Chineseinvestors.com's Curious Alibaba Claims

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Financial Alphas
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Summary

  • The company released a press release with its quarterly earnings to announce it has opened a store on Alibaba’s Tmall platform.
  • The CEO stated the exclusivity of opening a store, despite Tmall having over 150,000 brands. I believe investors should instead remain focused on the financials of the company.
  • $400k will be spent on advertising its Tmall business during the rest of this year. It needs to create a significant increase in revenues.

I found it odd that Chineseinvestors.com (OTCPK:CIIX) felt the need to issue a press release with its fiscal first quarter earnings to state it had opened a store on Alibaba’s (BABA) Tmall platform, not least because it’s been open for a while. It was followed by claims by the CEO about the difficulty and exclusivity in being approved to open a Tmall store. Unfortunately, as I’ve discussed before (here and here), it's my opinion that it isn't the first time the CEO has been somewhat liberal with the truth when signaling to investors.

Overstating the exclusivity of opening a Tmall store

For those not familiar with Alibaba’s China ecommerce business, here’s a quick primer. It’s mostly split into two platforms:

  • Taobao: third-party C2C platform. Think of it like eBay with just the “Buy It Now” function.
  • Tmall: the B2C platform, very similar to Amazon’s ecommerce platform. It’s typically where brands sell their own goods, or approved sellers do so.

Shortly after the press release, the CIIX CEO Warren Wang made the following claim:

So a lot of applications are sent to Tianmao [Tmall’s Chinese name], but only a few – like 10 or 20 – applications are approved by Alibaba.

Sounds impressive. It would seem that Chineseinvestors.com getting its hemp cosmetics products onto Tmall is quite an achievement. That is until you realize that Tmall had over 150,000 brands on it as of the end of March 2018 (Alibaba 10K page 4). Opening a Tmall store suddenly seems less exclusive and impressive. Alibaba itself highlights that it’s a pretty simple process that just requires some documentation, particularly if you are selling your own brand’s products.

This brings me to the next point: Chineseinvestors.com has had a Tmall store for at least a few months, which makes the timing of the announcement — two weeks ago on October 16 — so unusual.

ChineseInvestors.com, Inc., a leading online financial information provider and seller of industrial hemp CBD products for the global Chinese community, today announced that its subsidiary, CBD Biotechnology Co. Ltd., has entered into Alibaba Group's Tmall, China’s largest e-commerce marketplace for global and domestic brands and retailers. [Source: Chineseinvestors.com 8-K]

When you enter the Tmall store, there are customer reviews for the firm’s products from September. I believe the firm specifically released this news to deflect attention away from its recent earnings report, released less than a day earlier. I won’t repeat my coverage of the earnings, but they weren't good.

Spend money to make money

As a follow up to the release, the CEO announced the firm will spend around $400,000 during the rest of the year to advertise and drive traffic to the firm’s Tmall store. With the advertising costs in the most recent quarter being $317k, let's assume that these non-Tmall costs remain the same, meaning that total advertising expense could feasibly be $700k in the next quarter. That’s approximately the size of quarterly revenues. With other expenses (COGS and G&A) exceeding $2m, it seems unlikely that investors will see a profit any time soon.

Given the CEO’s expectation of making at least $10m in revenues in this fiscal year, perhaps this is a necessary expense to make. With three quarters left to make $9.3m, the firm really needs to generate sales on Alibaba, during the ecommerce behemoth’s busiest period. My belief is that this target will be out of reach, no matter what the company spends on advertising.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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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.

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