“Enron on steroids”

The collapse of Alibaba, when it happens, is going to be spectacular. From the accounting blog “Deep Throat”:

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!

Etc, etc, etc. From a comment cited in the blog post:

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.

Leave a Reply

Your email address will not be published. Required fields are marked *