18 March 2019
Named after the city where Batman fights crime, Gotham City Research said AAC Technologies may be using entities to dump some of its costs. Photo: Warner Bros
Named after the city where Batman fights crime, Gotham City Research said AAC Technologies may be using entities to dump some of its costs. Photo: Warner Bros

Dark night for AAC as Gotham casts doubts on its profitability

Shares of AAC Technologies Inc. (02018.HK), one of the major suppliers of acoustic components to Apple Inc., sank the most in seven years after short-seller Gotham City Research raised questions about the firm’s accounting.

The stock plunged 29 percent from this year’s peak of HK$116.5, hitting HK$82.6 before its trading was halted last Thursday.

Named after the city where the comic superhero Batman fights crime, Gotham City Research was founded by New York-based Daniel Yu.

The activist short-seller raised questions about the company’s relationship with its mainland suppliers, which AAC has never disclosed.

Gotham has also cast doubts about AAC’s incredibly high margins, compared with its peers including Goertek (002241.CN) and even Apple, its biggest customer.

The short-seller believes that the “secret sauce” behind AAC’s profitability is its use of undisclosed entities to offload around 1.5 billion yuan (US$217.7 million) in costs.

It cited at least 20 undisclosed entities managed and/or owned by associates and family members with direct ties to Pan Zhengmin, AAC’s chief executive and co-founder.

In the 43-page Part 1 of its report, Gotham referred to seven mainland entities, which it tied to AAC by means of field research photos, local filings and job ads postings.

One such firm, Gotham said, is SuQian QiXiang, which, according to local filings, is owned by Huang Yongdong, who is an assistant of AAC chairman Koh Boon Hwee.

The short-seller said its findings suggest that AAC may offload its costs to undisclosed entities such as SuQian QiXiang.

Another undisclosed entity suspected of holding AAC costs is Lian Tai Precision.

The report said during a site visit, Gotham found the AAC brand name painted on the factory wall.

Also, based on its Hong Kong corporate filing, the ownership of Lian Tai Precision was recently transferred to Huang Yongdong and Pan Shinan, the latter being the name of the CEO’s uncle.

AAC is Gotham’s first target in Asia. The short-seller made its mark in April 2014, when its report on Britain’s Quindell triggered a 39 percent one-day drop in the company’s stock.

AAC has denied Gotham’s allegations, but this has not been good enough to support the company’s share price.

After Gotham’s initial report on May 11, AAC issued two clarificatory statements to Hong Kong stock exchange. The company said “the board vigorously denies the allegations in the report and considers the information contained therein to be inaccurate and misleading”.

It also called an urgent press conference, although CEO Pan Zhengmin, the key figure mentioned in Gotham’s report, did not show up.

Worse still, the Hong Kong Economic Journal reports, top investment bank J.P. Morgan said it has received a written statement from AAC, but that statement failed to bring clarity to the bank’s key questions.

J.P. Morgan has issued a look-but-don’t-touch call for AAC within the next three to six months.

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EJ Insight writer

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