Barron’s threw down the gauntlet with its brutal story on Alibaba, arguing the stock could fall 50% and that the company was reporting numbers that “strain credulity.”
“In the end, gaudy financial reports can only work for so long before reality intrudes,” Barron’s Jonathan Laing wrote. “This hard lesson figures to be driven home to Ma and his trusting investors in the coming years, and it won’t be pretty.”
On Sunday, Alibaba fired back. Hard.
“Jonathan Laing’s story contains factual inaccuracies and selective use of information, and the conclusions he draws are misleading,” wrote Jim Wilkinson, Alibaba’s SVP of international corporate affairs. “The facts … provide a clear and compelling case for the lack of integrity, professionalism and fairness of Mr. Laing’s reporting.”
The respected financial periodical raised all sorts of red flags about corporate governance, conflicts of interest, counterfeit goods, and various other questionable business practices.
But perhaps the most damming parts were the implications that Alibaba was just making up numbers. Here’s Barron’s Jonathan Laing:
“Consider this: Alibaba claims to have 367 million users — about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?”
… That $US1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $US2,260.It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining …
The suggestion here seems to be fraud.
Alibaba addressed these issues directly, explaining in detail why Laing’s analysis factored in inaccurate exchange rates, made “flawed” comparisons, and even used data that was “clearly incorrect.” While the company’s numbers may appear impressive, they argued that the numbers were “not surprising.
As to some of the other points Laing made in his 3000-word feature, Alibaba hit back aggressively saying stuff like:
- “The rationale given by Mr. Laing is based on his incorrect calculation…”
- “Mr. Laing’s comments on Alibaba’s strategy shows his lack of understanding of e-commerce and Alibaba’s strengths and strategies…”
- “Mr. Laing misses the fundamental point that logistics is a critical component of online commerce…”
- “Mr. Laing cites a research study that relies on a survey of a limited number of respondents and for which none of the geographic base, methodology or the party commissioning the research has been publicly disclosed to our knowledge.”
Alibaba doesn’t think Laing’s piece is just inaccurate or unfair. Alibaba thinks Laing has no legs to stand on.
On Sept. 12, Barron’s magazine published a story with the headline “Alibaba: Why It Could Fall 50% Further.” Alibaba Group objected to the story in a letter to the magazine’s editor, stating that the story “contains factual inaccuracies and selective use of information.” Here is Alibaba’s letter in its entirety:
September 13, 2015
Mr. Edwin Finn
Editor and President
1211 Avenue of the Americas
New York, NY10036
Dear Mr. Finn:
Your September 12 article with the sensational headline “Alibaba: Why It Could Fall 50% Further” lacks three key ingredients — integrity, professionalism and fair play. We take strong issue with the reporting about the state of our company, and we feel compelled to set the record straight. Jonathan Laing’s story contains factual inaccuracies and selective use of information, and the conclusions he draws are misleading. Set forth below are some specific examples of these errors.
1. Mr. Laing suggests Alibaba’s stock price could fall 50% from the current level, which is also the headline of the article. The rationale given by Mr. Laing is based on his incorrect calculation that our consensus forward PE multiple is 25x consensus earnings “for the year ahead,” compared with eBay’s 15x.
– Mr. Laing refers to our PE multiple “for the year ahead” which should be 2016 but he cites the 25x PE multiple on analysts’ 2015 consensus earnings. That is misleading. If the PE multiple referred to is “for the year ahead” (i.e., 2016), then Alibaba’s PE multiple on analysts’ consensus for 2016 earnings would be approximately 20x.
– Comparing Alibaba’s PE multiple to eBay’s PE multiple is flawed because eBay does not operate in China. A more relevant comparison would be with our large-cap Chinese Internet peers. The PE multiples of Tencent and Baidu on consensus 2015 earnings are 31x and 24x, respectively.
– Mr. Laing cites his reading of history on our Hong Kong publicly traded B2B subsidiary from 2007 to 2012 as a “historical guide” to BABA stock price, but he ignores several important facts: (1) most businesses suffered during the global financial crisis of 2008; (2) from calendar 2007 to 2011, our B2B subsidiary grew revenues from RMB 2,163 million to RMB 6,417 million, and adjusted net profits from RMB 619 million to RMB 1,713 million, in each case representing a nearly three-fold increase; and (3) during the period from the B2B listing in November 2007 at HK$13.50 to when it was privatised at the same price in June 2012, the Hang Seng Index of Hong Kong’s largest bell-weather stocks was down by 34%.
2. Mr. Laing suggests that competitors are “eating into the market shares of” Alibaba’s position as the leader in e-commerce in China. The sole proof Mr. Laing provided for this assertion was “a study by a Financial Times research service” of online shoppers.
– Mr. Laing cites a research study that relies on a survey of a limited number of respondents and for which none of the geographic base, methodology or the party commissioning the research has been publicly disclosed to our knowledge.
– Our Taobao and Tmall marketplaces combined have an unrivalled leadership position in e-commerce in China. In the Tmall B2C segment, our market share according to iResearch is more than twice the share of the next closest player.
3. Mr. Laing attempts to question Alibaba’s reported financials and operating metrics by pointing to the following: (1) Alibaba’s reported number of active buyers compared against statistics published by the CNNIC; (2) “average annual spend per user,” which appears to be a metric derived from GMV and active buyers reported by Alibaba, suggesting the amount of online spend of Alibaba’s shoppers is more than the average US online shopper; and (3) “average user spend per user” on Alibaba’s marketplaces constitutes a significant percentage of per capita retail spending of Chinese citizens.
– First, Alibaba stands by our reported financials and operating metrics.
– Alibaba reported 367 million active buyers for the twelve months ended June 30, 2015, which reflects the number of user accounts that placed an order on our China retail marketplaces during the 12-month period. Mr. Laing appears to compare this to the size of last year’s Chinese online shopping population as reported by the CNNIC. However, according to the latest CNNIC report in July 2015, China’s online shopping population as of June 30, 2015 was 374 million. Given Alibaba’s leading market position, it is not surprising that the number of active buyers on Alibaba’s online marketplaces approaches the 374 million online shoppers most recently reported by the CNNIC.
– The “average annual spend per user”, derived from dividing Alibaba’s 12-month GMV by 12-month active buyers for the past seven quarters (the period referred to by Mr. Laing) was actually RMB6,759 on average, or US$1,056 at the 6.4 RMB/USD exchange rate, as opposed to the US$1,215 calculated by Mr. Laing.
– More importantly, the average annual spend per U.S. online shopper reported by Mr. Laing is clearly incorrect. According to the U.S. Census Bureau, total retail e-commerce sales in the United States amounted to US$298 billion in 2014. Based on our estimate of 179 million online shoppers in the United States in 2014 using Forrester Research projections, the average annual online spend per U.S. online shopper in that year would be US$1,665. This number is 73% higher than the annual average online spend per U.S. shopper claimed by Mr. Laing. The miscalculation of Alibaba’s “average annual spend per user” and the gross under-reporting of average annual spend of U.S. shoppers by Mr. Laing entirely undermine his conclusions.
– The comparison of the average annual online spend of an Alibaba shopper with the average retail spend of Chinese citizens is inappropriate. Shoppers that come to Alibaba’s platforms are early adopters of technology and tend to be urban and more affluent. It is flawed to compare Alibaba’s number to a number derived from simply dividing the size of the Chinese retail economy by 1.3 billion people including 600 million people in the rural villages.
4. Mr. Laing’s comments on Alibaba’s strategy shows his lack of understanding of e-commerce and Alibaba’s strengths and strategies as we clearly and transparently communicated during our IPO as well as in our annual report and our quarterly earnings updates. He wrote “many of Alibaba’s investments beyond online shopping — in areas like media, entertainment, logistics, and cloud computing — seem aimed more at beguiling investors than improving earnings.”
– Mr. Laing misses the fundamental point that logistics is a critical component of online commerce. Alibaba is committed to the overall customer experience so we will continue to invest in improving the delivery experience. Most importantly, rather than owning the hard assets and taking on large headcount increases ourselves, our primary logistics strategy is to partner with other companies to leverage their expertise and scale, such as the 14 major courier service partners we work with, Haier Electronics’ logistics division RRS for large appliances, and our recently announced strategic alliance in logistics and omni-channel retail with Suning, one of China’s largest electronics retail chains with 1,600 stores.
– Alibaba is in the cloud computing business because we have proprietary technology and scale advantages that grew out of our core business. Mr. Laing doesn’t seem to acknowledge that in the United States, Amazon has a large and growing cloud computing business.
– Media and entertainment is a new business for Alibaba. We are in the early stages of development because China’s media and entertainment market has historically been much smaller than the United States. We believe in the future growth potential of media and entertainment in China and have clearly communicated that we would invest and assume losses in the early cycle of this business.
5. Mr. Laing claims that “Shareholders of Alibaba Group don’t actually own the businesses that make up the company…,” referring to “virtual ownership” of Chinese companies through the “variable interest entity”, or VIE, structure.
– These statements are misleading. Alibaba shareholders own shares in a holding company which holds 100% equity stakes in its Chinese operating subsidiaries. As of the end of fiscal year 2015, Alibaba generated 86% of revenues through, and 95% of the company’s assets were held in, these wholly-owned subsidiaries, not in the VIEs. Through ownership in the shares of Alibaba, our shareholders own these assets and have direct access to the cash flows generated from the operations of the wholly-owned subsidiaries through dividends.
– Chinese regulations limiting foreign ownership require certain assets, such as an Internet Content Provider Licence, to be held in entities under the legal ownership of Chinese citizens. These entities are called “variable interest entities,” or VIEs, because contractual arrangements are in place to ensure that Alibaba Group receives the economic benefits of such VIEs, and the results of the VIEs’ operations are consolidated into the financial statements of Alibaba Group. VIE structures are commonly used by overseas listed Chinese companies, including our large-cap peers, Baidu and Tencent.
6. Mr. Laing attacks the corporate governance of Alibaba by impugning the personal integrity of Jack Ma on the issues of (1) Alibaba’s partnership model in nominating a majority of its board of directors; (2) Alipay divestiture in 2011 (four years prior to the Alibaba IPO); and (3) related party transactions. Again, these attacks are not supported by the facts.
– The facts relating to the director nomination rights of the Alibaba Partnership, the reason and history of the Alipay divestiture and related party transactions are fully disclosed in Alibaba’s IPO prospectus, and we stand by these facts.
– Jack Ma has publicly stated, as disclosed in the Alibaba IPO prospectus, that he will reduce his shareholding percentage in the holding company of Alipay to not exceed his shareholding in Alibaba Group immediately prior to the Alibaba IPO, and this reduction will be effected in a manner by which neither Jack Ma nor any of his affiliates would receive any economic benefit.
– Jack Ma will not personally benefit from the related party transactions referred to in Mr. Laing’s article, including his 40% interest in the general partner of Yunfeng Capital (where he has committed to donate any distributions to the Alibaba charitable foundation) and the transaction with Wasu Media Holding.
7. Mr. Laing’s reference to “Alibaba’s alleged failure to crack down on the sale of product knockoffs on its sites” ignores the industry-leading efforts Alibaba has undertaken to make anti-counterfeit its number one commitment to online consumers and intellectual property owners.
– The sale of knock-off goods by third-party merchants is a risk that all operators of third-party transaction platforms globally face, including eBay and Amazon. Given the size of Alibaba’s marketplaces, with millions of sellers and hundreds of millions of product listings, it is not surprising that counterfeiting concerns (similar to those that have been raised concerning other third-party platform operators) have been made about Alibaba.
– Alibaba has made excellent progress in intellectual property rights protection, including our strict take-down procedures, setting up legal precedents with law enforcement, and establishing cooperative relationships with more than 1,000 major brand owners and several industry associations to assist in our efforts.
– In 2013 and 2014, Alibaba spent over RMB 1 billion (approximately US$160 million) fighting counterfeiting and enhancing consumer protection. In 2014, Alibaba worked with Chinese authorities in over 1,000 counterfeiting cases. As a result of this collaboration, 400 suspects from 18 counterfeiting rings were arrested, while 200 brick and mortar stores, factories and warehouses involved in the production and sale of counterfeits were closed.
– Alibaba continues to cooperate with relevant government agencies, such as China’s product safety regulator, State Administration for Industry and Commerce (SAIC), to enhance the effectiveness of our procedures and to identify and combat counterfeiting at its source in order to safeguard the interests of consumers.
The facts above provide a clear and compelling case for the lack of integrity, professionalism and fairness of Mr. Laing’s reporting. We urge you to issue a correction and we stand ready to discuss this with you at any time.
Senior Vice President, International Corporate Affairs