Alibaba under probe by US SEC over accounting practices as its shares tank almost 7 per cent

Chinese e-commerce titan says it is cooperating with US regulators

PUBLISHED : Thursday, 26 May, 2016, 7:32am
UPDATED : Wednesday, 01 June, 2016, 9:34am

Chinese e-commerce giant Alibaba wowed investors when it went public in the US in September 2014, and its profits have bucked Wall Street expectations amid the Chinese economy’s slowdown. Yet its unorthodox business structure has raised eyebrows, it’s been suspended from an anti-counterfeiting group, and now US regulators are investigating its accounting practices.

Alibaba disclosed in a regulatory filing that the US Securities and Exchange Commission has requested documents and information related to the way it adds together earnings from its various divisions, and how it reports transactions with other companies it has a stake in, among other things.

“The financial disclosure we are providing to investors relating to Cainiao Network in our 20-F on pages 122-123 (revenues, net loss and balance sheet items) is exactly the kind of robust and transparent information that will address the underlying issues in SEC’s inquiry,” a spokesman for Alibaba told the South China Morning Post in Shandong when asked about the iniquity. The 20-F is the firm’s annual report.

“I think it’s a moment of truth for the company,” said Anant Sundaram, a finance professor at Tuck School of Business at Dartmouth College. “If I’m buying into that stock, what am I buying into?”

US-traded shares in Alibaba tumbled in heavy trading Wednesday after news surfaced of the SEC probe. Alibaba shares fell 6.8 per cent or US$5.53 to end Wednesday at US$75.59, the lowest close for the company since the middle of March. More losses were posted in after-hours trading in New York. Alibaba stock is down 20 per cent in the past year.

Volume traded in Alibaba hit 49.59 million shares, sharply higher compared to the 10-day average volume of 10.5 million shares.

The company said it is cooperating with the investigation. SEC spokesman Kevin Callahan declined to comment Wednesday.

Alibaba is the world’s biggest e-commerce platform, with more than 420 million people buying $485 billion worth of goods last year on its sites. Its digital platforms, including Taobao and Tmall, make up 80 per cent of Chinese e-commerce.

Disclosure of the SEC probe comes less than two weeks after the company’s membership in the International Anti-Counterfeiting Coalition was suspended.

“I think it’s a moment of truth for the company. If I’m buying into that stock, what am I buying into?”
Anant Sundaram, finance professor at Tuck School of Business at Dartmouth College

Some US retailers that are members of the group, which lobbies US officials and testifies before Congress, view Alibaba as a huge marketplace for fakes. Michael Kors, Gucci America and Tiffany quit the group in protest after Alibaba was made a member in April.

Alibaba Group Holding Ltd. went public in the US in September 2014. Investors, seeking to tap into the rapidly growing Chinese middle class, scrambled to buy shares. The offering raised $25 billion, making it the largest in the history of the New York Stock Exchange.

The SEC probe raises the possibility that the stellar results the company has reported may have been too good to be true, experts say.

A question is whether Alibaba or its suppliers may have falsified orders to pad sales volumes, suggests Jay Ritter, a finance professor at the University of Florida. Cancelled orders may not have been recorded until Alibaba’s next quarter, to inflate the immediate sales figures, for example.

That could ultimately mislead investors about the level of Alibaba’s sales and how fast they’re growing, Ritter said.

“It’s mainly a question about the magnitude of this,” he said. “There’s a whole spectrum of possibilities.”

S&P Global Market Intelligence quickly downgraded its rating on Alibaba’s stock to “Buy” from “Strong Buy.”

“We have related concerns about what could arise and be determined by the SEC,” equity analyst Scott Kessler wrote in a research note. However, he added, S&P believes the company’s stock price already reflects those concerns.

Led by self-made billionaire and founder Jack Ma, Alibaba has put a huge footprint on the Chinese economy and made unorthodox moves, such as spinning off its payment service into a company Ma controlled without telling Yahoo, a major investor in Alibaba.

To get around Chinese government restrictions on foreign investment in Internet companies, Alibaba deploys an unusual structure that gives foreign investors a stake in profits but keeps management control in China. That arrangement magnifies risks for investors. Chinese executives can confiscate corporate assets without compensating shareholders, and investors might have no grounds to sue. And Ma exercises veto authority over any decision.

Alibaba’s e-commerce platforms cater to both Chinese and global consumers. At its heart is Taobao, a Chinese consumer-to-consumer website similar to eBay. Tmall offers merchants official storefronts to consumers in China.

As growth has slowed in China with a weakening economy, Alibaba has reached abroad to spur sales, both from US companies selling goods on its platforms in China and Chinese sellers catering to international customers.

US investors, worried about the state of the Chinese economy, have been wary of any possible signs of weakness in Alibaba’s performance. The company in January reported better-than-expected results for its third quarter, as mobile shopping continued to grow and Chinese customers snapped up goods during the holidays.

Alibaba is the owner of the South China Morning Post.