To understand why Alibaba isn't keen to claim ownership of its logistics and distribution business, listen to Judy Tong.
She's the CEO of Cainiao Smart Logistics Network, the unprofitable Chinese delivery business that's approximately 47 percent-owned by Alibaba. Speaking at a conference in Hangzhou on Monday, Tong said Cainiao investors shouldn't hold their breath waiting for the money to roll in, Bloomberg News reports:
I definitely need more financing because we're making such a big platform. But we're being picky with investors. We want willing long-term investors. We don’t want those who tell us every day, ‘you must make money tomorrow.’
Just 15 months ago, Tong said Cainiao would "definitely conduct an IPO in the future," an important statement for any startup seeking funds, since a company's exit plan is among the first questions asked.
Alibaba wants to build a massive delivery network to support its e-commerce business without having that rollout drag on its margins. Tong's latest statement is as clear an indicator as you may ever get that Cainiao is potentially a black hole for investors for the foreseeable future. The question is which shareholders will wear such losses, and how. Understandably, Alibaba's management wants the U.S.-traded company to enjoy the upside from a future IPO without the burden of years of burning money.
The SEC isn't quite so understanding. In May, Alibaba revealed that it's being investigated by the U.S. regulator over how the e-commerce giant accounts for its stakes in affiliates such as Cainiao.
Both the SEC and Alibaba's lawyers will be spending a lot of time parsing IFRS 10, the chapter of the International Financial Reporting Standards dealing with the consolidation of financial statements. I pointed out last month that Foxconn's Hon Hai unit is unlikely to get away with disclaiming ownership of Sharp, despite a minority holding of "only" 45 percent.
Liberal interpretation of IFRS doesn't necessarily allow a parent to escape losses (or profits) from its minority investments -- it simply lets the mothership avoid consolidating sales of the affiliate into its own top line, among other things. One benefit is beautifying margins that might otherwise be squeezed by unprofitable units.
In Alibaba's case, mixing Cainiao's revenue in with the rest of the business would surely drag down already unstable margins. And shareholders tend to watch those margins closely.
Given Tong's statement that Cainiao's situation is unlikely to be reversed soon, it seems Alibaba wants to have its cake and eat it.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects Tong quote after second paragraph.)
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