The little known Alibaba affiliate that prompted an SEC probe

Hong Kong: The Chinese delivery business that lets customers of Alibaba Group Holding Ltd. ship packages from Shanghai in the east to a far-flung province bordering Pakistan in the west is now stirring questions from US regulators.

Cainiao Smart Logistics Network Ltd., 47% owned by Alibaba, isn’t consolidated into the e-commerce giant’s accounts and now the Securities and Exchange Commission (SEC) is asking why. Along with questions about Singles’ Day, its biggest sales promotion, and related-party transactions, news of the probe saw the stock slump.

Little-known Cainiao is at the heart of Alibaba’s push into rural areas and overseas customers as it develops giant hubs around China’s biggest cities, including one near Beijing as big as 37 football fields. Created in 2013, it doesn’t own the trucks and vans that ship Alibaba packages, and instead provides a centralized information system to marshal trucking, shipping and delivery firms to get products from seller to buyer.

In some ways, Cainiao is Alibaba’s answer to Amazon.com Inc.’s investment in logistics and warehouses. The US web retailer has spent billions to build out its own delivery and fulfilment network, in order to speed up package delivery and keep costs under control.

Alibaba includes results from Cainiao using the equity method, which counts profits and losses as a proportion of an investment. The company uses the same approach for other affiliates, including the Alibaba Pictures Group Ltd. entertainment business.

In 2015, Cainiao posted a net loss of 617 million yuan ($94 million) on sales of almost 3.1 billion yuan, Alibaba said. The e-commerce company recognized a loss of 295 million yuan for its share of those losses.

The SEC probe appears to be aimed at improving transparency and getting Alibaba to include all the earnings and losses from affiliates, said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management.

“One thing that would do is improve disclosures,” said Gillis, who said the company’s filing revealing the probe is doing just that. “This is not an unusual kind of probe.”

Cainiao’s growth is being funded by more than just Alibaba, which created the business with department-store chain Intime Retail Group Co. and industrial conglomerate Fosun International Ltd. The trio led an initial investment into the company, which is spending as much as 100 billion yuan to build out its logistics network. Subsequent investors include Temasek Holdings Pte, GIC Pte and Khazanah Nasional Bhd, which backed a funding round earlier this year.

To help its delivery to rural areas, Cainiao said in 2014 that it would create more than 100,000 network spots via partners including China Post Group. Overseas, Cainiao already has warehouses in the US and Germany through partners, as it envisions a goal to support daily package deliveries of 200 million, President Judy Tong said in an interview in June.