The battle between Montage Technology Group Ltd (NASDAQ:MONT) and Gravity Research is heating up even further, with Gravity firing a second shot at the company today in a new report. Montage responded to the last one with a brief press release stating that Gravity’s first report contained incorrect information and promising more information. Apparently Gravity decided not to wait for that information.

Montage Technology Group MONT

Gravity presents “new conclusive evidence”

At the center of Gravity’s short thesis is the claim that LQW, which contributes large chunks of Montage Technology Group Ltd (NASDAQ:MONT)’s revenue, is nothing but a related shell company. In this latest report, the firm refuted Montage’s claim that Shanghai Montage Microelectronics Technology Company Ltd. (SMMT) hasn’t been affiliated with it since 2009. The firm claims to have “conclusive evidence” which shows that Montage has controlled SMMT even after SMMT acquired LQW and in 2012 “well after” Montage started to recognize “significant revenue” from LQW.

Gravity states that it is “more convinced than ever” that Montage Technology Group Ltd (NASDAQ:MONT) is a “fraud.” The firm said it is “confident” that Montage is “dramatically overstating its revenue and margins.” It notes that most of Montage’s revenue is reported as coming from the sale of chips for set-top boxes, which are commoditized. However, Gravity states that Montage claims to earn profit margins which are 50% higher than the market leader in the Chinese STB system-on-a-chip industry.

Montage reported significant revenue improvements

The firm also wants an explanation for the “phenomenal” improvement in margins and revenues which happened between 2010 and 2011. Revenue rose 73%, while the cost of sales only increased 7.5%, pushing gross margins over 100%. Gravity couldn’t find any other fabless semiconductor company which saw this much of an improvement in gross margins year over year.

They note that in 2011, however, LQW, the company they claim is controlled by Montage Technology Group Ltd (NASDAQ:MONT), was incorporated and became one of the company’s distributors. Even though sales at all the other disclosed distributors declined from 2011 and 2012, sales at LQW rose. In the first nine months of 2013, Montage reported 179% revenue growth from LQW. There’s apparently a statement in Montage’s distribution agreements which gives each distributor a territory or customer base in order to prevent them from taking each other’s customers.

Gravity claims a series of half-truths from Montage

SMMT apparently acquired LQW four months after it was created, and Montage Technology Group Ltd (NASDAQ:MONT) claims that it is not affiliated with SMMT even though Gravity states that SMMT was formed by Montage and “a senior MONT employee.” The firm goes on to say that it believes Yang Chongyi, the person who Montage said it transferred its interest in SLMT to, is “almost certainly a sibling or cousin” of Montage CEO Yang Chonghe.” It also shows a number of other connections between Montage and the company in question.

We won’t go through the entire thesis here, but it’s definitely worth a read if you want to hear all of their evidence and decide for yourself.