WASHINGTON: Chinese e-commerce giant Alibaba Group Holding Ltd 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 has 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 (SEC) 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.
“I think it’s a moment of truth for the company,” Dartmouth College Tuck School of Business finance professor Anant Sundaram said. “If I’m buying into that stock, what am I buying into?”
US-traded shares in Alibaba tumbled about 7 percent in heavy trading on Wednesday after news surfaced of the SEC probe. They are down 20 percent in the past year, as investors, worried about the state of the Chinese economy, have been wary of any possible signs of weakness in Alibaba’s performance.
The company said it is cooperating with the investigation.
Alibaba is the world’s biggest e-commerce platform, with more than 420 million people buying US$485 billion worth of goods last year on its sites. Its digital platforms, including Taobao.com and Tmall.com, make up 80 percent 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.
Some US retailers that are members of the group, which lobbies US officials and testifies before US 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 last month.
The SEC probe raises the possibility that the stellar results the company has reported might have been too good to be true, experts said.
A question is whether Alibaba or its suppliers might have falsified orders to pad sales volumes, University of Florida finance professor Jay Ritter said.
Canceled orders might 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 are 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 from “strong buy” to “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.
Alibaba has put a huge footprint on the Chinese economy and made unorthodox moves, such as spinning off its payment service into a company controlled by founder Jack Ma 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, while Ma exercises veto authority over any decision.
