Hong Kong - Shares of AAC Technologies Holdings sank the most in seven years after short seller Gotham City Research questioned the Apple Inc. supplier’s accounting.
The stock dropped 10 percent in Hong Kong, wiping out HK$14.2 billion ($1.8 billion) of market value. Gotham, founded by New York-based Daniel Yu, questioned AAC’s profit margins and alleged that the company engaged in undisclosed transactions with related parties that aren’t listed in Apple’s supplier list.
Before today, AAC was this year’s best-performing stock on Hong Kong’s Hang Seng Index with a 58 percent gain. "We’re intrigued by it because its margins are higher, smoother than some of the best companies in the world,” Yu said in a phone interview.
“In my experience, that usually means that the company is a truly world-changing, excellent, high-competitive company or something else. And based on our investigation, we think the facts support the latter possibility."
AAC denied the allegations, calling the report “inaccurate and misleading.” The company is seeking legal advice and reserves the right to take action, it said in a statement to Hong Kong’s stock exchange.
The Shenzhen-based producer of miniaturized speakers and receivers for mobile phones is scheduled to report results for the three months ended March on Friday. Apple couldn’t immediately comment when contacted by Bloomberg News.
Some analysts questioned Gotham’s conclusions. BOC International Holdings Ltd.’s Tony Zhang, who has a buy rating on AAC, called the report “groundless” and said many of Apple suppliers enjoy high profit margins. His critique was echoed by Sanford C. Bernstein & Co.’s David Dai.
“I read the report,” said Dai, who has a market perform recommendation on AAC. “There is no hard evidence there, only speculation.”
This is Gotham’s first target in Asia. Named after the city where comic-book hero Batman fights crime, Gotham began publicly betting against companies after Yu got burned by an investment in mortgage lender Freddie Mac in 2008.
The firm’s report on Quindell Plc triggered a 39 percent one-day drop in the UK technology firm in April 2014, while its July 2014 report on Let’s Gowex SA preceded the Spanish Wi-Fi provider’s filing for insolvency and its CEO resigning after admitting he reported false financial results for at least four years.
Shares in Gotham’s most recent target, Aurelius Equity Opportunities SE, have fallen about 28 percent in Frankfurt since Gotham published a 68-page note in March questioning the company’s accounting. The German firm, which provides loans to distressed companies, has said that Gotham’s allegations were unfounded, and that Gotham’s report primarily consists of “manipulation of facts known and already published.”
Short sellers based in the US are increasingly turning their attention to companies listed in Asia. Carson Block’s Muddy Waters said in December it was betting against its first Japanese target, the precision motor maker Nidec Corp. Muddy Waters published a report on China Huishan Dairy Holdings Co. later that month.
Huishan Dairy’s shares have been frozen since they tumbled 85 percent on March 24, and Hong Kong’s Securities and Futures Commission on Monday took the rare step of saying the stock can’t resume trading without its approval.
Gotham said it plans to publish more reports on AAC “in the near future.” Yu declined to provide further details on timing.
The outlook for AAC’s shares will depend on the company’s success in responding to Gotham’s allegations, said Ben Kwong, executive director at KGI Asia Ltd. in Hong Kong. “Some investors are skeptical of their earnings after the report, while some are finding excuse to sell after share price has gone up a lot,” Kwong said. “No one likes uncertainty.”