Renowned short seller Gotham City Research (GCR) recently put out a short report on Apple supplier, AAC Technologies Holdings Inc (HK:AAC). The report questioning numbers of profits at the company caused shares of the firm to tank. However, another famous short biased research shop has a different take on the Hong Kong based company. Anonymous Analytics believes that Gotham is 100% wrong (to put it nicely) and details the long case in a new report. See the full report from Anonymous Analytics below – we will likely follow up with reaction from Gotham soon.
We believe GCR’s short report on AAC is grossly misleading, and contains shoddy research, demonstrably false statements, and a seemingly willful ignorance of what constitutes a disclosable related party under Hong Kong listing rules.
GCR claims that AAC has used at least 23 undisclosed related party entities to hide over RMB1.5 billion in costs. However:
• Of these 23 entities, only two of them are disclosable related parties under Hong Kong listing rules. Both of them have been disclosed by AAC in its annual reports under their alternative English names. It seems GCR did not realize that these entities have more than one English name.
• 17 of these 23 entities generated combined revenue of RMB157 million in 2015, according to SAIC filings. This represents only 1.3% of AAC’s RMB12 billion in revenue for that year. GCR’s report omitted these revenue figures – perhaps because they knew readers would dismiss these entities as small and economically meaningless.
• GCR’s report only focused on the remaining 6 entities, 5 of which generated a combined revenue of RMB1.5 billion. GCR claims this RMB1.5 billion figure represents costs that AAC is secretly booking off balance sheet. Unfortunately, what GCR does not mention is that these entities combined generated positive operating profits. If they were to be fully consolidated into AAC’s accounts, they would be accreditive to AAC’s earnings. Since AAC is valued as a multiple of earnings, this would increase AAC’s share value, not decrease it.
GCR’s short thesis is not only flawed from an undisclosed related party perspective, it does not even make sense from a valuation perspective.
Key GCR claims:35
• AAC has used these hidden entities to evade Apple’s labor standards specified in the Apple Supplier Code of Conduct.
• Apple (and other parties) will conduct independent investigations, & validate our findings. As a result, AAC’s profit margins will decline, converging to its peers’ levels.
• AAC is in violation of Hong Kong listing rules, Apple’s supplier code of conduct, and its own representations.
GCR vaguely suggests that Apple (and other parties) will conduct independent investigations to validate their claims. As it so happens, we are an independent party and we did conduct a deep, detailed investigation into AAC that spanned several months. Our investigation found that AAC is a well-managed company that makes quality products that are highly sought after. At least one other publisher of short research we have talked to found the same.
GCR’s only claim of labor issues is with regards to Lian Tai Precision.36 However, by GCR’s own admission, Lian Tai Precision is not even in the Apple supply chain.37
AAC and the other entities mentioned in the GCR report are mainly based in Jiangsu. Jiangsu is a small, but rich coastal province with the highest GDP per capita in China. Jiangsu has a sprawling electronics and manufacturing economy with an abundance of jobs and foreign direct investment.38
The type of systematic labor violations GCR imagines are highly unlikely to happen in Jiangsu. Workers in the province have options in terms of employment and would not stand for mistreatment. Indeed, AAC is one of the better employers in the region and does a lot to retain workers, including company talent competitions, providing sports facilities, and organizing outings:
Of all the targets GCR could have picked as its Hong Kong debut, it probably picked the worst one. AAC is a reputable, blue chip name with perhaps some of the best shareholder-friendly corporate governance practices among all Hong Kong listed stocks. AAC is also a member of the Shanghai through-train, was recently inducted into the Hang Seng Index, and has a global investor base.
If you are going to go after a company like that and knock it down over 30%, you better make sure your research is not factually wrong and economically meaningless.
We don’t imagine this ending very well for GCR.
See the full report below