Alibaba upcoming IPO still on track despite film unit's accounting issues

The suspension of Hong Kong-listed Alibaba Pictures from trading yesterday after management discovered possible financial records breaches will have no impact on its parent's plans for a heavyweight public offering in the United States, sources said.

But Chan Kar-lok, director of asset manager Essence International, said management should straighten out financial accounting and give a clear explanation to the public as soon as possible, warning that "otherwise it may hit the confidence of investors".

He doubted it would have any serious impact though, saying "the problem is at a subsidiary, not Alibaba Group".

"Alibaba has bought so many companies this year and there might be some problems technically, which they should solve as quick as quick can be," he said.

Alibaba has embarked on a series of acquisitions this year as the mainland e-commerce giant heads towards what could be the biggest ever initial public offering in the US.

It has spent about 40 billion yuan (HK$50.2 billion) on mergers and acquisitions so far this year, either through Alibaba Group or through other entities controlled by founder and chairman Jack Ma Yun.

It acquired a 60 per cent stake in film and television production firm ChinaVision, later renamed Alibaba Pictures, for HK$6.24 billion in March.

Alibaba Pictures announced yesterday that its newly installed management had found possible breaches in financial accounts dating before the completion of Alibaba Group's investment in the company.

A new chief executive was appointed last week.

Steve Vickers, chief executive of Steve Vickers and Associates, a specialist in IPO due diligence, said that in general terms, accounting issues could arise at any time in the offer process.

"The fact that a new CEO has arrived may or may not be relevant but the handover may have brought some outstanding issues into relief," he said. "Often as an IPO date gets nearer, key issues do surface."

Daniel Roules, a Shanghai-based partner at Squire Patton Boggs, a global law firm, said that making the public aware of the accounting irregularities was "the best you can do".

"They found the problem within a reasonable period of time - completion of the deal was no more than two months ago - and they announced it and apparently will probe into it and ensure it does not happen again," he said.

The way Alibaba was coping with such financial irregularities would be more acceptable to the American authorities and the investing public in the US than the delays and denials sometimes resorted to in the past by mainland firms listed there when they were found to be non-compliant, he said.

"Alibaba suggests this does not indicate an Alibaba problem," Roules said. "They found the problem and responded promptly and lawfully. I expect they will want to explore the possibility of claims against the seller of ChinaVision."

An Alibaba Group spokesman said the company was fully supporting Alibaba Pictures as it thoroughly reviewed and rectified the possible financial non-compliance found.

"The new management team has a firm commitment to transparency, good corporate governance and investor protection, and the actions they have taken are consistent with this commitment," the spokesman said.