Ali Baba and its 920 Entities-Financial Comedy in Modern Day Value Investment-Part 1

We all know that lots of quality funds and investors are holding Alibaba in spite of the fact that the share prices have crashed by more than 65% from its $320 in 27.10.2020 to $111.96 (As on 03.12.2021). Being one of the largest owner entity (More than 920 Entities operating in one umbrella), Books of Ali Baba seems to be completely opposite than its Global Brand recognition.

While people are busy in catching this falling knife in anticipation of “Bottom being done” but Alibaba is being arrogant to its investor when it comes to brutal fall. The real fall started when CCP imposed 3% of revenue fine on Alibaba  in FY 2020-21 due to abuse of dominant position and breach of provisions of Anti Monopoly law in China. The amount was $2.78 billion dollars Later on, news came that the Jack Maa is missing and then Chinese Government came with crack down with new regulations. Well Wait wait. I am not sympathetic to Ali Baba. Being an expert in the field of accountancy its my duty to analyse the Annual reports. So friends lets start with our part 1 analysis. In this blog we are only analysing Employees Cost, Lease Cost and Computer and Equipment cost. As employees forms biggest asset to any tech organisation. So let’s start with our analysis.

Analysis of Employees Cost, Rental and Property (Lease rent and ownership cost)

Particulars31.03.201831.03.2021931.03.202031.03.2021
Total Number of Employees66,4211,01,9581,17,6002,51,462
Total Increase in Employees35,53715,4621,33,862
Book Value of Computers, Equipment and Software (In Billion Dollars)5.057.9410.2912.95
Ratio of Book Value of Computers, Equipment and Software to No. of Employees$76,068$77,859$87,477$51,486  
Incremental Cost of Book value of Computers, Equipment and Software(Billion Dollar)2.882.342.65
Incremental Cost to Increase in Employees82,2061,50,17119,867.78
Space Occupied as on 31.03.20xx5.7 Million Sq. Mt.6.3 Million Sq Mt.8.70 Million Sq. Mt.15.10 Million Sq. Mt.
Ratio of Space Occupied to Total Number of Employees85.81 Sq Mt61.79 Sq Mt73.97 Sq Mt60.04 Sq. Mt.
Increase in Space0.60 Million Sq. Mt.2.40 Million Sq. Mt.6.40 Million Sq. Mt.
Ratio of Additional Space hired to Additional Employees hired16.88 Sq. Mt. per employee153.43 Sq. Mt. per employee47.81Sq. Mt. per employee
General and Administrative Cost (In Billion Dollar) 3.794.3035.647 (Excluding Fine from China’s Anti-Monopoly Law of $2.782 Billion)
% to Revenue6%11%5%8% (Due to Penalty fine which costed 3% of revenue)
Lease Cost (In Billion Dollar)0.712.2823.1334.02
Ratio of Lease cost to Employees$10,689$22,381.77$26,641$15,986.51
Book value of Properties along with never ending Construction work in progress (In Billion Dollar)7.6110.2812.4018.17
Incremental Cash Flow Stucked in Property (In Billion Dollar)2.662.125.767
Ratio of incremental cash flow in property to additional space hired 4433 per Sq. Mt883 per Sq Mt901 per Sq Mt
From Annual Report filed with SEC

Note: General and administrative expenses consist mainly of salaries, bonuses, benefits and share-based compensation expense for our management and administrative employees, office facilities and other support overhead costs, professional services fees, provision for doubtful debts on receivables and charitable contributions. Since Salary cost or Employee benefit cost is not available so we gave this figure above.

Points to Emphasise upon

  • The world’s largest office space is in The Pentagon located in Arlington with 0.62 million Sq. Mt. But Ali Baba hiring of additional space in 2019 is equivalent to 1 times of Pentagon Building. Similarly  in 2020, its 3.87 times and in 2021 its 10.32 times while the book value of the assets is dirt cheap for 21 years old entity. Had it been 50 years old entity we could have easily believed it but its mere 21 years old entity and billions of dollars to addition area hired is telling some serious problem as the cost of additional acquisition has reduced from 4433 per Sq. Mt to 901 per Sq. Mt. While globally the cost of property have increased multifold in last 4 years specially in China and Ali Baba operations are global.
  • Hiring area to number of employees tells us what king of accounting practices is this group is telling us.
  • The space usage of Ali Baba is a real comedy as each employee in 2018 is roughly 85 Sq. Mt which is far more than average residential apartment in Japan and US but the same in 2021 has decreased to 60 Sq. Mt (Which is average Flat size in Japan).
  • Average Computer and Equipment per employee is $76,068 in 2018 and the same has reduced to $51,486 in 2021. The ratio has been reduced on account of double hiring and Baba needs to hire more people to match up with average cost. Is’nt funny for Stock holder who were buying the dips. If still not satisfied then consider the Incremental cost to Incremental number of employees. You will definitely something out of this company. It feels like Ali Baba knew inflation of 2030 much before than reality. Are they using time machines?

Hope this is just the start before digging much deeper into Ali Baba-Part 2 as it requires time to read last 4 years annual report and give some analysis. Though quantity wise reports are good consisting of more than 300 pages or 700 pages but it doesn’t give quality in reporting like number of subsidiaries and number of investment. It is difficult and but not impossible. So guys  will come back with our Part 2.

From CA Nishant Maheshwari and Vishal Vora

Disclosure: This article is for information only and should not be construed as a financial advice.

In case you are interested in making a contribution to our writing, please do so in the following account:

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Account Holder Name:Rashi Maheshwari

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Name of the Bank:SBI India, YN Road Branch, Indore, India

One thought on “Ali Baba and its 920 Entities-Financial Comedy in Modern Day Value Investment-Part 1

  1. China and it’s economy is the biggest bubble when fizzles will certainly hit rest of the world. Predominately controlled by Govt bullying outside world not permitting to know the factual position it’s wise to zero the exposure.

    Like

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