Well, that was fun…..sorry I’m a little late on this analysis, but I’ve been a bit under the weather, my “day job” has kept me quite busy and, as always, there really wasn’t anything timely, serious, accurate or relevant (except for “One Thing“) discussed in the Investor Call anyway. Same-old-same-old-silliness….
Here are the source materials for this dog and pony show….
Press Release: https://www.alibabagroup.com/en/news/press_pdf/p191101.pdf
Presentation: https://www.alibabagroup.com/en/ir/presentations/pre191101.pdf
Webcast: https://edge.media-server.com/mmc/p/qqnbhb69
SEC 6-K: https://www.sec.gov/Archives/edgar/data/1577552/000110465919059003/a19-21664_1ex99d1.htm
Call Transcript via Seeking Alpha: https://seekingalpha.com/article/4301489-alibaba-group-holding-limited-baba-ceo-daniel-zhang-q3-2019-results-earnings-call-transcript?dr=1
As always the critical points are highlighted in RED below to save you some time. You’re welcome.
The participants in the call were as follows:
Perpetrators
- Rob Lin – Head of Investor Relations
- Daniel Zhang – Executive Chairman & Chief Executive Officer
- Joe Tsai – Executive Vice Chairman
- Maggie Wu – Chief Financial Officer
Accomplices and Unindicted Co-Conspirators
- Alicia Yap – Citigroup
- Eddie Leung – Bank of America Merrill Lynch
- Binnie Wong – HSBC
- Grace Chen – Morgan Stanley
- Zachary Schwartzman – RBC Capital Markets
- Alex Yao – JPMorgan
- Gregory Zhao – Barclays
- Tina Long – Credit Suisse
- Jerry Liu – UBS
- Youssef Squali – SunTrust
- Piyush Mubayi – Goldman Sachs
As I mentioned, today we’re going to focus on just “One Thing” that wasn’t discussed/referenced/inferred or even sniffed at by any of the accomplice/analysts on the call.
However, again, due to time constraints, I’m not going to discuss (because they have been described in this blog in every prior Quarter since its’ inception in 2014, as well as in detail in my prior “Comedy Gold” 20-F Analysis ) the following:
- ) The $1.140 Billion (6.8% of Revenue) of (SBCK) “Share-Based-Compensation-Kickbacks” to party elite and CPC controlled off-shore ShellCos, presumably to be used as collateral for the river-like flow of anticipated bad US Dollar loans provided by dim-witted, yield starved American investors/bankers. (Remember: If you don’t plan on paying the loan back, the interest rate and terms are irrelevant.)
- ) They’ve made $1.1 Billion in Property and Equipment additions ($399 million account increase plus $701 million in Depreciation). This figure is the equivalent of adding yet another “Burj Khalifa“, the tallest building on the planet, to Property and Equipment in the quarter with no description as to what this might be comprised of.
- ) The continuing increase in “Questionable Assets” (Investment Securities, Equity Investees, Intangibles and Goodwill) to $94.302 Billion, an increase of $8.764 Billion in the quarter. 58% of the Balance Sheet is now comprised of these il-liquid, hocus-pocus valuation “Questionable Assets“which, in all likelihood should never have been capitalized in the first place. Again, presented in the investor call with no reference, schedule or description as to what these “Acquisitions” were comprised of.
The “One Thing”…..
When I see something I have never seen before, it always piques my curiosity. I am of course referring to the termination of the Alibaba/Ant Financial Service Agreement. This now terminated agreement provided that BABA had received 37.5% of Ant’s Pretax Profit, while Ant charged back certain nebulous, undefined transaction processing and software/license fees. The agreement also provided that upon termination, Alibaba would “acquire” a 33% equity interest in Ant Financial, a company that nobody on the planet knows anything about. Presumably some form of the escrow/transaction process fees charged to Alibaba by Ant will continue.
The “One Thing” that I’ve never see before, and I’ll try to describe it as simply and plainly as I can, is as follows:
This transaction resulted in a $9.7 Billion dollar accounting gain in the current quarter, according to the 6-K filing. In the history of finance, I’ve never seen a gain that large, booked on a transaction between two related entities, where both businesses are foreign SOE businesses, in this particular case, the crowned jewels of the Chinese Communist Party financial arsenal, where one of them is a publicly traded company on a US Exchange, required to file statements with the SEC, where the filings disclose absolutely nothing about how the gain or carrying value of the newly “acquired asset” was derived, where no money/funding or anything tangible actually changed hands. Moreover, the “analysts” sat by in the investor call with their thumbs up their collective asses, asking ridiculous, absurd, irrelevant questions which were presumably spoon fed to them by Alibaba management, as they dutifully failed, per their orders, to even mention this gigantic accounting shenanigan/transaction at all.
Here’s the link and the complete filing/announcement:
https://www.sec.gov/Archives/edgar/data/1577552/000110465919051206/a19-18993_1ex99d1.htm
Interestingly, Alibaba’s Net Income for the quarter was $9.898 Billion, so if we subtract out the “one time” $9.7 Billion bookkeeping “gain” we see that Alibaba is actually just barely breaking even. (Based on the historic level of accounting Shenanigans “break even” is probably a stretch, but for the purpose of this post, in this particular quarter, I’ll give them the benefit of the doubt). Moreover, as I’ve said many times within the blog, when we see disclosures (or lack thereof) like this, we might as well throw out, write-off or at least substantially discount the rest of these absurd, il-liquid asset valuations. (Similar to what our good friends at SoftBank have recently been forced to do as well.) If you are an Alibaba booster, you might take issue with this characterization, but I’ve found over the years, that you just can’t trust the Chinese Communist Party’s bookkeeping. Go figure.
The Nuts & Bolts of the “Agreement”
For those of you who are unfamiliar with the administration of this terminated SAPA “agreement”, the agreement provided that every quarter, Ant Financial would report and accrue to Alibaba a payment of 37.5% of its pre-tax profit. In turn Ant Financial would also calculate an escrow/transaction processing fee based on GMV through the “ecosystem”, charging that “slush” fee to Alibaba as an offset to the 37.5% payment. Further, both businesses had provided software/licenses and intellectual property for the other to use, again, for undisclosed fees. All of these charges were somehow reconciled every quarter and no matter what the transaction volume or circumstances were, somehow all of these fees and offsets would roughly “zero out” so there was never a material profit/loss impact on the Alibaba financial statements, and therefore no disclosure of Ant Financial’s “pre-tax profit” or the escrow fees charged to Alibaba and US Shareholders. The 37.5% pretax “income” would magically equal the net of all of the other “expenses”. The individual components were never disclosed in the filings.
In summary, no US Shareholder, to this day, knows anything about:
- ) The profitability, revenue or any metrics whatsoever relating to Ant Financial.
- ) The go-forward “escrow service fees” which will presumably continue to be paid by Alibaba (and US Shareholders).
- ) The current ownership of Ant Financial and the SOE Relationship with the Chinese Communist Party.
- ) The composition and viability of Ant Financial’s assets (loans).
In other words, Alibaba booked a $9.7 Billion gain because they apparently decided, behind closed doors, that was exactly what the 33% equity interest is this business is worth. Without explicitly stating it, it also looks like they are carrying the Ant Financial investment as an “Investment in Equity Investees” which increased by $11 Billion during the quarter, presumably, although not stated, using “Equity Method Accounting” where, going forward, they will be able to book quarterly fake write-up (valuation gains) of 33% of Ant Financial’s Net Income as an increase in the value of the Asset, again, without disclosing anything about Ant Financial. The very idea that this has been going on, not only with Ant Financial, by far the most stunning application of these accounting gimmicks, but with every “Investee” (Alibaba Health, Alibaba Pictures, Wasu Media, Yoku Tudou, Cainaio, Sunning, Lazada, UC Web, etc. etc.) for so long without investigation or regulatory intervention boggles the mind. Tens of Billions of dollars of “valuation gains” bloating the Balance Sheet and goosing earnings, and the SEC remains silent. Incredible.
If you have the stomach for it, here’s the link to the “Summary Filing” as well as the unreadable, 86 page “Amendment to Share and Asset Purchase Agreement” (SAPA) that was closed, causing the transfer of “assets” from Alibaba in exchange for a 33% equity interest in Ant Financial
Summary Filing – Exercising the Purchase option and terminating the SAPA
https://www.sec.gov/Archives/edgar/data/1577552/000110465918005686/a18-5168_2ex99d2.htm
Details of the “Amendment to Share and Asset Purchase Agreement“
https://www.sec.gov/Archives/edgar/data/1577552/000110465918006211/a18-5188_1ex4d1.htm
That’s right, here’s the list of Alibaba entities and the signors involved in the SAPA:
- ALIBABA GROUP HOLDING LIMITED – Zhang Yong
- Ant Small and Micro Financial Services Group Co., Ltd. – Jing Xiadong
- ALIBABA.COM CHINA LIMITED – Tim Steinert
- Zhejiang Taobao Network Co., Ltd. – Zhang Yong
- Hangzhou Ali Venture Capital Co., Ltd. – Zhang Yong
- SILVERWORLD TECHNOLOGY LIMITED – Tim Steinert
- SOFTBANK GROUP CORP. – Masayoshi Son
- Alipay.com Co., Ltd. – Jing Xiandong
- APN LTD. – Joe Tsai
- Personally – Jack Ma
- Personally – Joe Tsai
- Personally – Xie Shihuang
- Hangzhou Junao Equity Investment Partnership (Limited Partnership) – Jack Ma
- Hangzhou Junhan Equity Investment Partnership (Limited Partnership) – Jack Ma
- PMH HOLDING LIMITED – Joe Tsai
| Further, the Architects of this mess, these “helpers” who wrote the agreements consisting of 86 pages of legalese along with hundreds (perhaps thousands) of pages of exhibits and references are listed below. These folks are brilliant:
Attorneys for the Seller or any of the Seller Parties (Alibaba et al): Morrison & Foerster, Shin-Marunouchi Building, 29th Floor, 5-1, Marunouchi 1-Chome, Tokyo, 100-6529, Japan Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, NY 10036 United States Attorneys for the Purchaser (Ant Financial et al): Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, NY 10019 The substantial amount of work and highly compensated legal brain power applied to this incomprehensible “Agreement” and the documentation surrounding the exercise of the option to terminate same, and acquire the Ant Financial “equity interest” is impressive indeed. To be frank, I would have thought that the level of disclosure and documentation in the filings once the transaction was actually consummated, would have been equally impressive, yet the 6-K was silent on any calculation as to the new basis/carrying-value or how this amazing, wonderful $9.7 Billion “one time” gain was accomplished. The only reference to the calculation in the filing, and I’m not kidding, was with reference to how the gain was NOT calculated. “This gain was not determined on the basis of Ant Financial’s current equity valuation.” 6-K pg. 13. This statement, of course, would prompt an educated observer to ask….”Oh really?…so then you must know what the ‘current equity valuation’ actually is?….and how this valuation is calculated?… and you should be able to provide a one page summary of how the $9.7 Billion ‘one time’ gain included in your financial statements differs from the ‘current equity valuation’ in your financial statements? Why aren’t these calculations and disclosures in the 6-K? On a positive note, I was actually expecting a much bigger fake write-up and an absurd disclosure and discussion of the fake value….however, it looks like management simply chose to remain silent in the filings, probably per their lawyer’s advice and consult. |
Analyst Questions (Paraphrased)
Now, let’s get into what usually is the most entertaining part of the quarterly dog-and-pony show…..drum roll….. the “Analyst” Questions…..YAYYYY! Feel free to read the actual questions (and irrelevant answers) in the Seeking Alpha link, but I took the liberty of paraphrasing the rapier-like brilliance of the interrogators, just to save you a little time, below.
Here below, is the wisdom of these un-indicted-co-conspirators, in a nutshell (unedited “cut & paste”) of selected nonsensical sentences from the Seeking Alpha transcript:
Alicia Yap – How’s Singles Day looking this year?
Eddie Leung – What are your thoughts on the competitive environment you see today in the less-developed areas versus a few years ago when you competed in the Tier 1 & 2 cities?
Binnie Wong – What’s the percentage of new users coming from lower-tier cities?
Grace Chen – What are Alibaba’s approaches to capitalize on opportunities in the affluent middle-class and urbanization/low-tier cities and the differences in the consumer behavior and preferences in these two segments?
Zachary Schwartzman – Profit growth trends across the business as a whole and on the core, core marketplaces have stabilized or even accelerated. How are you using your discretionary investing to strengthen your strategic moats?
Alex Yao – Are you going to be incrementally more aggressive your initiatives in the second half such that the financial result trend in the first half cannot be extrapolating to the second half? And also can you talk about your priorities across the four initiatives i.e. local consumption, international logistic and new retail?
Gregory Zhao – BABA is enhancing the digital economy strategy and then you split it the economy into two groups, to consumer and to business segments. How do you coordinate between the two segments? As well globally we see several successful examples like Amazon, like Microsoft. And how’s your strategy different from these peers?
Tina Long – I have one quick question on the live streaming. As the format of live streaming gets increasingly popular, can you give us update on the GMV contribution for this format in first half this year?
Jerry Liu – We talked about multiple new revenue drivers whether that’s live streaming at the secondhand platform. Just thinking ahead into next year as we look at these opportunities in addition to the feed is the feed still the primary one we’re looking to monetize? Are some of these other opportunities also possible as we head into next year?
Youssef Squali – Can you provide us with an update on the food delivery traction in lower-tier cities? Second, we’ve seen some conflicting data on the Chinese economy recently. NBS for July and September suggests a slowdown in the economy in general. And even online this morning, there was a new private survey that showed actually manufacturing expanded, I think in October much faster than expected. So, just what do you make of it?
Piyush Mubayi – What are the points about improving user experience that will result in higher engagement and customer spend? Where you are on user experience in terms of how you are defining that and where do you want to take it?
Not once did any of our intrepid “analysts” ask a single question or reference the calculation of this massive undocumented gain. Not once. Not a peep out of them.
This is, my friends is a travesty. It is also a crime under USC Sec. 1348 and Securities Exchange Act of 1934, punishable by fines or imprisonment of up to 25 years or both. Based on what I saw described above, I’d vote “both”. I’d suggest that if we start throwing “analysts”, as well as their bosses and bosses bosses in jail for a few years for, by their complicity and silence, putting their stamps of approval on presentations and filings like this, this sort of criminal Securities Fraud might actually abate. At least “analysts” might actually think twice about blindly going along with the program. I wonder how Alicia, Eddie, Binnie, Grace, Zack, Alex, Greg, Tina, Jerry, Youssef, Piyush and their friends at PriceWaterhouse Coopers would do in US Federal lockup for a few years? They’re young, I’m sure they will handle it just fine, out in five years with good behavior, ready to start their new careers selling used cars or insurance. Perhaps the night shift at a call center? The world will once again be their oyster.
As an aside, if you are a Class Action Securities Lawyer, reading this, if you’ve not already done so, you might want to consider getting your lead plaintiff(s) on the books and ready to go once this whole mess goes sideways.
Your targets, and your only opportunity to make your clients whole will of course be to sue the living snot out of Citigroup, Bank of America Merrill Lynch, HSBC, Morgan Stanley, RBC Capital Markets, JPMorgan, Barclays, Credit Suisse, UBS, SunTrust, Goldman Sachs and of course PricewaterhouseCoopers, Hong Kong.
Epilogue & Next Post “Teaser”
You rarely see a situation where the second greatest, publicly traded Ponzi scheme in history (SoftBank) owns a third of the greatest Ponzi scheme in history (Alibaba)…. and both are foreign listings on US/Japan exchanges. We live in unique, amazing times. Thank you Wall Street, you guys are the best. That said, here’s the third grade level chart from page 32 of the SoftBank Investor Presentation, describing the intrinsic value of the business as increasing by $19 Billion in just a few months, despite the WeWork/Vision debacle.
To put this in perspective, the current combined market capitalization of Alibaba and SortBank is $572 Billion. ($487B + $85B) By comparison, at the peak prior to the Great Financial Crisis, the combined market capitalization of Lehman Brothers and Bear Sterns was only $80 Billion ($60B + $20B). The primary difference between the Great Financial Crisis and what’s going on today, is that the Great Financial Crisis was brought on by our own naivety, greed and folly inflamed by our self destructive desire to blow up regulatory limiters, safeguards and safety nets for a few more basis points of yield. On the other hand, the Alibaba and SoftBank story is actually just one, relatively small component of a comprehensive strategy, designed by the Chinese Communist Party to bring America and the West to its collective knees.
Softbank Webcast Presentation
https://webcast.softbank.jp/en/detail/video/ref:20191106_01_en
SoftBank Investor Slides
SoftBank Financial Statements
SoftBank Investor Briefing
https://group.softbank/en/corp/irinfo/financials/financial_reports/