPLA/SAPA Shenanigans

Continuing the theme of “one of these things is not like the other” and financial statement manipulation, the IPLA/SAPA Profit Sharing Payments are an interesting topic as well.  Under a 2014 agreement Alibaba received profit share payments from ANT Group, the profit share payments were supposed to be the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of ANT Group.  As mentioned, in September of 2019, ANT Group and Alibaba entered into the SAPA modification agreement, where Alibaba was issued stock in ANT Group amounting to a 33% equity interest, Alibaba transferred the aforementioned pile of dog-shit intellectual property and vapor-ware to Ant Group and the fake profit share payment arrangement was terminated.  The value of the newly issued 33% ANT Group Equity Interest to BABA, although the calculations  and basis were never disclosed, indicated the “fair value” of this transaction was somehow magically calculated and BABA booked the $10.1 Billion aforementioned Gain due to this bogus/absurd transaction.  I find it interesting that there are actually three (3) separate documented, calculations of the Profit Sharing Calculation, ANT’s calculation, Alibaba’s calculation and the actual 37.5% of pre-tax ANT Income calculation contained in the documents.  Here’s the schedule….

Over the three year period based on ANT’s Pre-tax Income, ANT should have paid BABA 37.5% of it’s Pre-tax (Pre-Profit-Share) income of ¥35.114 Billion/.625 x .375, or ¥21.068 Billion, yet, ANT only paid Alibaba ¥8.544 Billion according to their Application Proof, and Alibaba only reported receiving ¥7.796 per their 20-F.  In US$ Terms, based on the figures presented, over the three (3) year period, ANT Group should have paid BABA $7 Billion, yet ANT Group only reported paying $1.2 Billion and Alibaba only reported receiving $1.1 Billion.  Again, why do these figures differ?

The Balance Sheet….What’s There? …. What’s Missing?

The ANT Group Balance Sheet is featured prominently on pages I-7, I-8 and a relevant schedule on I-11 of the Accountants Report (Beginning on pg. 384 of the pdf)… let’s take a look at the couple of pages describing, in slightly less than great detail, the composition of the book value of the Company’s vast (likely fake) holdings.

The things that absolutely jump out at us are that:

1,) ¥132.7 Billion (US$18.9 Billion), or virtually all of the ¥141.4 Billion (US$20 Billion) Non-Current Assets are comprised of investments in, and loans made to, “Investees” and “Associates”, Goodwill, Intangibles, etc .  Simply put, there are no hard assets. (i.e. Real Estate, Property, Plant, Equipment, Data Centers, Computers, etc.)  These corporate structures, joint ventures and Chinese Communist Party controlled Shell Companies are insulated from any meaningful disclosure by a liberal use of Chinese accounting conventions.

2.) In the last 18 months through June 30th 2020, ANT Group’s Equity Balance increased from ¥152.4 Billion to ¥214.9 Billion due primarily/allegedly to Net Income skyrocketing to ¥40 billion ($US5.7 Billion) during that same period.  Note that this Income figure is roughly equal to nearly all of the Group’s Retained Earnings from inception.  According to the document, total dividends paid since 12/31/16 were ¥0.8 Billion (¥0.3 Billion in 2019 and ¥0.5 Billion in 2017) so the “Retained Earnings” could/would not already have been paid out.  In other words, ANT Group must have operated at roughly a net break-even from inception in 2001 to the beginning of 2019.

Further, Shareholder Equity increased from ¥51.2 Billion from 1/1/2017 to ¥214.9 Billion on 6/30/20.  An increase of ¥163.7 Billion.  Since Cumulative Retained Earnings (which are not described in the filing other than the note from Page 320 below) have largely been accumulated in the last 18 months, let’s focus on income and four (4) transaction types which help explain the massive (roughly ¥160 Billion or US$22.5 Billion) increase in Equity in that time frame.

So to Summarize the above table, speaking in terms of US$, here’s the genesis of the $22.47 Billion increase in “Equity” since 12/31/2016:

Income – 32% of the increase (US$7.194 Billion) is from Income, of which 60% was generated by Alibaba and Other Related Entities and should be, by definition, “questionable in nature” if only because it’s being reported on a Chinese Communist Party Issued Financial Statement.  Nearly all (80% ) of this income was generated in the last 18 months, with the last few months being in the midst of a global pandemic.  As an analyst, if that alone doesn’t perk your antennas up I don’t know what would.

The First – transaction type is the previously referenced 2018 $10 Billion (¥68,278,095) private placement-capital-raise for a 6.6% Equity Interest  in the group, from a cadre of private investors, including Singapore’s sovereign fund GIC Pte Ltd and state investor Temasek Holdings (Private) Ltd, as well as Warburg Pincus LLC, the Malaysian Sovereign Fund, Khazanah Nasional Bhd, Carlyle Group LP and Sequoia Capital, generating the euphoric coverage surrounding the $150 Billion “WeWork-esque” valuation of ANT Group at the time.

Per the table, 43% of the Equity increase (US$9.754 Billion)  was reported to be an actual cash contribution by actual Sophisticated Investors (Temasek, Warburg Pincus, Carlyle, Sequoia, Sovereign Wealth Funds, etc.).  Hard to believe, I know.  Terms of the deal were not disclosed, but we can presume that the capital raise was all cash, based on the press-release.  Hopefully it wasn’t some sort of hokey note-payable/deferred-contribution “there will be no money….just total consciousness” unenforceable contract, as has become all to common within these related party transactions.  For their sake, let’s hope the US Investors have made some sort of off-the-books side-deal with the Chinese Communist Party which would bail them out if/when this whole mess goes south.  Since the cash balance never increased, the money must have been immediately spent, distributed or otherwise “invested in investees”.  I also wouldn’t be surprised that if these “investors” committed to pay $10 Billion to ANT, there was some sort of “you scratch my back and I’ll scratch yours totally unrelated boomerang contractual commitment” to turn the $10 billion back around to Warburg, Carlyle and Sequoia, just to give the deal some aura of legitimacy.  I make this statement with at least some level of confidence since none of these shareholders remain listed on the “list of 77 significant shareholders” beginning on page 160 of the Application Proof.   “Helpers gotta help”….especially when there a few bucks to be made.

The Second – transaction type is our old friend, the September 2019 IPLA/SAPA Alibaba Share purchase.  According to the Consolidated Schedule of Changes in Equity (I-11, page. 386 circled in red above)  The schedule shows the issuance of the 7,763,002 Shares to Alibaba at a cost of ¥11.662 Billion (US$1.6 Billion).  As an aside, if I were the deal makers at Warburg, Carlyle or Sequoia et.al., I might have been more than a little peeved if I had just paid US$10 Billion for a 6.6% interest in ANT Group, once I found out that the Chinese Communist insiders at Alibaba negotiated a much more lucrative sweetheart deal.  i.e)  33% of the company for US$1.6 Billion, a little more than a year later…..but hey, that’s just me.

Per the Table, 7% of the increase (US$1.666 Billion) was the Alibaba IPLA/SAPA deal, where Alibaba traded those bogus dog-shit intellectual property assets and terminated that goofy 37.5% Profit Sharing (the same one they screwed Yahoo! over with) Arrangement for the 33% Equity Stake in ANT Group.  Again, I have to say, that it’s strange that, at the time, the ANT Group only booked a “Fair Value” of US$1.6 Billion, yet Alibaba valued the deal at at least US$10.1 Billion (the “gain” plus unknown basis).  You’d think that all of these accountants would be on the same page.  Those wacky bean-counters!  (Note: We’ll talk a bit more about this discrepancy a little later in this post).  Further note: This was yet another non-cash transaction.  i.e.) No “money” changed hands.

The Third – transaction type is another old friend, and a favorite kickback vehicle of money-laundering Chinese elites everywhere, Share Based Compensation (SBC).  The incredibly generous management team at ANT Group somehow believe that’s it’s absolutely necessary to distribute, like clockwork, the equivalent of 27% of Income to employees, family members and other well-connected Chinese Communist political hacks, party bosses and Cayman Islands Shell Co’s. controlled by same.  A full 9% of the equity increase, or US$1.96 Billion, was spent on Share Based Compensation during the period.

The Fourth – transaction is “Equity Method Write-Ups and the Booking of Fake Earnings” of non-controlled “Group Members”.  This accounting convention takes a page out of the Alibaba/Softbank playbook.  It allows non-group-member-book-cookers to lend a hand to the cause, contributing to fake equity without actually contributing any cash or value…..just journal entries. 

So, in a nutshell, that’s how you increase “equity” in your business by US$22.5 Billion….you just apply some creative bookkeeping and a few journal entries, without ever having to put any effort into actually growing the business itself.  Finally, note the last heading on the chart “Money”.  The Yes/No/Maybe classification of these transactions indicates whether they actually provide cash or economic value to the business….”income” should, but if it’s all/mostly fake income generated by related parties it doesn’t.  I’m giving the $10 Billion “Helper” Private Placement transaction the benefit of the doubt as actually generating cash, but as I described….there’s a chance/probability that this was yet another charade transaction and little or no cash was exchanged and that transaction should be a “No” as well.

 

Retained Earnings

Retained Earnings is a very specific Accounting Term which refers to Accumulated earnings (Net Income/Loss) since the inception of the business which have not been paid out as dividends.  Interestingly, at least to me, the only time this term is mentioned is on Page 320 of the Application Proof document and provides at least some confirmation as to the lack of profitability of this business prior to the last 18 months.  Retained Earnings were ¥44.826 Billion as of June 30th 2020 roughly the amount of the Net Income generated since 12/31/2016.  As an aside, when the US Investors paid $10 Billion for that 6.6% interest in the business generating a $150 Billion Market Cap, based on 2018 earnings, they made the investment at a P/E of 525 based on current year income.  Shrewd.  They must have been using the WeWork equity pricing model.

Also note that they seem to be really concerned about keeping the cost and fees of the H Share offering Top Secret, as they’ve REDACTED anything to do with fees, commissions and expenses of this offer.  This is just semantics, but the term “To Be Determined” refers to something unknown.  The term REDACTED, however, means….”We know…we just don’t want to tell you.”

The Top-Secret Accounting Firm

Appendix I, The Accountant’s Report (160 Pages) and Appendix II, The Unaudited Pro-Forma Financial Information are, as you would expect in an “Application Proof“, unsigned.  Although Ernst & Young is listed (only once in the Application Proof) as the Reporting Accountant and Independent Auditor on page 104 of the document, they are not listed as the Accountant of record on either Appendix.  I wonder if the Ernst & Young, Hong Kong partners even know they are part of this charade?

This voluminous report was clearly prepared by accounting professionals or at least someone with extensive knowledge of accounting/financial presentation, terminology and format.  Perhaps ANT Group management is shopping this work?… looking for a more friendly accounting firm than Ernst & Young, who might actually sign off on this mess without too much looking under the hood?  Anyway, I found the undated, fill in the blank… “Certified Public Accountants, Hong Kong to-be-determined” boilerplate to be pretty amusing, particularly after spending what must be millions of US Dollars preparing this goofy document, this far along in the process.

Two Proposed….Really Hilarious….Journal Entries

As they say in just about every late night TV infomercial….

“But wait, there’s more…..”

The ANT Group Balance Sheet presentation, at least to me, is a bit confusing; probably because I’m used to looking at GAAP presentation/format, so if you’ll indulge me, I’ve condensed all of these categories into easier to read and understand “big broad” categories, just so I could get a better visualization of what was going on here.  Again, it’s an age old concept….debit balances must equal credit balances….no matter what you call the individual components:

Assets = Liabilities + Equity

For all of you who happen to be highly compensated analysts, obsessed with asking dumb-ass irrelevant “corporate vision” questions during quarterly events like the Alibaba 6-K dog-and-pony shows, as you are enamored with and opine about, all sorts of cool, silly, eCommerce terminology, you might want to write that “Assets = Liabilities + Equitything down.  It’s really important.

So when we take a look at the Balance Sheet above, it really looks pretty good doesn’t it?  Equity has nearly quadrupled in 2½ years.  The Current Ratio is nearly 2:1 and there is a relatively teeny/tiny level of Non-Current Liabilities/Debt.  What’s not to like?  Any public accounting firm worth its salt should be salivating to certify these financial statements.

But waaaiiiit a minute…this makes me wanna shout….c’mon now…based on the previous discussions and the possible shenanigans/adjustments discussed above, what if Ernst & Young (or whoever ends up signing off on this mess) after reviewing management’s numbers, recommends just two (2) additional, material journal entries.  The first entry would be to abandon the silly “netting” of Alibaba escrow (Restricted cash) against the (Escrow liability).  The second transaction would be to actually book the Alibaba US$10.1 Billion gain as Paid in Capital, mirroring the accounting treatment on the Alibaba books.

For those of you who have never been privy to a behind closed doors discussion between Management and the partners of a Public Accounting firm, when the firm discovers what they believe to be material changes and/or misstatements in the company’s financial statements, the following is a theatrical rendition/reenactment of the discussion that may or may not have transpired and the hypothetical give and take between ANT Group management and the Ernst & Young  (and/or the Anonymous Hong Kong Public Accounting Firm/s) Partners regarding same.  (Note: This discussion in no way challenges the integrity of Ernst & Young, HK since it’s not clear that they have anything to do with this document.  They may not even know they are involved in this charade.  i.e. we should wait to see who who eventually signs the Application Proof.  I’ll refer to E&Y, HK Partners here simply because they appear only once in the document, proudly, and prominently listed on page 104)

The “Discussion”….

Here’s the imaginary text of what may or may not have been discussed sometime in June, 2020  at 22/F, CITIC Tower, 1 Tim Mei Avenue, Central Hong Kong, The People’s Republic of China   (Note: according to the document Hong Kong is officially now a vassal state of the People’s Republic of China, presumably subject to the mainland “rule of law”….quotes added to reflect the comedic irony of the term.)

E&Y, HK Partners“Really glad you guys & gals could make it here today to discuss our proposed journal entries….but first, I think it’s important that we let you all know how awesome you have all been to work with and what a pleasure it’s been, and how grateful we are to have you finally assert your control over our silly little poorly run island.  You guys are the best!” (wild applause from the partners).

ANT Group Management Spokesperson:Thanks….so why are we here?

E&Y, HK Partners“Well…uhhum…gulp…although ANT’s financial statements and the Application Proof are wonderfully prepared and are really, really excellent, we have two teeny-tiny journal entries that we think that you might want to consider….I mean…it’s all up to you….these are just suggestions….no big deal….it’s your world, we’re just livin’ in it….heh…heh…heh”  

ANT Group Management Spokesperson: (Dead….you could hear a pin drop…. silence….)

E&Y, HK Partners“Ok…ummm….so the first totally optional change we suggest is that rather than ‘netting’ the Alibaba escrow payments like you are doing now, so you don’t have to disclose the asset and the offsetting liability, we think it would be better if you showed the asset as “restricted escrow cash” and an offsetting “escrow liability”.  That’s actually what it really is after all….By our calculations, although we are just guessing because the cash is somehow spread out over all of your subsidiaries and related Cayman Islands entities, we calculate that, since it takes days, weeks, months and sometimes forever in the case of fake knockoff luxury goods shipped to America to deliver these goods and close out the escrow (…everyone chuckles)… Anyway, we suggest that you book at least 5 days of GMV or ¥96,616,438,000 (¥7,053,000,000,000 /365 = 5 days = ¥96,616,438,000 or $US13.8 Billion) as a debit/increase to Current Assets and an offsetting credit/increase to Current Liabilities.  Since you wouldn’t let us confirm the cash balances in all of the subsidiaries or related entities, and there’s no number anywhere near that big on your balance sheet, we figured it must be netted out somewhere, like you do with all kinds of other things, so we thought you should probably record it in the financial statements.

ANT Group Management Spokesperson: (Deafening silence……) 

E&Y, HK Partners“…..umm….and moving along to our second journal entry….again, only a suggestion here, since PWC Hong Kong already signed off on the US$10.1 Billion Alibaba valuation of their 33% ANT Interest in September of last year, we think that, well….ummmm….maybe…just perhaps….these transactions should match?…..wadaya think?  we suggest that you book an additional ¥71,561,000.000 as a debit/increase to Long Term Assets (Goodwill, Intangibles or anything you feel like calling it) and an offsetting credit/increase to Equity.  Here’s the pro-forma schedule showing what the Balance Sheet might look like the end of 2019 after these two entries/adjustments to the audited financial statements.  So….thoughts?….comments?  everything hunky-dory?  So…whadaya think?

ANT Group Management Spokesperson: (More silence….veins bulging in various Chinese Communist necks and foreheads…)  “So you don’t believe our numbers are correct?  You think that we don’t know what we are doing?  Perhaps YOU don’t know what you are talking about?!!  Perhaps all of you need an all expense paid re-education session in Xinjiang?  With regard to your first proposed journal entry, this is just another case of Western Capitalists not understanding the incredible efficiencies that the Chinese Communist party is capable of…..”  

E&Y, HK Partners“…..umm….respectfully sir…we are all Chinese people living in Hong Kong….”

ANT Group Management Spokesperson:THAT DOESN’T MATTER!!…..YOU ARE AGENTS AND TOOLS OF WESTERN CAPITALISTS!!…..ANT Group is the flagship of Chinese Communist eCommerce payment processing.  The reason that you can’t locate and  book all of that extra cash is because ANT Group escrow processing is so efficient, that the cash doesn’t exist….”

E&Y, HK Partners“….it doesn’t exist…?”

ANT Group Management Spokesperson: That’s correct…everyone knows that Alibaba orders are processed, shipped and delivered instantaneously.  ANT Group escrows are closed out, the money is collected and paid out in less that ten minutes, maybe fifteen…tops!!  There is never a material amount of money sitting in ANT Group  escrow accounts.  This is customer money, not ours.  This amazing accomplishment is , of course, due to superior Chinese Communist logistics, EDI and a relentless dedication to on-line, real-time customer service driven, 5th Generation eCommerce operating methodologies.  We are capable of shipping underwear, toasters, Jumbo Jets, cheap knock-off chotchkies, Real-Estate and court-ordered-bad-loans anywhere on the planet instantaneously.  Here’s a short video showing the amazing progress made by both ANT Group and Alibaba, proving, beyond any doubt that we don’t have any of this money that you think exists somewhere.

ANT Group Management Spokesperson: “STOP!… STOP THAT VIDEO!….that’s not correct!…this is not Chinese eCommerce….this is Macy’s, Amazon or Walmart!…it’s American Propaganda intended to humiliate the Chinese Communist Party!  How did that get in this presentation deck! Heads must Roll!   Anyway….regarding your second journal entry, perhaps, since you admire PWC’s work so much, maybe we should hire them as our public accountants…at least they will do what we tell them to do.  We can’t very well completely change these numbers after we’ve sold this whole mess to Warburg Pincus, Carlyle, Sequoia and other dumb-ass, yet highly-compensated American investors.  You are trying our patience!!….”

E&Y, HK Partners“I’m so sorry to have upset you my liege…..but we really are trying to help….both of these journal entries actually make the financial statements look much better than they do now!  We’ve figured out a way to increase both assets and equity on your already fortress-like Balance Sheet and we can actually make the numbers match up with Alibaba’s.  We can come up with some sort of ‘Change in Accounting Method’ bullshit to justify these giant restatements.”  

ANT Group Management Spokesperson: (…listening intently…pause….thinking…) “….tell me more….”

E&Y, HK Partners“We can pull this off….it’ll just take a few thousand billable hours, some legal fees and severance for the dumb-ass staff accountants that screwed this up in the first place. We can put some kind of off the books deal in place so the American investors are taken care of.  We can spin it like PWC Hong Kong was incompetent, throw them under the bus and you announce that E&Y HK came in to save the day!!….”

ANT Group Management Spokesperson: (pause)….”I like the way you think…..go head….take care of it….”

E&Y, HK Partners“Excellent….we’ll put this master plan in motion….we’ll alert the usual media, Bloomberg, Reuters, South China Morning Post, the “helpers” and our legions of CPC Twitter-bots.  Of course, time is of the essence, as we’ve discussed before, there’s a remote, yet growing probability that some savant-like, irritatingly brilliant, yet surprisingly hilarious American Insurance Agent might actually spend his valuable time reading through all of this garbage, somehow figure this scam out and write a childish, yet directionally correct  blog-post about it….”

ANT Group Management Spokesperson: “LOL LOL…..a savant-like, hilarious, irritatingly brilliant American Insurance Agent outsmarting the entire Chinese Communist Party??….with all of the paid ‘helpers’ we have on our side is going to figure this out???….. HHAAA!!!…..that’s rich!…”

Proforma Presentation and Ratios

The goal of this next exercise is to illustrate what the Balance Sheet of ANT Group might look like if we were to eliminate all of the aforementioned questionable income and fake capital transactions.  So when we put all of the above together and book what should be the “real” adjustments, here’s what we come up with:

We start out with the June 30th 2020 balance sheet on the left and apply the following previously discussed/described adjustments:

1.) The first thing we do is eliminate the 60% of Net Income (Column 1, debiting/reducing Equity and crediting/reducing Assets by ¥30.213 Billion) which has been generated by Related Parties.  We’ll get into why this should be eliminated, in the next section, but suffice it to say that since the sources of this “income” are likely all part of this highly coordinated Chinese Communist Party fraud perpetrated on Western Investors, it would be impossible for any Audit or Regulator to detect, verify or validate it.

2.) The next column/elimination is intended to illustrate what the Balance sheet would look like without the odd, private placement, US$10 Billion, Warburg, Sequoia, Carlyle and Sovereign Wealth Fund capital raise.  At the time of the capital raise, income of the Group  was  ¥2.156 Billion, putting the P/E at the time of the transaction at 487, even with the inclusion of the “Related Party” fluff income.  As described above, it’s also not clear to me, despite the press releases, that this deal was “all cash”, as the cash balance only increased US$500 million from 12/31/2017 to 12/31/2018, so the money (US$9.5 Billion) was either spent, “invested” or still sitting in some bullshit “Investment-Receivable-Show me the Money” account somewhere.  That said, again, these investors are really smart, savvy people, either they were taken for a ride by ANT Group or there’s some other side-deal going on behind the scenes that we are unaware of….perhaps a bit of both.  “Helpers gotta help”…

3.)  The next column removes all of the “Related Party Asset Write Ups”  ¥13.305 Billion.  They’ve apparently booked these increases outside of the Income Statement, debiting/increasing Assets and crediting/increasing Equity.

4.) The last column removes the aforementioned Alibaba SAPA/IPLA Equity Increase of  ¥11.662 Billion (US$1.67 Billion….vs. the $10.1 Billion gain on the Alibaba books)

So let’s take a look at the change in ANT Group reported ratios/metrics after we eliminate all of these bizarre, misleading Capital Account transactions.  When we apply these adjustments, the Balance Sheet ratios look, well, pretty frightening, especially if you just spent US$10 Billion for 6% of this business.  Based on the annualized earnings over the last 42 months, the P/E increases from a disconcerting 73 to a terrifying 182.5.  a shocking number for a 20 year old, monopoly business, about to launch an IPO in China at the greatest valuation in the history of finance.   (Note: Monopolies are historically much more profitable than this.) Further note, if we use “China-Mike-Bloomberg’s” $250 Billion valuation, the P/E skyrockets to 121 on the published earnings to 305 based on the adjusted earnings.  Debt to equity nearly doubles (47% vs. 110%) and the current ratio is nearly cut in half. (192% vs. 117%).  For those of you who are new to this accounting game, that’s bad. 

“Bad is such a big word….for being such a small word…”



 

Related Parties

Now let’s look at exactly who all of these related parties are.  Here’s the definition:

Related Parties: (I-52, Page 427)

I’m not kidding, that’s really what it says.  So to paraphrase, the definition of “Related Party” is apparently anyone that the Chinese Communist Party decides needs some kickback cash.

…..and here’s the list of the presumably abbreviated list of “Significant Related Parties” on I-128 (Page 503) .  Note, the definition above does note seem to preclude giving US$1 Billion loans to drunken family members with gambling addictions.  For example, like Alibaba did with the US$1 Billion personal loan Simon Xie (Page 208 of the 2020 BABA 20-F).    Apparently, these loans apparently are not be deemed to be “significant”, at least as far as the SEC, Hong Kong or Chinese Regulators are concerned.

Note that Alibaba Group Holdings is a “Related Party” as defined under (b) above, therefore, any consolidated subsidiary of Alibaba Group Holdings is also a “Related Party”.  Let’s talk about that for a minute….

The following schedule illustrates the meteoric increase in the number of “consolidated subsidiaries” that has taken place within the veil of Alibaba Group Holdings (BABA) since their IPO in September of 2014.  These figures are per the 20-F’s with page number references listed in the column on the right.

Note that for the first two years (2015 and 2016) the “Organizational Structure” note in the 20-F’s reflected a relatively constant, yet enormous number of Subsidiaries in the Group.  Since then, the number of Consolidated Subsidiaries increased roughly 300 entities per year, until this year, when the 20-F inexplicably “went dark” on the topic, failing to disclose the number of these Subsidiaries.  Note also that, even though nearly all of Alibaba’s business is conducted on the mainland, for some reason the “Rest of the World” consolidated entities (primarily in Tax Havens like the Caymans, BVI, Bermuda, Hong Kong, etc.) have increased from 170 Corporations/LLC’s to 520 in only three years.  Mainland Consolidated Entities also skyrocketed from 150 to 700 during the same time period.  If we extrapolate, we can guess that there are more than 1,500 Consolidated Subsidiaries now, with likely tens of thousands of elite Chinese Communist Party “Friends and Family” suckling at the teat of this massive dollar-sucking-black-hole money laundering apparatus.

The really nice and convenient thing about all of these Related Parties and transactions is that it makes auditing really easy.  One of the key tools an auditor uses to substantiate transaction legitimacy and asset values is third party verification.  With all of these related parties, the Auditors will likely never find a variance.  The Related Party will simply coordinate with ANT Group management, confirm the transaction, loan balance, amount owed, asset value, or whatever transaction is being questioned or investigated, whether the transaction is actually legitimate or not.  A well constructed fraud is really easy to audit….there’s no reconciliation needed….everything matches up!

If We Don’t Have the Political Will to Regulate This…enter the Lawyers!

Let me be clear, I’ve never been a proponent of capital punishment for financial crimes.  After all, it’s only money.  I’d be fine with the confiscation of the perpetrators assets, breaking up the bank/business/firms involved and giving the perps who mastermind these schemes a taste of “life with the possibility parole after 20 years” only with “good behavior”, of course.  Unfortunately, sadly, based on our tolerance and admiration for those “helpers” doing “Gods Work” following our most recent engineered financial crisis, combined with the legal protections offered by Chinese, Hong Kong and offshore ShellCos, it’s unlikely that any bankers, underwriters, accountants, lawyers or “helpers” will ever spend any time in the gray-bar-hotel, for anything….ever…..even as egregious as this.

On the other hand, here in the states, we are indeed fortunate that we have a “rule of law”.  We also have something that no other country has.  In America we have an oversupply of viscous, killer, relentless class action lawyers who will do just about anything to get paid…and a “jury of our peers” system.  I’ve said this before, but the targets for all of you class action lawyers who are reading this, looking for a big score, are not in China.  You will never get paid.  These targets are right under your nose.   They are the “helpers” and it’s a “target-rich environment”.  The “helpers” are the folks who continue to collect massive fees for selling out the US Financial System, the little-guy investor and democracy by marketing this garbage. With a little bit of work you can easily make a brilliantly constructed “known or should have known” case against these folks once this whole mess goes sideways.  The losses associated with these “securities” once they find their way into the hands of all of the passive index funds, ETF’s, Pensions (Again, for emphasis, the word “China” is listed 240 times in the most recent, 401 page, 2019 CALPERS Annual Investment Report) and naive money managers who make their investment decisions based on Bloomberg marketing fluff rather than actually reading filings will be enormous…..you, as the fearless killer-sharks you are, will have lead plaintiffs and clients everywhere, and you will be able to use our cherished “rule of law” to strip the carcasses of these “helpers” clean…..that is, of course, if our bought and paid for Congressional leaders don’t step in and offer reams of protective legislation, “for the good of the people”, as has been the trend over the last few decades.  Anyway, the first wave of targets is listed prominently on the front page of the Application Proof, with I’m sure many more eager to pile on if the fees are right.

I’ve always found it comforting when the boilerplate “If you have doubt in this document” disclaimer, in the usual brazen attempt to absolve the sponsors of any responsibility in the marketing and sale of this debacle, is front and center at the top of the offer sheet.  I also find solace in the fact that the word REDACTED is listed 1,329 times in the document.

So the first class action targets up to bat will be Citi, JP Morgan, Morgan Stanley and Ampere, accompanied by the next wave and I’m sure, a long parade of “helpers” that feel they can make a quick buck pedaling this piece-of-shit Chinese Communist Party stock to dumb-ass money managers, widows and orphans.  Additional deep pockets, and usual suspects are listed on page 100-106 of the Application Proof.  Thank goodness Joe Tsai is chairing the Audit Committee on this deal, I had no idea that he had an accounting background!  I’m also sure he has all kinds of time on his hands to really dig into and pour over the nitty-gritty of this deal.  Perhaps he can explain why the Market Cap of ANT seems to fluctuate between US$35 Billion and US$250 Billion depending on who’s buying/selling it?  Perhaps the US Investors who end up getting burned on this will end up owning the Brooklyn Nets?….or at least get some sweet discounts on Net’s season tickets or autographed Kyrie or KD memorabilia in the settlement after the lawyers get paid……they will also most assuredly take further solace in the obligatory SEC Press Release and Congressional hearings, explaining to us poor, unwashed, working stiffs, how nobody could have possibly seen this coming….

Rather than to blindly accept these Chinese Communist boondoggles, relentlessly endorsed by fee hungry, traitorous “helpers”, and go through all of this economic theater, anguish and carnage on a decennial basis, wouldn’t it make more sense to prevent these dog-shit-“securities” and “deals” from hitting the street in the first place?  Is it really that hard?  Can’t we prevent these financial cancers from finding their way into passive/index funds, pensions, and balance sheets of unwitting investors who just want to plow their life savings, a little bit at a time, into some safe place at a reasonable return so they can retire on relatively guaranteed terms and pass along what’s left to their kids?  ….as investors, we just want to put our money in a place where the rug isn’t pulled out from under us on a regular basis…we’d want to live in a place where interest rates are sustainable and the “time value of money” is more than an ancient concept.  We want to be assured that we are not the last ones holding the bag as the wealth we had created throughout our lifetime of hard work isn’t transferred to the “helpers” who know exactly when to be the first ones out of the dootie-filled-pool……is that really so hard?….really?……  strange times….but here we are….

So Why Does All of This Matter?

Why does this matter?….I’m glad you asked!  We need only take a look at CAPLERS, America’s largest public pension fund and poster child for the China financial cancer that has befallen us.

2019 CALPERS Annual Investment Report

In the most recent Investment Report available, the word “China” is listed 240 times, “Asia” 39 times, “Shanghai” 67 times, “Beijing” 48 times ….and my favorite… “Xinjiang” is listed 6 times….after reading, and fully understanding what ANT Group, Alibaba and every one of the dog-$hit Chinese IPO’s has been all about for the last decade…..can someone tell me why on God’s green earth America’s largest Public Pension Fund was/is so deeply entrenched with the China Dream (fake) growth story? (I mean…other than the weird coincidence that the fund was actually managed, for years, by a CIO who happened to be a Chinese Communist Party Member….yeah….there’s that…..you really can’t make this stuff up.)

Unfortunately, CALPERS-esque investment philosophy is more of a rule than an exception.  As garbage stocks like ANT Group, Alibaba, et. al.  gain legitimacy through “helper” efforts (like CALPERS) and are added to indexes and asset allocations, forcing passive investors to unwittingly buy them, the valuations continue to be manipulated/pushed and rocket skyward.  The flow of passive money accelerates into this Chinese Junk and the “helpers” keep doing their thing.  As secondary beneficiaries of an enormous wealth transfer for their efforts, the “helpers”, since the Chinese Communist party is effectively sending the buy & sell signals to the them first, are no longer “throwing darts at the board”…..and the cycle continues.

Tens of thousands of tax haven investment funds, at least $35 Trillion of Western Financial Assets (by my count), are anonymously controlled by the Chinese Communist Party and their elites, with likely another $10-$15 Trillion or so, controlled by the “Western helpers” (you all know who they are) who get a friendly “heads-up”  when this tsunami is about to shift course taking aim on, and wiping out phalanxes of out-of-the-loop, naive, Bloomberg-ette, Robin-Hood-ish trend followers and passive-investing villagers.

That’s why this is important….this is not some game….it’s the driving force behind the demise of democracy.  I’m shocked and dismayed that there are indeed so many “helpers” out there who are not only willing, but eager, to effectively sentence their grandchildren to a life under communist rule, just so they can make a quick buck.  They justify it by saying things like “we just need to be on the right side of this trade” and “we are just deploying capital, doing our job and maximizing returns”….again…you know who know you are….rest assured there will be a luxury suite in hell booked, reserved and waiting for you.  Then and only then, will you realize you’ve been on the “wrong side of the trade” all along….