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Alibaba: Don't Pay 31x Earnings To Own A Black Box


  • BABA skepticism continues
  • Given the track record of foreign domiciled companies listed in the U.S., we believe skepticism is warranted and should be the default mindset for investors
  • With tens of thousands of available instruments to invest in across U.S. markets and exchanges, there's no need to own Alibaba

By Parke Shall

It has been years that companies based overseas have been listing on the US and Canadian stock exchanges and over the course of this time a number of companies were found to have committed fraud.

For instance, there was the case of China domiciled Sino Forest where,

[The company faced] a hearing before the Ontario Securities Commission, which has alleged that they committed fraud. The company collapsed after a short-seller alleged in 2011 that it was a Ponzi scheme that could not account for its stated $3-billion in timber holdings in China.

There was also the case of China domiciled Puda Coal where,

Puda admitted it was basically a worthless shell company, court filings show. Its shares plunged in value on April 8, 2011, and the New York Stock Exchange froze them a short time later.

If you have the time and would like to do some reading on countless other examples of foreign domiciled, U.S. listed frauds, you can click this link.

And one of the common denominators between all of these companies wasn't only just that they were ripping off those buying their ADRs in the US market but also that nobody seem to understand exactly how these entities were set up to be public in the United States. No one understood the reverse merger and nobody understood that because these companies were outside the U.S. they were basically outside of the jurisdiction of U.S. regulators.

For instance, not many people understand that foreign filers are exempt from Regulation FD. A lot of investors also don't understand that owning shares in a VIE or owning depository receipts is not the same as owning shares of common stock of a United States corporation. Shareholders have significantly less rights, as detailed in this Forbes piece from 2012,

This article was written by

Contributors: Scott Tzu, Parke Shall, Thom Lachenmann (contributors write under pen names for anonymity purposes) Please read Seeking Alpha's Policy on Anonymous Contributors to familiarize yourself with the site's terms and conditions relating to anonymous authors.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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