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Alibaba Faces U.S. Accounting Inquiry Alibaba Faces U.S. Accounting Inquiry
(about 3 hours later)
HONG KONG — The Alibaba Group, the Chinese e-commerce giant, said it was under investigation by United States securities regulators over whether its accounting practices had violated federal securities laws. HONG KONG — The Alibaba Group, the e-commerce giant, said it was under investigation by United States securities regulators over its accounting practices, in a potential setback for a Chinese company long seen as a symbol of that country’s growing technological might.
Alibaba said in its annual filing with the Securities and Exchange Commission on Wednesday that it had provided the agency with documents and information about its policies for consolidating affiliated companies and its practices for related-party transactions. The investigation — disclosed on Wednesday in a stock filing — appears to focus on how Alibaba deals with a web of companies in which it owns stakes or has some say in the operations. The company said the Securities and Exchange Commission was investigating how Alibaba accounts for affiliated companies, including a logistics venture, and how it treats related-party transactions.
It also said it had provided information about how it reports data about Singles Day, China’s e-commerce holiday in November, for which Alibaba widely trumpets the total amount of goods its vendors sell on its sites. It also puts under scrutiny Alibaba’s handling of Singles Day, a one-day shopping event in China that the company says gave it the world record for most online sales volume in a day. Alibaba said it had provided the commission with information about how it reported data from that event.
Alibaba added that it was voluntarily cooperating with the commission and that the investigation was not an indication that it had violated any law. Alibaba said that it was voluntarily cooperating with the commission, and that the investigation was not an indication it had violated any law.
It is unclear whether the investigation will have an impact on Alibaba. Asked for comment, a spokeswoman for the company reiterated its statement to the commission. Still, the disclosure risks tarnishing a rare Chinese company that has won global fame for its business acumen. Two years ago, Alibaba raised $25 billion in the world’s largest initial public offering. Its executive chairman, Jack Ma, rubs elbows with global technology and political leaders. Last week, he attended a private lunch with President Obama at the White House.
Alibaba’s share price has stabilized in recent months. Its stock soared after its initial public offering in New York, only to fall below the price of the first day of trading over investor concerns about missed earnings targets, China’s slowing economic growth and Alibaba’s investments. Last year, the company named a new chief executive. But as Mr. Ma’s profile has risen, Alibaba has grappled with challenges, including allegations from the owners of famous brands that it takes a lax stance on counterfeit goods on its sales platforms — a charge it denies.
Its shares have also seesawed over investor concerns about China’s slowing economic growth and Alibaba’s enormous shopping spree to cater to the growing legions of Chinese consumers who order everything from taxis to in-home massages on their smartphones. The company has spent billions of dollars on services as varied as logistics, food delivery and film production.
It is unclear whether the investigation will have an impact on Alibaba. Asked for comment, an Alibaba spokeswoman reiterated the company’s statement to the commission.
Alibaba’s share price has stabilized in recent months.
In the most recent quarter, the company had strong revenue growth despite the broader worries about China’s slowdown.In the most recent quarter, the company had strong revenue growth despite the broader worries about China’s slowdown.
The focus of the commission’s investigation appears to be similar to concerns voiced last year by some short-sellers and by Pacific Square Research, a research firm. In particular, Pacific Square had raised questions about whether Alibaba should consolidate its logistics affiliate, Cainiao Smart Logistics Network. Alibaba has a 47 percent stake in the company. Alibaba is at the center of a complicated web of companies in China that broadly touch the lives of Chinese consumers.
In the filing, which was submitted on Tuesday in the United States, Alibaba said it provided information to the commission about its accounting for Cainiao. Mr. Ma also controls the parent company of an electronic payment service called Alipay. Alipay is a giant in its own right, with a financial smartphone app widely found on Chinese handsets and offerings including money market-like investments and easy money transfers. Chinese consumers often use Alipay to buy merchandise from Alibaba’s platforms.
Alipay, which was valued at about $60 billion in its last fund-raising round, was once part of Alibaba but was peeled off into a separate company in 2011 in a move that spurred acrimony with Yahoo, then a major investor in the Chinese company.
To date, Alipay’s parent company has lent more than $100 billion, mostly to small businesses, according to the company. Those businesses could spend that money on marketing on Alibaba’s e-commerce sites, which would in turn become Alibaba revenue.
According to data from Dealogic, Alibaba has also spent $25.5 billion since its listing in September 2014 to broaden its services to compete with Tencent and Baidu, fellow Chinese Internet giants that are scrambling to make money from a shift to mobile devices. Its key investments and acquisitions include its purchase of Youku Tudou, once a YouTube-like service that now streams movies and TV shows, and an investment in Koubei, a food-ordering app in which Alipay’s parent company is also an investor.
One focus of the S.E.C. investigation appears to be Alibaba’s investment in logistics, which itself signaled a shift in its business approach. In its filing, Alibaba said it provided information to the commission about its logistics arm, Cainiao.
Alibaba has long eschewed building a logistics network to keep down costs. That approach has increased profit margins but made it more vulnerable to competitors with better control over delivery channels, which are underdeveloped in China.
As Chinese e-commerce rivals offered fast delivery, Cainiao was created in 2013 as a way to make Alibaba’s logistics more efficient. Cainiao is jointly owned by Alibaba and a number of the logistics companies that deliver the bulk of the goods ordered on Alibaba’s sales platforms, like Taobao and Tmall. At the time, Alibaba said Cainiao would spend up to $16 billion in developing smart logistics in China in the coming years.
Mr. Ma was named as chairman when Cainiao was created, Alibaba holds a 47 percent stake in the company, and a number of companies Alibaba has invested in have since worked with Cainiao. Still, Alibaba does not consolidate Cainiao’s results with its own.
That relationship has been questioned by some short-sellers and researchers. In a 40-page report released to its clients in October, Pacific Square Research, a research firm, argued that Alibaba did not disclose enough information about its large number of investments. It said that at times Alibaba used that web of investments to control companies like Cainiao without taking their losses onto its balance sheet.
The Alibaba spokeswoman said that the company had provided disclosures about Cainiao’s financials in its most recent annual report. That “is exactly the kind of robust and transparent information that will address the underlying issues in the S.E.C.’s inquiry,” she said.
Alibaba recorded losses of about $60 million over the past two years in connection to Cainiao, according to the filing.
The report also described instances that it said showed Alibaba did not disclose related-party transactions. For example, it said that Alibaba had failed to disclose the amount it had spent in advertising on Weibo, the Chinese social-media service, even though at that time Alibaba had made a $1 billion investment in Weibo. By comparison, Weibo, also a listed company, disclosed the amount it had received from Alibaba.
In its most recent filing, Alibaba disclosed that it had spent about $230 million on Weibo marketing in the past three years.
“We haven’t seen anything quite as difficult to untangle as this in our respective careers,” Herb Greenberg, a managing partner of Pacific Square, wrote in an email. “In our view, Alibaba is like a big ball of wet knotted yarn.”
Asked about Pacific Square’s assertions, the Alibaba spokeswoman said the company did not comment on market speculation.