Nine bubbles in Alibaba’s financial report

  Alibaba (09988.HK) was established in the British Cayman Islands in June 1999. It was listed on the New York Stock Exchange (NYSE) on September 19, 2014, and raised RMB 139.9 billion (US$21.8 billion). It was listed in Hong Kong for the second time on December 6, 2019, raising 83.7 billion yuan (101.2 billion Hong Kong dollars). The current market value is HK$3.7 trillion.
  The company is known as the most outstanding Internet company in China. Recently, the author found many bubbles and puzzles in Ali’s financial report under the scrutiny.
Internet high-tech: carving beams and embroidering pillars, painting buildings and flying dogs

  Alibaba’s business model has troubled me for a long time, and I have never understood how it makes money? Some people say it is an e-commerce company, some say it is an Internet high-tech company, but no one has ever said it is an advertising company. Recently I took a closer look at Ali’s financial report and discovered the mystery. In essence, Alibaba is an advertising company. The reason why few people associate it with an advertising company is because Ali deliberately concealed its commercial nature, carving out beams and embroidering pillars. Define advertising and commission income as retail and wholesale income, and then classify retail and wholesale income as core business income. Layers of wrapping make people lost under its whitewash. After reshaping Alibaba’s financial report, we found that most of its core business income is advertising and commission income. According to the 2021 financial report, of its sales revenue of 717.3 billion yuan, revenue from advertising and commissions is not less than 369.2 billion yuan, accounting for 51.48% of total revenue. So it is not an exaggeration to say that it is an advertising company.
  Alibaba’s advertising revenue includes not only P4P marketing services, but also information flow push services, display marketing services, and revenue from cooperation with third-party online media. The Taobaoke program is Ali’s most distinctive advertising artifact, providing promotion services through cooperation with shopping guide platforms, small and medium-sized websites, mobile apps, individuals and other third parties (collectively referred to as “Taobaoke”). Ali’s advertising and promotion capabilities may be far beyond our imagination.
  Another source of income is customer transaction commission income.
  Transaction commissions are commissions paid by merchants to Ali as a percentage of the transaction amount generated in trading markets such as Tmall, in addition to the purchase of advertising services. This part of the commission rate varies depending on the seller’s different product categories, usually between 0.3% and 5.0%. Ali’s annual report refers to the combination of the above two incomes as core business income, and also distinguishes retail, wholesale, China, and cross-border, instead of directly defining it as advertising and commission income. As a result, it misleads users to understand Ali’s advertising and commission income as E-commerce transaction income.
Gross method (GMV) and net method, mixed with fish eyes

  In its 2021 financial report, Alibaba claimed to be “the world’s largest retail business entity”, based on the fact that Alibaba’s platform generated 8.12 trillion yuan (about 1.24 trillion US dollars) in gross transactions (GMV). From the perspective of total transaction volume, it is indeed the world’s largest e-commerce platform, including Taobao, Tmall, 1688, Lazada, Alibaba, etc. This makes Amazon, the world’s number one e-commerce originator, dare not claim to be the world’s largest e-commerce platform. First”.
  Amazon’s fiscal year 2020 sales revenue was US$386.1 billion, and the total platform turnover (GMV) was US$482 billion. In terms of sales revenue, it is far above Ali’s 717.3 billion yuan and is the world’s largest e-commerce company, but in terms of total transaction volume, it is obviously far behind Ali.
  However, the total volume of platform transactions and sales revenue are completely different things. Amazon is very careful and careful to distinguish the differences between the two, for fear of confusing the boundaries of the two and triggering antitrust regulations. But Ali is just the opposite. In order to exaggerate his image and performance, he always blurs the boundary between the two intentionally or unintentionally, misleading users to understand the total transaction volume as Ali’s sales. The service and commission income collected by third-party merchants are regarded as sales income under the net method. Regarding the total transaction volume of third-party merchants on Ali’s platform as sales revenue under the total amount method, it intends to exaggerate Ali’s performance.
  In contrast, Amazon and’s financial report presentation methods are completely different. In 2020, Amazon’s online self-operated revenue was US$197.3 billion, accounting for 51.12% of total revenue, and offline physical store revenue was US$16.2 billion, accounting for 4.2%; third-party seller commissions and advertising services revenue, logistics service revenue, etc. totaled US$80.5 billion , Accounting for 20.84%; cloud service revenue of 45.4 billion US dollars, accounting for 12%.’s online self-operated revenue in 2020 is 651.9 billion yuan, accounting for 87% of total revenue; platform and advertising services revenue is 53.5 billion yuan, accounting for 7.17% of total revenue, and logistics and other services revenue is 40.5 billion yuan, accounting for 5.42%. From this we can see, who is seeking truth from facts? Who is confusing and confusing? It’s clear at a glance.
Mergers and acquisitions promote sales, increase revenue but not profit

  There is no doubt that Alibaba is a fast-growing Internet company. In the past 10 years, its sales revenue has increased from 20 billion yuan in 2012 to 717.3 billion yuan in 2021, with a compound growth rate of 48.83%. The main part is derived from the endogenous growth of Ali, but there is no lack of M&A revenue.
  In order to expand its ecosystem, Alibaba has successively acquired a series of companies with low or negative profit margins in the past three years, such as Lazada, Cainiao,, Koala, and Gaoxin Retail. Although the profits of these companies are not high, or even losses, they have accelerated the growth of Ali’s consolidated revenue. Of course, the negative impact is that the company’s gross profit margin has been lowered, showing the phenomenon of increasing revenue but not profit.
  In 2021, Ali’s sales gross profit margin fell to 41.28%, which was more than 33 percentage points lower than the 74.54% that was the highest in the year when it was listed in 2014, an alarming drop. Moreover, there seems to be room for further decline. The continued decline in sales margins means that the competitiveness of products or services has declined. However, Ali believes that this decline will not reduce the value of the company. “Acquisitions of loss-making companies will not lower the value of the company, because these acquisitions have brought us clear long-term strategic value.” Of course, this is only the view of Ali management, not the view of market investors.
M&A premiums have spawned asset bubbles

  The inevitable result of mergers and acquisitions is a sharp increase in goodwill. The more aggressive the M&A policy, the faster the goodwill will grow. According to the 2021 financial report, the balance of Ali’s goodwill assets is 292.7 billion yuan, accounting for 17.32% of the total assets. Although the proportion has declined, the balance has continued to grow. The reason for the decline in the proportion is the excessive growth of the total asset balance, rather than the decrease in goodwill assets.
  The consequence of the increase in reputation and asset balance is that on the one hand, it will accumulate asset bubbles; on the other hand, it will reduce the efficiency of asset utilization. Relatively speaking, Tencent’s balance of goodwill assets in 2020 is only 108.6 billion yuan, accounting for 8.15% of total assets; Jingdong’s goodwill is only 10.9 billion yuan, accounting for 2.58% of total assets. It can be seen that Ali’s M&A strategy is more radical than the above two, and the accumulated asset bubble is also larger.

  In the past three years, the largest source of Ali’s pre-tax profits, in addition to operating profits, has been net investment income.
Bodhidharma Academy, Arhat Hall, more aimed at attracting attention

  In October 2017, Alibaba announced the establishment of the world’s top science and technology research and development institution-Bodhidharma Academy. Although the advancement of Bodhidharma Academy remains to be seen, it has taken the lead in public opinion and occupied various commanding heights. It also fully demonstrated Ali’s strong brand marketing capabilities and public relations capabilities.
  On June 26, 2018, Ali announced the establishment of an open research institution jointly initiated by the world’s top scholars in the field of social sciences-Luohantang. The first batch of members of the academic committee of Luohantang are mainly economists, including six Nobel Prize winners in economics, which is a strong lineup.
  Let’s not ask if there are any serious “arhats” in the Bodhidharma Academy and Arhat Hall, but only by looking at its R&D budget, we know that its flicker is greater. Ma Yun originally announced that Dharma Academy would invest 100 billion yuan in three years. However, looking at Ali’s total R&D investment in the past three years, it was only 103.3 billion yuan. Is this money invested in Dharma Academy? It is said that so far there are only 88 registered R&D personnel in the “Dharma Academy”. I don’t know how these 88 people are wasting the 100 billion yuan in R&D funds? Maybe someone will believe it, but I don’t believe it.
  Alibaba invested 57.2 billion yuan in R&D in 2021, accounting for 19.33% of gross sales, which was basically the same as Tencent. It is much lower than Amazon ($42.7 billion, 27.98%), Google ($27.6 billion, 28.19%) and Facebook ($18.5 billion, 26.63%). With such a big gap in R&D investment between Chinese and American companies, how can people believe that Alibaba has the ability to build the world’s top Dharma Academy?
Counting the money for selling games while saying not to make games

  In 2008, Jack Ma publicly stated: “Starve to death and don’t make games.” In 2010, he said publicly again: “We don’t invest a penny in games.” Ma Yun said: “Almost all Internet companies have their own online games. We are The only Internet company that does not develop online games.” While talking about not making games, he counted the money for selling games. In 2013, Ali announced its entry into the mobile game field; in January 2014, mobile Taobao launched the game center; in June of the same year, the game distribution platform was established; in 2016, Ali’s UC Jiuyou officially changed its name to Ali Games; in March 2017, Announced a full entry into the game publishing field and established a game business group at the same time. In February 2019, the Ali Mutual Entertainment Division was established. Moreover, in addition to this, Taobao has always been China’s largest game virtual goods trading platform.
  Ali game revenue was originally included in the “Innovative Business and Others”. On April 1, 2020, the self-developed online game business has crossed the incubation stage, so the revenue from this business has been reclassified to the “Digital Media and Entertainment” segment .
  In addition, Alibaba has also invested in 12 domestic and foreign game companies. Including Heartbeat Game, EJOY, KTplay, Celadon, Kabam, Aiming, Ouya, Giant Network, Area28, QooApp, Same Table, Challengermode, etc. Jack Ma vowed to not make games, but he secretly invested so many games in private. It turned out that he just wanted to tell others not to make games. Is this kind of external combination and internal difference counted as a kind of bubble? Maybe more serious than the bubble.
Cross-border equity investment is like Yanchao on the screen

  The balance of Alibaba’s securities and equity investment in 2021 is 447.2 billion yuan, accounting for 26.46% of total assets. According to IT Orange statistics, the investment covers more than 451 items, spanning 21 industries. Among them, the industry with the most investment projects is culture, entertainment and media, with 69 items in total; e-commerce with 61 items in the second place; and enterprise services with 60 items in the third place. Of the invested projects, 22 have closed or ceased operations. If such projects are understood as investment failures, the proportion of failures is significantly higher than that of Tencent.
  Equity investment risks mainly have two aspects: one is the premium paid when investing in equity, which will exist in Ali’s long-term equity investment balance in the form of a bubble; the other risk is that the investment of the invested company fails to cause investment impairment, thereby Increase the high degree of uncertainty in the company’s future profitability. In addition, equity investment may also touch anti-monopoly regulations. Therefore, US Internet companies rarely invest in foreign equity, Amazon does not, and Google has only US$20 billion in long-term equity investment in fiscal year 2020. Facebook has less than US$6 billion. Facebook acquired Instagram and WhatsApp in 2012 and 2014. , Has still been sued for monopoly. Internet companies are keen on equity investment, which may be a unique landscape in China’s specific business environment. The “formation of cliques” in the form of equity investment and the so-called “ecological circle construction” may sooner or later trigger supervision, which will lead to unpredictable policy risks and legal risks. It’s like a finches nestling on the curtain, with huge risks.
From e-commerce to “new retail”, more hair and less meat

  Alibaba was originally a pure Internet company, and because of its embrace of the Internet, it developed the world’s largest online business platform. Now with the support of the capital market and the profits of online platforms, Ali took the opportunity of “new retail” to start an offline business. On the one hand, it is committed to building a brand new chain experience store; on the other hand, it uses the power of capital to transform the traditional old chain model and get a share of it. Realize the digital transformation of chain hypermarkets through the acquisition of Gaoxin Retail. Through the investment in the red star Macalline chain and Beijing Juran Home, the digital transformation of the partners’ traditional stores has been realized. By duplicating the new retail experience store Tmall Supermarket and Hema Fresh Food, the rapid growth of new retail revenue has been achieved. In the past three years, new retail sales revenues were 40 billion yuan, 86.3 billion yuan, and 167.6 billion yuan, and the proportion of sales revenue increased from 11% and 17% to 23% in fiscal year 2021, and the compound growth rate exceeded 105. %.
  In addition to its strong chain replication capabilities, the rapid growth of new retail sales is also an important reason for its rapid growth. The so-called total amount method was originally just a customary measurement method in the offline retail industry, that is, a method of measuring corporate income based on the total sales of goods. Only because Ali’s original sales revenue is part of its advertising services and commission income, there is a distinction between the gross method and the net method. Combining the total offline retail products with the net online income (advertising and commission income) does not seem to be the same. Because the growth of offline income has changed the Internet attributes of Ali’s income, the greater the proportion of offline income, the more the gold content of total income will be spread, thus forming a bubble of income growth.
Self-entertainment income

  Alibaba’s 2021 fiscal year net profit is 150.3 billion yuan, income tax is 29.3 billion yuan, and the actual income tax rate is 16.97%. The pre-tax profit was 179.6 billion yuan, of which the main business profit contributed 89.7 billion yuan, accounting for 51.97% of the pre-tax profit. Interest income and net investment income contributed 72.8 billion yuan, accounting for 42.18% of pre-tax profits. In other words, nearly half of the pre-tax profit is not the current main business profit contribution, but derived from equity investment income or other non-recurring gains and losses.
  In the past three years, the largest source of Ali’s pre-tax profits, in addition to operating profits, has been net investment income. The net investment income in fiscal year 2019, fiscal year 2020 and fiscal year 2021 will be 44.1 billion yuan, 73 billion yuan and 72.8 billion yuan, respectively. The bulk of the net investment income comes from the premium obtained from the revaluation of the fair value of long-term equity investments.
  In fiscal year 2019, Alibaba gained control of Koubei and Alibaba Pictures, and then revalued the previously held equity of Koubei and Alibaba Pictures, confirming a revaluation gain of RMB 27.8 billion. In fiscal 2020, after acquiring 33% shares of Ant Group and injecting AliExpress’s Russian business into a joint venture established with a Russian partner, the business terminated the merger and confirmed a one-time gain of RMB 71.6 billion and RMB 10.3 billion. . In fiscal 2021, due to the merger of Sun Art Retail, the revaluation of the previously held equity confirmed RMB 6.4 billion in gains. It can be seen that Ali’s left-handed-right-handed equity appreciation game is equivalent to self-entertainment income, and has no practical significance except for entertaining the eyes.
  Disclaimer: This article only represents the author’s personal views. Liu Xueying also made important contributions to this article