Hacktivist group Anonymous weighs in on Gotham’s short selling note on AAC
A faction of the global hacktivist collective Anonymous has stepped into a short-selling call on a Hong Kong-listed electronic components maker, in an unusual bit of rivalry amid a capital market that’s come into the cross hairs of short sellers’ sights.
At stake is whether AAC Technologies, a supplier of speakers, microphones and other parts to electronic companies, engaged in dubious accounting practices and misled its client Apple Inc to evade the American company’s labour standards.
Gotham City Research, a short seller based in New York, said last month that AAC Technologies used more than 20 undisclosed related parties to overstate its profits and evade Apple’s labour standards. While the company denied the charge as “inaccurate and misleading,” a faction of the global hacktivist collective Anonymous has also chimed in.
“The entirety of Gotham’s short thesis alleging undisclosed related parties appears not only false, but it doesn’t even make sense from a valuation perspective,” according to a 50-page report by Anonymous Analytics. “Gotham had made a series of unfortunate mistakes in sourcing evidence and properly translating Chinese entity names to their English equivalent.”
Anonymous Analytics labelled AAC as a strong buy with target price of HK$111.
“I was shocked to learn about the document published by Anonymous. I am unfamiliar with the details of such document,” Benjamin Pan, Chief Executive Officer of AAC said after the release of the report, adding that he denied that Gotham City’s allegation had prompted business partners to reconsider or investigate the company’s work environment.
It wasn’t immediately clear why Anonymous, which describes itself as a collective for the promotion of transparency and free speech, is inserting itself into Gotham’s short call on AAC. Anonymous Analytics’ corporate research had included notes on Qihoo 360, and Chaoda Modern Agriculture.
A number of Chinese companies traded on the Hong Kong exchange have fallen prey this year to short sellers, who make profit by selling stocks high before buying them back low
Cogobuy Group, an e-commerce platform for electronic goods was targeted by Blazing Research last month, causing its stock price to plummet 22 per cent in less than an hour in its biggest intraday decline in nearly two years, to HK$7.89 at the end of May, and further slipping to a current level of HK$5.07.
China Huishan Dairy, the operator of the country’s biggest dairy farms, was perhaps the most famous recent victim, with its stock price plunging by 85 per cent in March, after a debt crisis triggered partly by Muddy Waters’ report four months earlier, claiming the company was “worth close to zero.”
Adding to a twist to Hong Kong’s stock market on Tuesday, Muddy Waters’ founder Carson Block said in a Bloomberg interview that he has identified a target in the Hong Kong stock market and would reveal the company’s name on Wednesday afternoon.
His comments triggered a plunge in several small and mid-cap Hong Kong stocks including Wisdom Sports, Tongda Group and Man Wah Holdings amid speculation that one of these companies will be the target.
Block rose to prominence from shorting against Sino Forest in 2011. But he did it with a single killing blow as he knew the power of his evidence, Anonymous Analytics said.
“Short sellers and those who publish critical research are already hated by everybody. But when one of us is this wrong, we all end up paying the price,” Anonymous Analytics said, referring to the error in Gotham City’s research.
Only two of AAC Technologies’ related entities are required to make disclosures under Hong Kong’s listing rules, and they had already divulged the relevant information in the company’s annual reports under their alternative English names, which Gotham City did not realise, Anonymous said.
Trading in AAC Technologies’ shares, suspended on the Hong Kong bourse, was last at HK$81.43. The stock was halted for 10 days in the previous fortnight, after Gotham City’s May 18 report. AAC has submitted its request to Hong Kong Exchange to resume trading tomorrow, managing director Richard Mok said.
Seventeen of AAC’ s related entities generated a combined revenue of 157 million yuan (US$23 million) in 2015, representing only 1.3 per cent of AAC Technologies’ 12 billion yuan in revenue for that year, Anonymous said, citing filings to the Chinese State Administration of Industry & Commerce.
However, Gotham City omitted these revenue figures – perhaps because they knew readers would dismiss these entities as small and economically meaningless, it said.
Gotham City focused on six entities, five of which generated a combined revenue of 1.5 billion yuan, which it claims are costs that AAC Technologies is secretly booking off balance sheet. But Gotham City did not mention that these entities generate combined positive operating profits, which if they were to be fully consolidated into AAC Technologies’ accounts, would be accredited to the company’s earnings, Anonymous Analytics said.
Rumours of AAC Technologies using undisclosed related parties to hide costs had already started last year but none of the Hong Kong short-sellers publish them probably because they did not find the arguments convincing, Anonymous Analytics said.