In a thorough research (100 pages) called “SMC –A LOT OF HOT AIR”, Well Investment rated SMC (6273:JP) as strong sell (45%-85% downside), with target price of JP4,500-13,500.
SMC Corporation (6273:JP), is a JPY2tn market cap company, manufacturers pneumatic control equipment for factory automation.
Well investments believes that SMC has ‘fake’ cash and dramatically overvalued inventory on its balance sheet as a result of inflated margins if not other undisclosed losses. In addition Well Investment mentioned that:
- http://www.wsj.com/articles/short-sellers-shake-up-asias-clubby-investing-scene-1477298606
SMC Exploiting intracompany trading between consolidated and unconsolidated subsidiaries, and undisclosed related party transactions among other questionable accounting techniques. SMC's has not only masked the true status of its inventory and cash balances but also concealed evidence of deteriorating business fundamentals.
The researchers uncovered evidence in several SMC subsidiaries of conflicts of interest, related party transactions and extremely questionable accounting practices, which they believe to be just the tip of the iceberg.
Well Investments expects massive write-downs on SMC inventory as a result.
The researchers question SMC's margins in Japan, which they believe to be far lower than what the company reports.
SMC’s use of a tiny audit firm, Seiyo, with a history of fraudulent clients, underscores the researchers belief that SMC’s audited financials cannot be relied upon.
With SMC claims to have purported revenue of over JPY462bn, 72 subsidiaries across the globe and more than 18,000 employees, it is extremely hard to believe that Seiyo Audit Corporation (which until July 2016 had just 16 certified public accountants ) is able to conduct an effective audit on the company despite its massive size.
On top of it , the researchers claim that some of its accountants have a checkered history of auditing companies that have committed fraud.
Additionally, SMC's chairman has pledged most (if not all) of his shares (over 100 billion yen) as collateral to Resona Bank.
Strict centralized control and a problematic corporate culture has allowed this activity to go on unreported for years.
Well Investments Research aims to identify situations where Japan’s capital markets have overlooked opaque, suspect or confusing issues around listed Japanese firms and provide an insight into them based on clear, actionable analysis. Recently the Wall Street Journal and Bloomberg spoke with Well Investments Research founder, Yuki Arai.*
