Milwaukee-based A.O. Smith Corp. says a research report alleging the company had overstated its sales in China and concealed a partnership with a Chinese firm was designed to negatively impact its share price and included “inaccurate, unfounded and misleading allegations.”
The maker of water heaters and water treatment products has done business in China for more than 20 years. Sales in the country topped $1 billion for the first time in 2017 and grew nearly 4% last year, according to securities filings. China made up more than one-third of A.O. Smith’s revenue in 2018, compared to around 10% in 2008.
The report, published by J. Capital Research, however, argues that A.O. Smith’s relationship with distributor Jiangsu UTP Supply Chain has obscured the performance of the business in China. The report also suggests the company used most of the cash it has in China for distributor loans to “prop up sales.” J. Capital questioned whether A.O. Smith has access to most of the cash because of the obligations created by the loans.
A.O. Smith has projected sales in China will decline 6% to 8% this year, but J. Capital says its “detail distributor channel checks” suggest revenue will be down 21%.
“We’re challenged to understand how investors with an appreciation for the breadth of Chinese operation and financial obfuscation can get comfortable investing with a management team that was either this in the dark or complicit,” the report says.
J. Capital Research acknowledges on its website that it stands to benefit if A.O. Smith’s stock price falls.
“Be warned. We are short-sellers. We are biased,” the website says.
J. Capital’s price target for A.O. Smith is $22.68 per share. The company was trading above $48 per share prior to the publication of the report last week. A.O. Smith stock was trading around $43 as of Monday morning.
A number of securities law firms have issued press releases since the report was published seeking clients to form a class action lawsuit against A.O. Smith.
A.O. Smith responded to the report with a statement on Friday afternoon:
“As is common for many companies who do similar business in China, we utilize a distribution channel where third-party supply-chain partners, such as Jiangsu UTP Supply Chain (UTP) and other supply chain partners, purchase product from us which they subsequently distribute to distributers and ultimate end-users,” the statement said. “We understand our supply chain partners do similar services for other global companies with whom they work. All revenue associated with UTP and others was appropriately recognized in accordance with U.S. GAAP in our financial statements.”
The statement also noted the company’s financial statements are audited annually. A.O. Smith also said it does not have any debt or equity interest in UTP and maintains “appropriate independent commercial agreements.”
