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.
Earnings Uncertainty
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.
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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.”