Apple supplier AAC posts record profits a day after short-seller attack

The component maker said its high profit margin is aided by ‘automatic production lines and economics of scale’

PUBLISHED : Friday, 12 May, 2017, 8:30pm
UPDATED : Friday, 12 May, 2017, 8:30pm

AAC Technologies, the Apple supplier newly targeted by prominent US short-seller Gotham City Research, posted record first-quarter earnings while predicting further room for growth in its profit margin.

The company’s shares plunged the most in seven years on Thursday after Gotham questioned its unusually high profit margins and undisclosed transactions with related parties that may have violated Apple’s labour standards. Shenzhen-based AAC later denied all the accusations.

“It makes sense for an industry leader to have a higher profit margin. I believe our engineers and management are capable of increasing it further,” managing director Richard Mok told reporters in a press conference on Friday.

It makes sense for an industry leader to have a higher profit margin. I believe our engineers and management are capable of increasing it further
Richard Mok, managing director, AAC

The short-seller’s attack came just one day before the manufacturer of miniaturised speakers and receivers for clients like Apple, Huawei and Xiaomi posted the financial result of its “most profitable first quarter ever.”

Net profit for the three months ended March 31 surged 72 per cent to 1.06 billion yuan, boosted by demand from Chinese clients for higher-end waterproof and stereo speakers, according to the company’s filing to the Hong Kong stock exchange.

Helped by the phenomenal success of Apple’s iPhones, AAC has seen its share price soar nearly twelvefold over the last decade with steady revenue growth. It is one of the best performing stocks in Hong Kong so far this year, gaining 36 per cent over the last five months.

Investors had also piled into the stock for its hefty gross margin, which it managed to lift to a staggering 41.6 per cent for the first quarter from 40.5 per cent booked a year earlier.

Apple supplier AAC denies short-seller’s accusation of ‘dubious accounting’ as shares plunge

The Gotham report alleged that AAC’s higher margin versus peers is due to its transactions with 20-odd undisclosed related parties owned by the chief executive’s families or employees. The New York-based researcher went on to accuse the electronic component producer of hiding these entities so as to get around Apple’s labour standards.

It is the first time Gotham, which has gained recognition among hedge fund managers for its stellar campaign returns, has launched an attack on an Asian company. Its 2014 short-selling report on Spanish company Gowex saw the Wifi provider file for insolvency while another European tech firm Quindell plunged 39 per cent straight after its attack in 2014.

But Mok dismissed all the claims, stressing on Friday that “the company has achieved a 40 per cent profit margin thanks to our automatic production lines and economics of scale, among other factors.”

“All of our clients speak highly of us regarding our standards for suppliers,”he said. “We don’t have any undisclosed transactions with related parties.”

Jefferies analyst Rex Wu wrote in a note released on Friday that his channel check confirmed the existence of Lian Tai Precision in China’s southeast Jiangsu province, the case raised in the Gotham report as a “related party.” But his note suggested the factory mainly produces metal casings for firms such as Huawei and Xiaomi, but not Apple.