Market overreacting to SEC investigation of Alibaba: Morningstar

Investors are overreacting to Alibaba's disclosure on Tuesday that it was being investigated by U.S. financial regulators over its accounting practices for its affiliates, according to investment research firm Morningstar.

Alibaba said in a regulatory filing that the U.S. Securities and Exchanges Commission (SEC) asked the Chinese e-commerce giant to provide documents related to its consolidation practices, which included accounting of its logistics affiliate and delivery partner Cainiao Networks, as well as operating numbers from China's biggest annual online sale event and other "related party transactions."

Alibaba's shares fell nearly 7 percent Wednesday on the back of the news.

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But Morningstar reckoned that move was excessive.

"While there is always the risk that the SEC investigation could uncover other irregularities, we ultimately believe the market is overreacting to the news, based on the additional data the company has provided," said R. J. Hottovy, sector strategist at Morningstar in a note.

Cainiao Network is a joint venture formed with other Chinese companies, with Alibaba owning approximately 47 percent stake.

Investors had long questioned Alibaba's accounting practices when it came to affiliates such as Cainiao Network.

Alibaba's latest SEC filing showed for the 12 months that ended December 31, 2015, Cainiao Network made a net loss of 617 million yuan ($94.08 million), 237 percent more than the 183 million yuan loss in 2014. Total revenue in 2015 was approximately 3.1 billion yuan.

For its stake in the company, Alibaba recorded a net loss of 295 million in fiscal years 2015 and 2016.

"We view these losses as reasonable , given that Cainiao is still in investment mode as the e-commerce market in China evolves," said Hottovy. "The loss represents a relatively small part of Alibaba's net income."

In the year ended March 31, 2016, Alibaba's total revenue was 101.1 billion yuan and net income was at 71.29 billion yuan.

The SEC investigation added to a list of setbacks the e-commerce giant had suffered of late, including its suspension from the U.S.-based International Anti-Counterfeiting Coalition just weeks after joining.

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