It appears that the investigation by the US Securities and Exchange Commission into the accounting practices of Alibaba Group Holdings was anticipated by a large part of the short-selling community.
Noted short-sellers Jim Chanos of Kynikos Associates and John Hempton of Bronte Capital have been raising red flags about the Chinese e-commerce giant’s accounting practices since last year, according to Reuters.
Hempton told Reuters in an email on Thursday that Alibaba, which went public in September 2014, is “a real company” but “with questionable accounts.” He added: “The ability to value it from the accounts is, thus, tricky.”
Hempton said he believes shares will eventually “go down a lot — and get a takeover bid.”
In the annual report Alibaba filed on Tuesday, the company said that the SEC had launched an investigation earlier this year. The probe focuses on the accounting for logistics firm Cainiao Network, a company in which Alibaba has a 47% stake. It’s also probing accounting practices applicable to related-party transactions in general; and operating data from its annual “Singles’ Day” sale.
The company on Wednesday said that it was cooperating with the SEC and that the SEC had said a request for information did not indicate that it believed federal laws had been violated, adding that the annual report delivered this week was “exactly” the type of information regulators requested.
On Wednesday, Alibaba’s share sank 7% to $75.59, but bounced back 3.6% on Thursday to $78.35. Midday Friday in New York, the shares were up 2.6% to $80.40.
Short interest in Alibaba shares doubled in the second half of 2015, reported Reuters, jumping from fewer than 50 million shares in June to a peak of 98.1 million in January 2016. As of the last bi-monthly data from the New York Stock Exchange, short interest had fallen to 77.5 million shares, still more than 10% of Alibaba’s free float.
At an investment conference in November, Chanos pitched Alibaba as a “short idea.” “We are skeptical on BABA’s prospects as China e‐commerce is maturing, while BABA’s market share is already very high,” according to a Kynikos research report Chanos sent out at the conference, which was seen by Reuters. “Free Cash Flow is being sapped by increasing acquisitions and equity investments into opaque entities,” he added.
Paul Gillis, professor of accounting at Peking University, told Reuters: “Something has gotten SEC focused on this. It does not appear to be a routine inquiry. It appears to be more serious than that.”