Could Alibaba's film unit accounting issues hurt US IPO? (+video)
Alibaba's recently acquired film unit said Friday that a review has uncovered possible accounting irregularities. The news comes as Alibaba readies for what's expected to be a mammoth initial public offering in New York next month.
Hong Kong — The recently acquired film unit of Chinese e-commerce giant Alibaba said Friday that a review has uncovered possible accounting irregularities.
The disclosure by Alibaba Pictures Group comes as its parent company readies for what's expected to be a mammoth initial public offering in New York next month.
Alibaba Pictures said in a statement to the Hong Kong stock exchange that a new management team found "certain possibly non-compliant treatment of financial information" in the company's accounts. As a result, it is delaying the release of its first-half earnings.
The company said the accounting irregularities date to before Alibaba's purchase of the company in June.
Alibaba has made a slew of other recent acquisitions, including the purchase of a 50 percent stake in China's most popular soccer team, Guangzhou Evergrande.
The film business said the discrepancies mean it's likely that there has been "insufficient provision for impairment of certain assets" in the January-June period. That could mean the company has valued assets at more than they are worth.
An audit committee is investigating whether it would affect the company's previous financial reports. Shares of AlibabaPictures have been suspended from trading until further notice.
Alibaba bought 60 percent of the film company, previously known as ChinaVision Media Group, for more than $800 million as part of its push into online content. The film company said in July it has signed development deals with "leading movie producers and directors" including Wong Kar-wai, director of films including "The Grandmaster" and "In The Mood for Love."
While little known in the United States, Alibaba is an e-commerce powerhouse that earns more than Amazon.com Inc. and eBay Inc. combined.
The company, whose IPO could top the $16 billion raised by Facebook two years ago, has helped drive the rise of e-commerce in China and is now expanding into other businesses amid intensifying competition among the country's Internet companies. As the Monitor reported in May, the announcement that the company would file in the US created a buzz in tech IPO circles not seen in years:
Alibaba's debut is anticipated to be among the largest tech IPOs ever, creating a buzz in US investment circles not seen since Facebook's IPO announcement nearly two years ago. The company controls about 80 percent of the Chinese e-commerce market; it aimed to raise $1 billion in its IPO, but most expect it to raise much more. At CNBC, one analyst predicted the company's valuation could reach "over $200 billion," and the IPO could raise up to $15 billion. The valuation won't be locked down, however, until the company begins trading sometime later this summer.
Still if trends continue as they have, Alibaba may still be able to expect a profitable US debut:
Many factors triggered Alibaba's decision – more and more Chinese companies are choosing to go public in the States, prompted by stricter regulations and disruptions of the IPO process in their home country. But the Alibaba IPO is part of a larger-than-usual swell of IPOs that hit US stock exchanges in 2013 and in the early part of 2014: A total of 222 companies went public in 2013, raising about $55 billion along the way – and 2014 brought more than 50 IPOs by the end of March, raising about $8.5 billion. Those IPOs are performing beyond expectations.
The average "first day pop" or price increase for an IPO in 2014 has been 22 percent, well above the typical 13 to 15 percent, according to Renaissance Capital, an IPO consulting firm based in Greenwich, Conn.
Recent IPO activity has been "the highest we had seen since the Internet bubble of 1999-2000," Kathleen Smith, an investment adviser with Renaissance Capital, writes via e-mail.