Looks like, the Chinese ecommerce giant Alibaba Group Holdings Limited (BABA, Financial) is caught in a ring of fire when it comes to its (illegal) business dealings or allegations of withholding information from investors. The latest string of trouble to surround Alibaba comes in the form of allegations of fake orders or "brushing."
Brushing
The term "brushing" is popularly used in China. It refers to a practice where a company pays people to pretend to be customers in able to pad their sales figures to boost their standing in the online marketplace through a show of inflated sales volume. By showcasing such inflated numbers the vendors managed to rank higher in terms of credibility and preference by genuine prospective customer. People who pose as "brushers" or fake customers are paid a fee and the money for the goods to be ordered by them. To make this process look genuine, the vendors then ship empty boxes to the brusher’s address or box full or worthless things. The brushers then write glorious reviews about the product ordered by them.
This form of false advertising or brushing is considered illegal in China and the U.S. and the vendor is liable to face legal implications in the respective countries. The matter came to light when one of the vendors who sold his products through Alibaba’s ecommerce platform admitted to have indulged in brushing. In January itself Alibaba was accused by the Chinese government of failing to crack down on brushing on its biggest platform "Taobao." After a round of discussions with Chinese regulators, it was announced that the SEC letter stated it should in no way be construed as Alibaba Group having done anything wrong or there having been any violation of securities law. In November last year, a Chinese news agency had reported that an estimated 17% of sellers (1.2 million) on Taobao had faked RMB10B in 2013 which translates to $1.6 billion worth in transaction.
Alibaba has come under sharp criticism from China quality watchdog (General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ)) which considered such murky dealings by the Chinese ecommerce giant as a threat to the reputation of China and its products. It urged the government and ruling communist party to take the matter seriously and take necessary steps.
Ordered to get out of Taiwan
To add to its woes, Alibaba has been asked by Taiwan to pack its bags and get out of the country within six months on charges of non-compliance of rules applicable to a Chinese company. Despite being listed on the U.S. stock exchange, Taiwan considers Alibaba Group Holidings Limited as a Chinese company due to its country of origin and the structure. Alibaba is trying to mend the ends with Taiwanese authorities. Company’s top executive Jack Ma has announced setting aside 300 million to help budding Taiwanese entrepreneurs who wish to set up their businesses through his company. But it has failed to melt the ice with Taiwanese authorities.
Impact on the stock
Hardly six months have passed since Alibaba witnessed a blockbuster IPO in September last year, and the stock has already begun to lose its sheen. After reaching a peak of $120 in November last year the stock price has been heading southwards. Two drops in recent months eroded $11 billion from the company’s market cap. The company’s fourth-quarter results were below market expectations.
Instead of recording new highs the stock is recording new lows (-3.3%). In fact Baba is struggling to maintain the prices above $80. The is down by 13% since its IPO hit the market in September last year and 27% below than where it stood three months back. The tumbling Alibaba has also pulled down Yahoo!Ă‚ (YHOO, Financial) stock price (-3.8%).
At present Baba trades for 28 times estimated FY16 (ending March 2016) EPS. The consensus for FY ’16 revenue growth stands at 36%. But whether the company be able to fulfill market expectations is difficult to ascertain because the recent result announcements weren’t up to the mark and the tumbling stock price isn’t a good indication. The legal hassles and misdemeanor allegation have earned the company a lot of bad press which have also negatively impacted the company’s reputation and the stock price.
Parting words
Investors are advised to bail out if the purchase has been made at a lower price than the current levels and if liquidity is the need of the hour. The more patient investors can wait approximately a year for the realization of market consensus.
