SMC (6273): Puncturing the Myth

SMC Corporation (6273:JP), is a ¥2 trillion market cap company, which manufactures pneumatic control equipment for factory automation. We believe SMC Corp has ‘fake’ cash and dramatically overvalued inventory on its balance sheet as a result of inflated margins if not other undisclosed losses. These questionable accounts have been enabled by the severe lack of oversight from their tiny audit firm, Seiyo, who has been auditing SMC’s accounts since the industrial firm’s IPO in 1987. We note that SMC Chairman Takada and friends have pledged over 100 billion yen of their stock to Resona Bank for loans for unclear purposes. We rate the stock a strong sell with maximum downside of 85%.

Abstract

  • We believe SMC’s cash balances to be substantially less than the company claims.
  • 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.
  • We have uncovered evidence in several SMC subsidiaries of conflicts of interest, related party transactions and extremely questionable accounting practices, which we believe to be just the tip of the iceberg.
  • We expect massive write-downs on SMC inventory as a result.
  • We question SMC’s margins in Japan, which we believe to be far lower than what the company reports.
  • SMC’s use of a small auditor, with a history of fraudulent clients, underscores our belief that SMC’s audited financials cannot be relied upon.
  • Additionally, SMC’s chairman has pledged most (if not all) of his shares as collateral to Resona Bank.
  • Strict centralized control and a problematic corporate culture has allowed this activity to go on unreported for years.

We strongly encourage additional existing and former employees, suppliers, contractors or customers who have concerns about misconduct at the company to raise their concerns with either the authorities in their respective countries, the media or Well Investments Research in order to improve transparency and corporate governance.

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