Apple supplier AAC tumbles

Published May 11, 2017

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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.

Read also:  Apple takes on SA-based reseller over trademarks

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.”

BLOOMBERG

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