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China Stock Research

About the Author China Stock Research

Several years experience as an analyst in the hedge fund world. Investment knowledge includes long/short equities, credit, macro, arbitrage, distressed debt, and special situations. Previous research publication experience includes Japanese small cap research distributed to institutional investors. Education credentials include BS in Computer Science, MBA in Finance, and CFA Charter. Follow on Twitter @ChinaStockRsrch Follow on StockTwits @ChinaStockResearch

Alibaba, The SAIC, And The SEC


Alibaba (NYSE:BABA) announced that it received a request for information from the SEC this week, regarding the recent dust up with the SAIC. This is the latest development in what has so far been a fairly entertaining circus. First, the SAIC leveled some very weighty accusations about the company and raised other serious questions about the business at a joint mid-2014 meeting, but held off publishing its report to avoid disrupting Alibaba’s IPO. After the company vigorously contested knowledge of the SAIC’s report, the regulator almost tripped over itself while retracting it. Clearly, Alibaba’s Jack Ma is well connected (invites to Davos as a member of Premier Li Keqiang’s entourage don’t grow on trees), something which might have been a factor in the recent showdown dissolving so quickly.

And right when it looked like the entire situation was in the rear-view mirror, it looks like the SEC doesn’t want to be left out. Their vigilance is just inspiring, and they clearly serve investors under the “better late than never” philosophy.

Based on Alibaba’s disclosures, the SEC’s request was just for information, which is relatively common, and in isolation doesn’t signal more to come. It wasn’t the dreaded Wells Notice which typically precedes prosecution.

Will it come to anything like that? Probably not. Even if there was something fishy going on, Alibaba would have to provide the SEC with the smoking gun. It seems unlikely that the company would have anything (those meetings are generally informal, not the kind involving rigorous note taking), and it is further unlikely that the company would willingly hand anything over.

Our take is that the recent communication was more of the routine variety, similar to when a stock pops up absent major news and company management needs to go on record of having no knowledge why.

Neither the SEC, who just concluded (“-ish”) a long-running feud with local Chinese auditors regarding annual audits of US-listed clients, nor Alibaba really want to go forward with this. There is already an army of lawyers pressing ahead with class-action suits regarding the SAIC meeting and pre-IPO risk disclosure, and the SEC doesn’t need to step into the fray just yet. Instead, the SEC is probably trying to cover their flank in the event that something damning comes to light later.

This latest development may add to the near-term uncertainty around the stock, which could mean near-term pressure on the share price. Alibaba remains the undisputed heavyweight in China’s e-commerce industry, and irrespective of how this particular issue plays out, its place atop the pile seems relatively secure. Investors looking at the stock need to take a long-term view, and in doing so ignore the noise. And until something more comes to light, that is all this latest development is, noise.