By Jennifer Ablan
NEW YORK (Reuters) - Alibaba Group Holding Ltd (N:BABA), which disclosed it is under investigation for its accounting practices, has emerged as one of the short-selling community's favorite targets in the relatively short time it has been in the public market.
Noted short-sellers Jim Chanos of Kynikos Associates and John Hempton of Bronte Capital have been raising red flags since last year about the Chinese e-commerce giant's accounting practices.
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". A takeover would require deep pockets without an extreme decline - the company is currently worth about $190 billion.
Questions about Alibaba's growth rate and its relations with affiliated companies have dogged the firm for years. The latest investigation highlights how far Alibaba has to go to improve transparency, while a continuing acquisition spree creates uncertainty over its earnings.
Alibaba declined to comment beyond its statements on Wednesday that it was cooperating with the U.S. Securities and Exchange Commission, that the SEC had said a request for information did not indicate that it believed federal laws had been violated, and that the annual report delivered this week was "exactly" the type of information regulators requested.
Alibaba said the SEC investigation launched earlier this year focused on the accounting for logistics firm Cainiao Network, which is around 47 percent-owned by Alibaba, accounting practices applicable to related-party transactions in general, and operating data from its annual "Singles' Day" sale, according to Alibaba's annual report filed on Tuesday.
Shares of Alibaba recovered a bit on Thursday, closing up 3.65 percent at $78.35, after diving nearly 7 percent the day before. Some financial analysts downplayed the inquiry.
"While we would never be dismissive of an SEC inquiry, we believe that investigations are sometimes launched because the SEC is unfamiliar with various" business models, Deutsche Bank (DE:DBKGn) wrote.
Short interest in Alibaba shares doubled in the second half of 2015, shooting from fewer than 50 million shares in June to a peak of 98.1 million in early January 2016. That has dropped back to around 77.5 million shares, more than 10 percent of Alibaba's free float, as of the last bi-monthly data from the New York Stock Exchange.
Senator Bob Casey, a Pennsylvania Democrat who raised concerns about Alibaba and Chinese IPOs in 2014, applauded the investigation. "China's financial markets remain so opaque there are serious questions about whether investors are receiving basic protections," he said in a statement.
Chanos pitched Alibaba as a "short idea" at an investment conference in November.
"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 a conference last November which was seen by Reuters. "Free Cash Flow is being sapped by increasing acquisitions and equity investments into opaque entities," he added.
The AdvisorShares Ranger Equity Bear ETF shorted Alibaba about six weeks ago, expecting the stock to fall below $60, said portfolio manager Brad Lamensdorf. He said he did not buy back any shares during Wednesday's 7-percent stock drop, and is sticking with his conviction that the stock has further to fall.
“Its business is very convoluted, there's a lot of stuff that has not been disclosed properly, and it trades at a ridiculous multiple,” Lamensdorf said.
All told, Paul Gillis, professor of accounting at Peking University, said the accounting for Cainiao off Alibaba's balance sheet is important because Alibaba is trying to position itself as an "asset-light company."
Gillis said: "Their accounting is designed to support the argument that they don't have a lot of capital invested in the business when, in fact, they actually do."
Alibaba in its annual report said Cainiao is a logistics platform and "does not deliver packages itself."
Still, Gillis said: "Something has gotten SEC focused on this. It does not appear to be a routine inquiry. It appears to be more serious than that."