WEBVTT - A Forensic Accountant On Why Chinese Internet Companies Are So Tough To Analyze 0:00:11.119 --> 0:00:14.720 Hello, and welcome to another episode of the Odd Blots podcast. 0:00:14.800 --> 0:00:20.200 I'm Tracy Allaway and I'm Joe wisntal Joe. I don't 0:00:20.200 --> 0:00:23.720 know if you've been following what's going on in Hong 0:00:23.800 --> 0:00:27.440 Kong markets lately, but there is a very very big 0:00:27.480 --> 0:00:31.360 event coming up. Well it's only a few weeks away now, 0:00:31.360 --> 0:00:34.159 although I have to say I'm not exactly sure when 0:00:34.200 --> 0:00:37.560 we're at leasing this episode, but in theory, there is 0:00:37.640 --> 0:00:40.960 a very big event coming up, so much to choose from. 0:00:41.000 --> 0:00:43.080 I feel like, you know, when you say something like, oh, 0:00:43.159 --> 0:00:44.760 I'm not sure if you're following what's going on in 0:00:44.800 --> 0:00:48.479 Hong Kong lately, my mind darts to, like, uh ten 0:00:48.560 --> 0:00:52.440 different things. Yeah, okay, But in the market, there is 0:00:52.560 --> 0:00:55.680 just one thing I think that everyone is focused on 0:00:55.720 --> 0:00:58.040 at the moment, and that is the I p O 0:00:58.720 --> 0:01:01.880 of Ant Group, which is the sort of offshoot of 0:01:02.360 --> 0:01:07.280 Jack Ma's Ali Baba. The big thing about this particular 0:01:07.360 --> 0:01:10.440 I p O is that I think they're aiming for 0:01:10.600 --> 0:01:15.720 evaluation of something like at least two hundred eighty billion dollars, 0:01:15.800 --> 0:01:20.320 which would easily make it the biggest I p O ever, 0:01:21.040 --> 0:01:24.600 and the whole transaction again, it hasn't actually taken place yet, 0:01:24.800 --> 0:01:27.160 but the whole transaction is so big that we're actually 0:01:27.200 --> 0:01:32.160 seeing it affect things like demand for Hong Kong dollars. 0:01:32.240 --> 0:01:38.000 We've seen liquidity in that market Titan. The demand for 0:01:38.240 --> 0:01:41.320 ant shares is expected to be so high that they 0:01:41.319 --> 0:01:45.880 haven't even bothered with Cornerstone investors, which is really unusual 0:01:46.560 --> 0:01:50.280 for an I p O. We're also seeing brokers in 0:01:50.360 --> 0:01:55.800 Hong Kong offer retail investors twenty times leverage on the 0:01:55.840 --> 0:01:58.320 ant shares because they're so certain there's going to be 0:01:58.360 --> 0:02:01.600 a pop on the first day of trading, and everyone 0:02:01.640 --> 0:02:05.120 wants to get an allocation of the equity when it 0:02:05.160 --> 0:02:08.520 first comes out. So it's a really really big deal, 0:02:08.639 --> 0:02:11.399 and you can see that there's a lot of excitement 0:02:11.760 --> 0:02:15.840 around at at the moment. Wow, those are some great stats. 0:02:15.880 --> 0:02:17.200 And I knew it was a big deal, and I 0:02:17.240 --> 0:02:19.440 knew it was a big company, but actually you sort 0:02:19.440 --> 0:02:22.400 of just blew me away with all that stuff. I mean, 0:02:22.440 --> 0:02:25.960 two quick questions for you. A what does AUNT do? 0:02:26.320 --> 0:02:29.079 I mean, I know it's like this big finance thing, 0:02:29.160 --> 0:02:31.079 but I actually have no concept of what the company 0:02:31.120 --> 0:02:33.880 actually does. And be two billion dollars, I mean that's 0:02:33.880 --> 0:02:36.200 got to make it. Whether you know, it's bigger than 0:02:36.240 --> 0:02:39.880 any US financial institution by a laun shot, right, Yeah, 0:02:39.919 --> 0:02:42.200 I think that's right. And if you think think back 0:02:42.240 --> 0:02:45.040 to Saudi Aramco. I mean, there was so much talk 0:02:45.040 --> 0:02:47.840 about Saudi Aramco when they listed on public markets for 0:02:47.880 --> 0:02:50.000 the first time. I think we even did one or 0:02:50.040 --> 0:02:52.919 two episodes about it that ended up being something like 0:02:53.040 --> 0:02:57.640 twenty eight billion dollars raised, so much smaller than what 0:02:57.680 --> 0:03:02.120 we're talking about now. Aunt grew Group. I'm sure I'm 0:03:02.120 --> 0:03:03.840 not going to describe it right, and I'm sure some 0:03:03.880 --> 0:03:07.800 people are going to take issue, but it's basically the 0:03:08.000 --> 0:03:11.880 sort of um I think it's the fintech portion of 0:03:12.000 --> 0:03:15.440 Ali Baba, including Alley Pay, which is one of the 0:03:15.720 --> 0:03:20.200 big big payments providers in China along with we Chat. 0:03:20.320 --> 0:03:23.560 So if you've ever visited China, you know that cash 0:03:23.680 --> 0:03:26.560 is almost non existent at this point, and anywhere you go, 0:03:26.840 --> 0:03:31.080 be it a Starbucks or a street side vendor, you 0:03:31.120 --> 0:03:34.360 can pay using a digital wallet like ally Pay or 0:03:34.440 --> 0:03:37.160 wee Chat. So that's one of the reasons people are 0:03:37.200 --> 0:03:40.280 really excited about it. And of course it's a big 0:03:40.760 --> 0:03:44.880 fintech giant in a very very large market in one 0:03:44.920 --> 0:03:47.880 of the few markets that is really growing at the moment, 0:03:47.960 --> 0:03:53.680 given China's purported economic strength. But of course when it 0:03:53.760 --> 0:03:57.320 comes to this type of growth, particularly in China, there's 0:03:57.400 --> 0:04:01.800 always a question mark over how you're actually measuring that 0:04:01.960 --> 0:04:06.240 and whether those measurements or those numbers are accurate or not, 0:04:06.520 --> 0:04:09.480 you know what I mean, absolutely so, So just to 0:04:09.520 --> 0:04:13.839 step back, just to sort of conceptualize the company, um, 0:04:13.960 --> 0:04:18.360 Ali Baba is this sort of right e commerce powerhouse, 0:04:18.440 --> 0:04:21.200 extraordinary company doing all kinds of things, And so I 0:04:21.240 --> 0:04:23.560 guess you could sort of imagine it is like say, 0:04:23.600 --> 0:04:27.680 like Facebook or some of the US megacap internet companies, 0:04:28.200 --> 0:04:30.720 they have their own like sort of payments apps and 0:04:30.760 --> 0:04:33.640 payments messaging and stuff like that, and so this would 0:04:33.680 --> 0:04:37.400 be this is Ali Baba's. It's gigantic, and they're essentially 0:04:37.440 --> 0:04:40.680 spinning it out into its own publicly traded company that's 0:04:40.760 --> 0:04:43.599 worth the insane amount of money. But as you say, 0:04:44.080 --> 0:04:46.920 you know, with with so many of these UH companies, 0:04:47.120 --> 0:04:50.600 I mean, they produce financials, but all kinds of um 0:04:51.160 --> 0:04:54.720 difficulty really gating from the outside like a true like 0:04:55.040 --> 0:04:58.400 size and scope of the business. Yeah, I guess you 0:04:58.400 --> 0:05:01.680 could think about it as jen if Amazon also owned 0:05:02.000 --> 0:05:05.440 Venmo or something like that, and everyone used Venmo to 0:05:05.560 --> 0:05:08.320 pay for virtually everything in the US. Oh, and also 0:05:08.360 --> 0:05:12.120 that Amazon had a gigantic money market fund that people 0:05:12.320 --> 0:05:15.279 using Venmo could also invest in. That's that's kind of 0:05:15.279 --> 0:05:20.359 Alley Pay in a nutshell. I'm excited now. Okay, So 0:05:20.560 --> 0:05:24.000 for today's episode, we're going to do a deep dive 0:05:24.360 --> 0:05:28.559 onto Chinese internet companies. We're going to get a better 0:05:28.680 --> 0:05:32.560 sense of how they're actually accounting for the growth that 0:05:32.680 --> 0:05:35.159 I just described, and I think we're going to get 0:05:35.240 --> 0:05:38.160 a better idea of whether or not all that excitement 0:05:38.680 --> 0:05:43.159 over future growth is necessarily justified. And to do that, 0:05:43.480 --> 0:05:46.360 we're going to be speaking to Stephen Clapham. He's the 0:05:46.400 --> 0:05:49.760 founder of Behind the balance Sheet and also runs an 0:05:49.760 --> 0:05:56.360 investment and research training consultancy. He recently published a very 0:05:56.520 --> 0:06:02.080 very detailed and expensive report into Chinese internet stocks, looking 0:06:02.120 --> 0:06:06.120 at them from a forensic accounting perspective. So really the 0:06:06.200 --> 0:06:09.719 perfect person to discuss all this with. I think, alright, 0:06:09.760 --> 0:06:14.400 I can't wait. You got me super excited. Okay, all right, Steven, 0:06:14.560 --> 0:06:17.520 welcome to the show. Thanks so much for coming on. Well, 0:06:17.600 --> 0:06:20.560 thank you for having me. So I guess to begin with, 0:06:21.120 --> 0:06:26.159 I'm curious what piqued your interest in Chinese internet stocks 0:06:26.240 --> 0:06:30.320 in particular, because there's no shortage of companies that you 0:06:30.440 --> 0:06:34.880 could be looking at with a forensic accounting background, and 0:06:35.440 --> 0:06:38.599 you chose to look at these ones in particular. I 0:06:38.600 --> 0:06:41.800 think you looked at five of the biggest ones. What 0:06:41.920 --> 0:06:46.120 sparked your interest? Well, Tracy, you said that this report 0:06:46.240 --> 0:06:50.400 was expensive, and in fact, I want to disagree articly 0:06:50.560 --> 0:06:53.240 because I think this report is very cheap and the 0:06:53.360 --> 0:06:58.400 reason I allude at these is five thousand dollars, right, honestly, Tracy, 0:06:58.560 --> 0:07:01.760 five thousand dollars is a argon for this report. And 0:07:01.839 --> 0:07:05.039 before you laugh, and let me explain why. So the 0:07:05.160 --> 0:07:08.160 reason that I looked at this I was commissioned to 0:07:08.240 --> 0:07:11.200 produce this report by a client, and one of my 0:07:11.320 --> 0:07:16.520 training clients is particularly interested in the Chinese um internet 0:07:16.560 --> 0:07:20.040 companies and was concerned that they hadn't been able to 0:07:20.080 --> 0:07:22.840 get to the bottom of the way they were accounting 0:07:23.480 --> 0:07:26.560 in various aspects when we talked about what those aspects were, 0:07:27.040 --> 0:07:30.400 so they asked me if I could help, and I said, yeah, 0:07:30.480 --> 0:07:34.600 of course, and foolishly I completely underestimated how long it 0:07:34.640 --> 0:07:38.160 would take to to do the work. And when I 0:07:38.200 --> 0:07:43.120 tell you that Ali Baba's accounts were a thousand and 0:07:43.160 --> 0:07:47.320 seventy seven pages long, you can probably understand why it's 0:07:47.360 --> 0:07:50.000 quite easy to underestimate how long it would take. And 0:07:50.040 --> 0:07:52.560 so I went back to the clients halfway through the 0:07:52.600 --> 0:07:55.120 work and I said, look, I'm having a better problems 0:07:55.160 --> 0:07:58.080 here because it's taken me far, far longer than than 0:07:58.240 --> 0:08:01.440 I was anticipating. I knew that it would be complicated, 0:08:01.480 --> 0:08:05.440 but I didn't quite understand how much work would be involved. 0:08:05.800 --> 0:08:08.080 And the clients, I know, look, no problem at all. 0:08:08.400 --> 0:08:10.560 I said, Look, the best way around this is I 0:08:10.560 --> 0:08:12.120 don't want to do a bad job for you, but 0:08:12.120 --> 0:08:14.640 equally I don't want to spend a huge amount of 0:08:14.640 --> 0:08:17.480 time and I'm not getting rewarded for so the best compromises, 0:08:17.560 --> 0:08:20.640 why don't I just sell the report once you were 0:08:20.680 --> 0:08:23.160 finished with it and once you've done everything that you 0:08:23.240 --> 0:08:25.120 want to do in the in the stocks. And they 0:08:25.160 --> 0:08:28.480 said that's fine, and so we um, we just put 0:08:28.800 --> 0:08:32.040 the report up on the website a few weeks ago. 0:08:32.120 --> 0:08:34.439 There's been quite a bit of interesting we haven't actually 0:08:35.200 --> 0:08:39.000 started to advertise it yet. Obviously, these are very, very 0:08:39.040 --> 0:08:43.600 big companies, and they are incredibly complicated, and if you 0:08:43.679 --> 0:08:46.319 think about a set of accounts, it's over a thousand 0:08:46.320 --> 0:08:49.520 pages long. The most recent accounts are about half that, 0:08:49.720 --> 0:08:53.559 but it's still a huge amount of time to go through. 0:08:53.720 --> 0:08:57.440 And what we do is we go through word by words, 0:08:58.120 --> 0:09:02.400 number by number, dissecting every element of it. And if 0:09:02.440 --> 0:09:06.079 you're the average institutional investor, you just not have time 0:09:06.400 --> 0:09:10.600 to do this detail work. So that's why five dollars 0:09:10.640 --> 0:09:14.240 is Actually it's not nearly it's not nearly as much 0:09:14.240 --> 0:09:17.520 as it sounds, because it's saved people a huge amount 0:09:17.559 --> 0:09:20.040 of effort and there's a huge amount of effort involved 0:09:20.040 --> 0:09:24.319 on our side and producing it. Okay, So setting aside 0:09:24.360 --> 0:09:27.360 whether five thousand dollars is a fair value or not, 0:09:27.760 --> 0:09:31.920 stepping back a little background, tell us your sort of 0:09:32.040 --> 0:09:35.240 general work. You mentioned that this was originally produced for 0:09:35.320 --> 0:09:37.760 a training client. What do you do for clients when 0:09:37.760 --> 0:09:40.240 you say training clients? And what was the sort of 0:09:40.440 --> 0:09:44.920 request that came in that ultimately led to this research? Oh? Sure, 0:09:45.120 --> 0:09:48.400 so we I mean, our business has got three parts 0:09:48.480 --> 0:09:51.280 to it. We've got our retail side, so we've got 0:09:51.320 --> 0:09:53.640 an online training school for retail investors. So you can 0:09:53.679 --> 0:09:55.920 go there and you can buy one of our courses 0:09:55.960 --> 0:09:59.000 which helps you understand how to invest. And then on 0:09:59.040 --> 0:10:02.640 the institutional side, which two things we do bespoke research 0:10:02.720 --> 0:10:05.199 for people and we run training courses. So we've got 0:10:05.200 --> 0:10:10.960 a forensic accounting course which we started in June and 0:10:11.000 --> 0:10:14.080 we've done I think three hundred people have been through 0:10:14.120 --> 0:10:16.320 that course in the last two and a bit years. 0:10:16.320 --> 0:10:20.800 Obviously fewer people this year because it's a physical in 0:10:20.920 --> 0:10:23.600 perison course, although we've been doing a little bit of 0:10:23.640 --> 0:10:27.480 it on on Zoom. And on the bespoke research side, 0:10:28.040 --> 0:10:30.959 people typically will come to us when they've got a problem, 0:10:31.040 --> 0:10:33.839 they've got a piece of research that is either too 0:10:33.920 --> 0:10:37.400 difficult for them to do in house, or too time 0:10:37.440 --> 0:10:40.040 consuming for them to do in house, or sometimes too 0:10:40.160 --> 0:10:43.600 controversial for them to do in has. Often what happens 0:10:43.679 --> 0:10:47.640 is you own a stock and it goes down, and 0:10:48.160 --> 0:10:52.400 the analyst that's involved in in looking after that position, 0:10:53.000 --> 0:10:55.640 we'll do one of two things while they say he 0:10:55.760 --> 0:10:58.720 or she, while they say, you know what, I think, 0:10:58.720 --> 0:11:00.600 we think I'm in a mistake. We should just get out, 0:11:01.280 --> 0:11:04.800 or they'll say I'm right, We've just got to be patient. 0:11:05.520 --> 0:11:10.200 And often what happens is the portfolio manager doesn't feel 0:11:10.360 --> 0:11:13.120 that the analyst is being able to make the decision 0:11:13.400 --> 0:11:17.080 rationally without emotion, and he doesn't have enough time to 0:11:17.120 --> 0:11:19.959 do the working staff, so they bring me in as 0:11:19.960 --> 0:11:25.359 a sort of independent third party without any emotion attached 0:11:25.440 --> 0:11:28.840 to the holding that can make a rational assessment of 0:11:28.960 --> 0:11:32.240 where the risk and reward lies at this point after 0:11:32.240 --> 0:11:34.560 the shares have fallen. And that's what we do. It 0:11:34.600 --> 0:11:36.520 a little bit of that. And the other thing we 0:11:36.600 --> 0:11:40.240 do is we do forensic accounting research. So people will say, 0:11:40.600 --> 0:11:43.040 you know, I'm thinking of I'm thinking of buying a 0:11:43.080 --> 0:11:46.199 stock and can you please have a look at it? 0:11:46.600 --> 0:11:48.960 Or they'll say we own this stock, can you please 0:11:48.960 --> 0:11:51.160 have look at it? In fact, it won't be a 0:11:51.240 --> 0:11:54.520 surprise to you, Tracy sitting in Hong Kong that Hong 0:11:54.600 --> 0:11:58.559 Kong listed or Chinese based companies are quite a popular 0:11:59.760 --> 0:12:02.280 area for people to ask us to get involved. One 0:12:02.320 --> 0:12:06.240 we did quite recently it was Hutchinson, so a client. Again, 0:12:06.400 --> 0:12:08.800 I mean I do this obviously exclusively for Trump for 0:12:08.920 --> 0:12:12.280 clients that our clients on the training side. I don't 0:12:12.679 --> 0:12:15.360 get random people coming in off the street asked me 0:12:15.360 --> 0:12:18.080 to do fends and accounting reports for them. I do 0:12:18.160 --> 0:12:21.640 it for the people that know me and like my work. 0:12:22.320 --> 0:12:26.959 And this particular client, very big two billion asset manager. 0:12:27.679 --> 0:12:30.400 We're interested in Hutchson because it looked very cheap, and 0:12:30.400 --> 0:12:34.160 he said, can you go and have a deeper dive 0:12:34.760 --> 0:12:37.040 and tell us if it really is cheaper not? And 0:12:37.120 --> 0:12:39.120 that's typically what we do, and this is exactly what 0:12:39.160 --> 0:12:42.079 we did in the case of the fire Chinese internet 0:12:42.120 --> 0:12:46.439 companies Ali Baba, ten Cent, JD, dot Com, Buy Do 0:12:46.840 --> 0:12:51.240 and made To and Ding Dan King. There are those 0:12:51.280 --> 0:12:53.440 five stocks we were asked to look at and to 0:12:53.480 --> 0:12:55.680 look at on a series of I think it was 0:12:55.679 --> 0:13:00.360 a dozen different elements, and there were things like is 0:13:00.360 --> 0:13:04.720 the company flattering at sarnings? Is the company using investment 0:13:04.760 --> 0:13:09.280 gains to boost tarnings? Is it carrying the value of 0:13:09.600 --> 0:13:12.520 enlisted investments? Are they being carried at the correct values? 0:13:12.760 --> 0:13:14.679 So it's a whole string of things that we were 0:13:14.880 --> 0:13:17.200 that we were asked to the camp. That's a really 0:13:17.240 --> 0:13:20.760 helpful description of what you do. I'm curious when it 0:13:20.800 --> 0:13:24.920 comes to Chinese stocks though, are there particular challenges that 0:13:25.080 --> 0:13:30.920 investors face when it comes to things like transparency or 0:13:31.640 --> 0:13:34.320 you know, realistic accounts. I guess this is a criticism 0:13:34.360 --> 0:13:39.400 that we hear about Chinese accounting and Chinese companies quite 0:13:39.440 --> 0:13:45.040 a lot. There's all sorts of issues you face. I mean, clearly, 0:13:45.360 --> 0:13:48.160 the first problem you've got is that the first of 0:13:48.160 --> 0:13:50.760 all I've got is that I don't speak the language. 0:13:51.040 --> 0:13:54.439 I can't read the language. So you're at a massive 0:13:54.559 --> 0:13:58.400 disadvantage relative to looking at a company in the United States. 0:13:58.520 --> 0:14:01.440 Are in the UK, where you've got that sort of 0:14:01.480 --> 0:14:06.160 home country advantage and where you've got local pools of knowledge, 0:14:06.240 --> 0:14:10.320 local sources of intelligence. And we've got some contacts in China. 0:14:10.559 --> 0:14:12.840 But for example, one of the things that the client 0:14:12.920 --> 0:14:16.040 asked us to look into was the role of the 0:14:16.040 --> 0:14:20.720 audit firm and any connections between the partner involved in 0:14:20.720 --> 0:14:23.560 the audit and the companies. And you know, we had 0:14:23.600 --> 0:14:25.920 to say to them, look, we can't really do that 0:14:26.080 --> 0:14:29.800 because we just don't have sufficient knowledge. We don't have 0:14:29.840 --> 0:14:34.120 any feet on the ground in China um to be 0:14:34.200 --> 0:14:37.440 able to assess if there are any hidden links between 0:14:37.920 --> 0:14:42.760 the company and the auditor, whereas in the UK, for example, 0:14:43.280 --> 0:14:45.840 that would be it wouldn't be easy to do. But 0:14:45.880 --> 0:14:49.840 we've got various tools and techniques that we deploy in 0:14:49.920 --> 0:14:52.600 order to make an assessment if that there, if there 0:14:52.640 --> 0:14:55.080 could be that sort of connection. But it would be 0:14:55.120 --> 0:14:57.320 impossible for us to look at something like that in China, 0:14:57.400 --> 0:14:58.960 and we don't we just so we don't. We don't, 0:14:59.080 --> 0:15:02.560 We don't even try. But there's there's a number of 0:15:03.000 --> 0:15:08.480 issues with Chinese companies in general. Obviously the use of 0:15:08.520 --> 0:15:13.160 these variable interest entities is a very common that these 0:15:13.200 --> 0:15:15.960 companies are said, uh and these you know, that has 0:15:16.000 --> 0:15:19.400 a whole set of other issues which we which we 0:15:19.440 --> 0:15:21.600 don't go into detail in this report because they're generic. 0:15:21.840 --> 0:15:24.680 You know, that's a generic thing. What are you buying 0:15:24.720 --> 0:15:27.440 when you buy one of these businesses? And you know, 0:15:27.480 --> 0:15:31.200 there's lots been been written about that, and people I 0:15:31.240 --> 0:15:34.280 think have made their own judgments about whether they find 0:15:34.360 --> 0:15:38.720 that an acceptable risk or an unacceptable risk. Instead, what 0:15:38.800 --> 0:15:41.720 we did here was we drilled down into some of 0:15:41.760 --> 0:15:45.200 the specifics. And many of the specifics are related to 0:15:45.240 --> 0:15:47.280 the nature of these businesses, the fact that they are 0:15:47.560 --> 0:15:51.880 internet businesses and that they're heavily involved in a whole 0:15:52.120 --> 0:15:56.280 investment ecosystem, and so a lot of our work was 0:15:56.600 --> 0:16:16.400 dedicated to that area that part of them. So to 0:16:16.480 --> 0:16:19.520 do some compare and contrast. Obviously, we have our internet 0:16:19.560 --> 0:16:23.920 giants here in the US, Facebook, Amazon, etcetera. Talk to 0:16:24.040 --> 0:16:27.960 us about some of the general differences that are required 0:16:28.040 --> 0:16:32.040 for someone to do serious accounting analysis of the books 0:16:32.400 --> 0:16:35.960 or of the statements of US based Internet companies first 0:16:36.040 --> 0:16:39.040 Chinese ones. Well, I mean some of these companies report 0:16:39.120 --> 0:16:42.440 under US GAP. So there's you know that counting rules 0:16:42.560 --> 0:16:46.160 are the same, um right, ten Cent reports sunder I 0:16:46.280 --> 0:16:48.440 f r S, which I think is quite unusual because 0:16:48.800 --> 0:16:53.680 ordinarily companies that are listed in the US generally have 0:16:53.960 --> 0:16:58.560 gaps as their main language, mean accounting language, but that 0:16:58.680 --> 0:17:01.080 counting rules are exactly the same. But what you've got 0:17:01.120 --> 0:17:04.399 here is if you if you think of Ali Baba 0:17:04.400 --> 0:17:06.959 and Amazon, they're being they're they're kind of similar in 0:17:07.480 --> 0:17:10.280 in concept. I mean they're obviously they do different things 0:17:10.280 --> 0:17:13.679 and their different score ten Cent, gd dot com you 0:17:13.680 --> 0:17:16.440 would think of those in the same light as thinking 0:17:16.480 --> 0:17:20.200 of an Amazon. But if I told you that the 0:17:20.280 --> 0:17:23.040 Ali Baba cants went from over a thousand pages to 0:17:23.119 --> 0:17:25.400 just under five hundred pages, do you know how long 0:17:25.480 --> 0:17:27.560 that counts are for Amazon? Do you want to make 0:17:27.560 --> 0:17:34.200 a guess? A good guess? So you're You're obviously practiced 0:17:34.200 --> 0:17:38.760 at this game, because the Amazon accounts in twenty nineteen, 0:17:39.160 --> 0:17:43.320 including Jeff Bezos's letter at the front, which is an 0:17:43.320 --> 0:17:47.920 addendum to the actual pen K filing, was only eighty 0:17:47.920 --> 0:17:52.240 seven pages, so their cants are much much simpler there 0:17:52.400 --> 0:17:57.159 and an Amazon um I think, although I disagree with 0:17:57.240 --> 0:17:59.560 some of it's some of the way it presents its numbers. 0:17:59.600 --> 0:18:01.840 You know, I wrote a blog a little while ago 0:18:01.880 --> 0:18:04.680 about the fact that it presents its free cash flow 0:18:04.800 --> 0:18:09.400 in three different ways, all of them wrong in my view. 0:18:10.040 --> 0:18:12.879 I've got a different definition, but at least it is 0:18:12.960 --> 0:18:15.760 quite helpful in the way it presents its numbers. Some 0:18:15.880 --> 0:18:18.840 of these Chinese companies are I would open it they're 0:18:18.920 --> 0:18:23.160 less helpful than ANALYSM. Sorry, can you just dive into 0:18:23.200 --> 0:18:26.679 that point? So how are the numbers less helpful? And 0:18:27.000 --> 0:18:29.280 I'm aware that, you know, one of the criticisms of 0:18:29.440 --> 0:18:35.359 tech companies all over the world is flattering their growth figures, 0:18:36.040 --> 0:18:39.320 you know, how many users they have on their platform. 0:18:39.760 --> 0:18:44.000 There's also, I guess, the use of non gap metrics, 0:18:44.080 --> 0:18:48.760 the most famous being uh we work and community adjusted EBITDA. 0:18:49.359 --> 0:18:51.639 Is that the kind of thing that you're that you 0:18:51.720 --> 0:18:55.240 found in your report. Yeah, absolutely, I mean the use 0:18:55.320 --> 0:18:59.520 of non gap. I mean this isn't a criticism solely 0:18:59.560 --> 0:19:01.760 of these and Neese companies. I mean it's that it's 0:19:02.280 --> 0:19:06.359 very prevalent throughout Less and Pole hundred as well. Um. 0:19:06.400 --> 0:19:10.000 But you know these companies, the non gap numbers and 0:19:10.040 --> 0:19:15.600 the gap numbers are there often miles apart, not so 0:19:15.880 --> 0:19:17.560 much in the case of ten cents, but in the 0:19:17.560 --> 0:19:22.040 case of all there for they're very significant differences. And 0:19:22.280 --> 0:19:25.199 you know one of the main differences, which isn't a 0:19:25.200 --> 0:19:28.239 criticism of the Chinese companies, more a criticism of the 0:19:28.240 --> 0:19:33.399 way the South Side community treats the reporting these days. 0:19:34.400 --> 0:19:37.840 But they all make huge adjustments for stock based compensation. 0:19:38.480 --> 0:19:39.879 So I think in the case of Ali Baba, but 0:19:39.960 --> 0:19:42.840 I remember correctly, it was something like five billion dollars 0:19:43.560 --> 0:19:48.400 um and that obviously stock based compensation is a real 0:19:48.560 --> 0:19:51.679 expense because if you didn't give people stock, you'd have 0:19:51.720 --> 0:19:55.440 to pay them real money. And it's a real expense 0:19:55.600 --> 0:19:59.560 because it comes at the expense of shareholders, shield shareholders 0:20:00.080 --> 0:20:04.160 lucid to the extent that these shares are issued. So 0:20:04.880 --> 0:20:09.440 it's daft. I think that analysts ignore this number when 0:20:09.480 --> 0:20:13.440 they're calculating earnings because if they weren't, it wasn't stock based, 0:20:13.480 --> 0:20:16.600 it'd be cash and they wouldn't ignore it. So I 0:20:16.640 --> 0:20:19.840 think this is just you know, one aspect. But the 0:20:20.080 --> 0:20:24.680 one of the big elements in the Chinese group which 0:20:24.760 --> 0:20:29.840 is different from the US peers is the use of 0:20:29.920 --> 0:20:33.639 investment gains to flatter profits. Do you see a lot 0:20:34.040 --> 0:20:39.560 of gains on either the sale of investments or on 0:20:39.840 --> 0:20:43.520 the revaluation of investments. And this isn't to say that 0:20:43.560 --> 0:20:47.479 these companies are doing anything wrong because the counting rules 0:20:47.720 --> 0:20:51.560 I think are slightly daft in in in this in 0:20:51.560 --> 0:20:57.680 this respect, because what happens here is that I've got 0:20:57.680 --> 0:21:03.680 an investment in company X. Company X is a young, 0:21:03.960 --> 0:21:08.040 fast growing Chinese internet company. It's hungry for capital, so 0:21:08.119 --> 0:21:10.359 it needs more capital, and it decides to bring in 0:21:10.520 --> 0:21:16.000 an outside shareholder. When outside shareholder makes an investment, it's 0:21:16.040 --> 0:21:19.160 likely to be at a higher price than the price 0:21:19.320 --> 0:21:23.080 which I have invested, And accounting rules require you to 0:21:23.760 --> 0:21:27.840 revalue the investment and book the game through the p now, 0:21:28.400 --> 0:21:34.119 which it's obviously ludicrous. I mean, whoever thought up this 0:21:34.320 --> 0:21:38.280 accounting standard, I don't know what planet they were that 0:21:38.480 --> 0:21:40.720 they were wrong but I think it's a I think 0:21:40.760 --> 0:21:44.480 it's a silly system. And I'm not saying that the 0:21:44.560 --> 0:21:48.119 companies are doing anything wrong by adopting this. This is 0:21:48.160 --> 0:21:51.400 what they're required to do, but it gives a misleading 0:21:51.480 --> 0:21:56.440 representation of their profitability. So this should be a balance 0:21:56.520 --> 0:22:00.480 sheet item as opposed to something that would flow down 0:22:00.520 --> 0:22:02.600 to the bottom line basically, if we're trying to get 0:22:02.600 --> 0:22:05.280 a true understanding of the company. Yeah, well, I mean 0:22:05.400 --> 0:22:08.480 I would argue that it shouldn't even be adopted in 0:22:08.520 --> 0:22:10.840 the balance sheet. You might want to note what the 0:22:11.000 --> 0:22:15.159 what most recent valuation was, because obviously it's helpful for investors. 0:22:15.200 --> 0:22:17.960 But to give you an example, in the case of 0:22:18.000 --> 0:22:21.720 Ali Baba mean Ali Baba and had an investment in 0:22:21.760 --> 0:22:26.119 a business and the investment was being reorganized and these 0:22:26.359 --> 0:22:33.359 are almost invariably very complicated structuring. So this particular investment 0:22:34.000 --> 0:22:38.200 was an investment that they held jointly without financial and 0:22:38.880 --> 0:22:42.280 the business was restructured by being merged with another business. 0:22:43.000 --> 0:22:46.360 And who should come in to make an investment in it? 0:22:46.440 --> 0:22:51.600 But soft Bank. Now we all know that soft Bank 0:22:51.840 --> 0:22:55.879 is not the most disciplined purchaser of assets, and that 0:22:55.880 --> 0:23:00.159 they've been prepared to invest on the basis of a 0:23:00.240 --> 0:23:05.800 longer term vision than most other more ordinary shareholders would 0:23:05.800 --> 0:23:07.920 be prepared to say so, being prepared to pay very 0:23:08.000 --> 0:23:13.879 high prices for some assets that I think are quite questionable. 0:23:15.160 --> 0:23:19.840 So Ali Baba also owns it is also partly owned 0:23:19.880 --> 0:23:22.240 by soft Bank, So soft Bank owns a big steak 0:23:22.280 --> 0:23:26.960 in Ali Baba. So what you have is SoftBank coming 0:23:27.000 --> 0:23:30.960 in paying a very high price for one of Alabama's assets, 0:23:31.080 --> 0:23:35.399 and Ali Baba then revaluing the value of that asset 0:23:35.440 --> 0:23:37.959 in its books and taking a difference to profit loss account. 0:23:38.480 --> 0:23:42.200 What could go wrong? Well, um, just on that note, 0:23:42.400 --> 0:23:45.840 could you maybe talk a little bit more about related 0:23:45.920 --> 0:23:50.200 party transactions because this is something that also crops up 0:23:50.640 --> 0:23:53.280 quite a bit with Chinese companies, where you often have 0:23:53.520 --> 0:23:58.040 this sort of shadowy network of companies that are tangentially 0:23:58.280 --> 0:24:02.600 related to each other and are sometimes, if not self dealing, 0:24:03.280 --> 0:24:06.160 lending each other helping hand when it comes to things 0:24:06.200 --> 0:24:11.320 like funding. What examples of that did you find? There 0:24:11.359 --> 0:24:14.959 are a lot of related party transactions in in in 0:24:15.000 --> 0:24:18.879 these companies. Ali Baba is actually not the not the 0:24:19.480 --> 0:24:22.200 main culprit here. I think it was g D dot 0:24:22.240 --> 0:24:26.240 Com had the largest exposure it's related party transactions and 0:24:26.280 --> 0:24:28.760 the problem with the lated party transactions, and that we 0:24:28.760 --> 0:24:33.000 we cover this in our forensic accounting course for our 0:24:33.040 --> 0:24:38.000 institutional clients. We also cover it in online courses for 0:24:38.080 --> 0:24:41.199 retail investors to say, look, one of the first things 0:24:41.240 --> 0:24:43.600 that we look at when we open this out of accounts, 0:24:43.600 --> 0:24:47.720 we look at the related parties, not because if there 0:24:47.760 --> 0:24:52.000 are a string of related party transactions, you then have 0:24:52.119 --> 0:24:55.639 to ask yourself, well, who's who's verifying this? How do 0:24:55.720 --> 0:24:58.040