Anta Sports Products, the world’s third-largest sportswear company, was targeted by US short-seller Muddy Waters.
Following negative reports from the short-seller, the Chinese firm saw its share price tumble 7.3 percent on Monday. But it quickly stabilized the following day after Anta issued a clarification.
Muddy Waters issued reports totaling 106 pages, accusing Anta of fraudulently inflating profit margins. The short-seller disclosed some exclusive internal documents.
However, the allegations are not vitally important from investors’ perspective, which is probably why the selloff was brief.
Muddy Waters accused Anta of fraudulently boosting its profit margins by secretly controlling the major distributors, or so called first-tier distributors.
According to the report, Anta has shifted most sales costs to these distributors by setting their procurement prices at a high level, to inflate profit of the listed firm.
As a result, Anta’s gross profit margin hit up to 50 percent, even higher than that of Nike and Adidas. By contrast, its first-tier distributors have an average profit margin of merely 0.1 percent, as opposed to the usual 10 percent, the report noted.
Now, even if that may be the case, the fact is that the profit of the listed firm has been boosted, benefiting small shareholders.
One may argue Anta could do the opposite and shift profits away from the listed firm to distributors. However, as the leading Chinese brand, Anta probably wouldn’t want to take the risk.
Anta, as a matter of fact, has steadily raised its dividend since its IPO in 2006, indicating it has been rather fair to shareholders.
Muddy Waters also accused Anta’s management of bilking investors by stripping the listed company of a valuable international retail asset through a proxy “straw buyer.” The unit was offloaded at 190 million yuan in 2008.
This might be true, but it happened more than a decade ago, and the amount involved is immaterial compared to the company’s current market value that tops 130 billion yuan.
Anta has successfully built its brand awareness over the years. During last year’s Singles Day shopping festival, it sold 66 percent more products, indicating how popular they have become.
Anta may have some accounting issues, but as long as the problem is not too large and the underlying business is solid, investors seem more than willing to look the other way.
This article appeared in the Hong Kong Economic Journal on July 10
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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