SMC (6273): Puncturing the Myth, a Follow-Up

ACCOUNTABILITY BY THE MAIN BANK, INSTITUTIONAL INVESTORS, PENSION FUND MANAGERS AND SELL SIDE ANALYSTS

Nearly two months have passed since we published the report on SMC, “Puncturing the Accounting Myth.” Since then we’ve been contacted by a number of institutional investors around the world and sent additional questions to SMC and its main bank based on the issues raised by the investors. Some of the sell-side analysts who cover the company have also come out to point to SMC’s corporate governance issues. And yet, throughout, SMC’s management continues to keep silent. SMC’s silence and its inability to address any of the core issues raised by Well Investments Research (WIR) speaks volumes.

The issues WIR has raised include the improperly disclosed share pledge and aggressive management share sales, potentially false disclosures under Japanese rules, the existence of unaudited subsidiaries and that of a scandal-ridden small auditor who supposedly oversees the group’s numbers, the constant rotation of auditors at overseas subsidiaries, an incomprehensibly fast completion of audits for a global business of this scale, a dubious inventory valuation and cash balance that don’t add up.

While the above has no small bearing on the company’s value, and in spite of their own stated concerns about SMC, most sell-side firms retain their Buy rating on the stock and dismiss WIR and its reports. Perhaps that is why some large institutional investors have stopped trading with certain sell-side firms, seeing those firm’s willingness to brush off glaringly governance issues as a red flag. There is still too much of a sales-first culture in Japan’s banking, which is what leads to sell-side comments such as this one: “No one has ever been laid off because they had a buy rating on Toshiba.” It is notable that while Jefferies published a report on December 14th ranking SMC as the ABSOLUTE WORST in the TOPIX 500 for corporate governance, the bank kept its Buy stance on the stock.

The issues that WIR pointed to in our previous report, however, were not only about corporate governance. They ran to the heart of SMC’s financials. And now, new questions around SMC are starting to pop up.

Based on feedback from WIR readers, we decided to dedicate this report to laying out a summary of the main points that investors and other market participants should pay most attention to at this moment.

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