Cartoon by Christopher Moss for J Capital
ACM Research (ACMR): Dirty Business
Initiation Report: October 8, 2020
We believe ACM Research (ACMR) is a fraud, over-reporting both revenue and profit. What real profit the company has is apparently being siphoned off to related parties.
ACMR faces a cash crunch even with a reported $86 mln in the bank. ACMR is borrowing at high rates of interest, and the company is pushing to IPO substantially all the company assets in Shanghai in order to raise cash. This will significantly dilute U.S. investors.
We visited ACMR sites in China, Korea, and California, accessed credit reports on ACMR subsidiaries, reviewed ACMR’s exchanges with Shanghai regulators, and conducted more than 40 interviews. This work brings us to conclude the following:
• ACMR reports industry-beating gross margins of 47%. We believe the real gross margins are half that at best. That would wipe out the company’s net profit.
• We estimate that revenue is overstated by 15-20%.
• We have evidence that undisclosed related parties are diverting revenue from the company.
• Key means by which ACMR tunnels over-reported profit out of the company may be through about $20 mln in overstated inventory costs and through cash that is inflated or just compromised. We think least $11 mln in warranty and service costs are understated.
• ACMR appears to be strapped for cash in spite of the $86 mln reported on the balance sheet. ACMR had $25.77 mln in short-term borrowings in Q2 2020, up by $21.88 mln QoQ and at average annualized borrowing cost of 6.1% compared with annualized interest income of 1.3%. ACMR’s CEO has personally guaranteed 11 of 13 short-term “lines of credit” issued on the mainland.
Reactions to the Q3 2020 report: Curiouser and Curiouser
Questions to ask on the Nov. 6 earnings call
On Friday, November 6, ACM Research (ACMR US) will unveil its third quarter 2020 earnings. In our October 8, 2020 report, we showed why we believe these earnings are fantasy. Here are some questions we think investors should press on the company on its earnings call :
• Why don’t you disclose in your English filings that 91% of your sales are conducted through five sales agents?
• Is Ninebell in Korea, a supplier of robotic arms to ACMR, buying machines from ACMR or acting as a sales agent? If so, why isn’t that disclosed? If not, why are there ACMR machines on premises at Ninebell?
• Since Korean documents and your disclosures show that ACMR accounts for 97% of Ninebell’s revenue, why don’t you consolidate this company’s accounts?
• Why have procurement managers at four of your largest customers—SK Hynix, SMIC, Shanghai Huali, and Yangtze Memory--never heard of the agents that you reported were responsible for their sales?
• In the STAR IPO documents, the company's primary operating subsidiary in Shanghai had negative operating cash flow for 2019, even though the Mainland accounts for 96% of total main operating income. Why?
• Why does ACMR need to allocate nearly one-third of its capital expenditure budget at its new facility in Shanghai to trial production costs, when you are putting together pre-assembled components with manual labor, and no new production engineering?
• Please explain why the price for your machines charged by agents is significantly higher than your reported sales prices, with mark-ups far in excess of typical agent fees.
• Does ACMR staff still import components themselves through air travel via Shanghai Pudong International Airport? Do ACMR staff enjoy shopping duty-free?
• In recent quarters, why are there no longer disclosures on a very significant number of stock options that are still not included in your diluted EPS calculation?
• How many of your customers are vulnerable to US sanctions?
J Capital Research ("J Cap") is a stock-research company. J Cap has analyzed the U.S.-listed company ACM Research, Inc.. (“ACMR”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We may be short shares of ACMR and, for this reason, there might be a conflict of interest.
Reply to Shanghai regulators' inquiries, October 20, 2020
"Blue Heron": SOSI report supporting SMIC's addition to the U.S. "entity list." SMIC is a material customer for ACMR.