I’ve written before about the challenges facing investors in Chinese businesses. Alibaba Group Holding Ltd (NYSE:BABA) has so many red flags that I simply refuse to get involved with BABA stock. Over a year ago, I cautioned investors:
“China is a difficult beast to understand, especially for Americans who have never done business over there. Crosscurrents regarding how the government operates are simply unknown quantities, and they factor into and affect how business is done. The Chinese government wakes up each morning with one focus: how to feed, clothe and shelter two billion people.”
Anything that gets in the way of that goal will be summarily removed. In short, this means that without any warning, China could suddenly turn on Alibaba (and therefore on BABA stock).
China is too opaque for retail investors, and so are Chinese companies. The filings are challenging to read. We already know the SEC has been investigating BABA accounting practices.
We’ve learned that state-owned Unicom Group engaged in “unprecedented degree of falsified revenue,” according to Bloomberg. Chinese GDP data has been falsified according to another report.
In reading over the rather complicated 20-F filings, there are a few things that stick out as being rather odd about BABA. Since people call Alibaba the Amazon.com Inc. (NASDAQ:AMZN) of China, maybe there are some comparisons to be made. Except those comparisons seem more like contrasts.
BABA claims it ships 12 million packages per day, while AMZN handles 3 million. That number seems very odd to me. Do you have any idea how complex fulfillment and distribution logistics are? I’m supposed to believe that Amazon, which likely has the most cutting-edge logistics in the world as far as F&D, ships only 25% of what BABA does on a given day?
This is what a Chinese fulfillment center looks like. The photo doesn’t make it clear where this is, but all that matters is what it looks like. This is what Amazon’s looks like.
See what I mean?
That leads me to another suspicious metric. Amazon ships about 1.1 billion packages per year, or about 6% of the total U.S. shipping volume. Therefore, we are to assume that BABA ships about between 4.4 billion, or about 15% of China’s shipping volume. We’re supposed to believe that BABA alone accounts for one out of every six packages shipped in China?
Can anyone explain why BABA stock reports show annual active buyers increase at about a 7% annual rate, while actual revenue growth is increasing at a 42% annual rate? Are people suddenly buying six times more than the previous year?
Bottom Line on BABA Stock
There are just too many questions here, and the history of corruption in Chinese businesses and reporting doesn’t help matters any. The Chinese government dictates that certain businesses report certain numbers. That’s because they want to show the world that capitalism is doing great in China, and China is growing, and to show the people that everything is going gangbusters.
Meanwhile, businesses like movie theaters don’t come close to reaching the required numbers. So they inflate them artificially and skim some of the top. That’s just how things get done.
That’s why I will never trust Chinese stocks, and that includes the outrageous BABA stock price.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
