Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Our full 27-page report on Montage Technology Group Ltd. along with its two appendices can be found here.

Montage Technology Group Ltd. (NASDAQ:MONT) is a Chinese fabless (short for fabrication-less) semiconductor company focused on the set-top box chip market. We believe that Montage Technology Group Ltd. ("MONT") is grossly overstating its revenue, and that MONT's actual revenue is significantly lower than MONT has reported to investors due to overwhelming evidence that MONT's largest distributor is nothing more than a shell company used to help fabricate MONT's financials. LQW Technology Company Limited ("LQW"), a Hong Kong entity which MONT claims accounted for 71% of its revenue in the first 9M of 2013 (up from 50% in 2012), is secretly 100% owned by Shanghai Montage Microelectronics Technology Co. Ltd. ("SMMT"), an undisclosed entity established by MONT and a MONT employee. Our evidence includes the following:

1) Chinese corporate filings showing that LQW (the distributor accounting for 71% of MONT's reported 2013 revenue) is owned by SMMT, an entity established by MONT and a senior MONT employee

2) LQW filings and registration/passport information showing that one of the two directors of LQW provided a false residential address that actually belongs to Phoebe Su, the VP of Finance and Administration at MONT

3) Photographic evidence from visiting the registered office of LQW showing that the "office" is actually nothing more than a small, 1,000-1,500 ft2 warehouse room. We visited on a recent weekday afternoon, and it was padlocked. A security guard working at the building stated that LQW had moved into its room a few months ago, but that he had never seen anyone from LQW entering or exiting the premises

4) Documentation showing that the current registered office of SMMT doesn't even exist

5) A recorded conversation with an officer/shareholder of SMMT where she denied selling set-top box chips (MONT's bread and butter), refused to meet in person, and insisted on conducting future correspondence through text messages rather than calls

Introduction

LQW was founded by Anthony Ho (an ex-employee of MONT CEO Howard Yang at Newave Semiconductor) in October 2011 (the exact same month MONT claims to have started doing business with it1), and 100% ownership of LQW was transferred over to SMMT on February 2, 2012-less than four months after it incorporated.2 SMMT was formed by MONT and a senior employee at MONT (Lei "Larry" Wu/吴雷). Wu and MONT's VP of Finance and Administration (Lin "Phoebe" Su) were appointed to the roles of general manager/executive director/legal representative and auditor of SMMT, respectively.3 Every single job posting for MONT that we came across that listed MONT's subsidiaries included SMMT as one of them.4 This includes the corporate description attached to jobs posted as recently as January 10, 2014.5 SMMT has had two registered offices, both of which were down/across the hall (same floor of the same building) from offices registered to MONT.6 Other sources, including a recorded interview with an employee of MONT and published articles, refer to SMMT either as part of MONT or interchangeably with MONT.

As of today (February 6, 2014), the registered address of SMMT is Room 303-30, Building 33, 680 Guiping Rd., Shanghai.7 We tried to visit the purported office. Room 303-30 does not exist and SMMT had no office anywhere on the floor or in the building. Below is the building directory for the third floor of Building 33, 680 Guiping Rd., Shanghai:

There are only five separate offices located on the floor, none of which belong to SMMT and none of which are number 303-30. We also asked staff at other offices on the floor, and they claimed to have never heard of SMMT.

We also visited LQW. LQW's registered "office" is actually nothing more than a small warehouse room that we estimate to be between 1,000 and 1,500 square feet. We visited the registered address of LQW on a recent weekday afternoon, where we found LQW's door padlocked and did not see any employees. A security guard working at the building during the day said that LQW had moved into its room a few months ago, but that he had never seen anyone from LQW entering or exiting the premises. See below for pictures of the front entrance of the registered "office" of MONT's largest distributor:

Prior to MONT going public, ownership of SMMT was transferred from Larry Wu and MONT to two women, Zhu Yan (朱焱, received 60% of SMMT) and Chen Yueci (陳悅慈, received 40% of SMMT). SMMT also changed its legal representative from Larry Wu to Zhu Yan. Zhu Yan is also legal representative for a Shanghai subsidiary of a Hong Kong entity controlled by the parents of MONT President Stephen Tai. During a recorded phone call with Zhu Yan on January 15, 2014, she claimed that she was not in the office and would not be working for the next few weeks since she was not feeling well and Chinese New Year (which was weeks away at the time of the call) was coming up. During the call, we inquired about obtaining price quotes for set-top box chips (MONT's bread and butter), and Zhu Yan appeared to be uncomfortable. She claimed that she was not selling such products, stated that she only had a small relationship with MONT (a strange comment for the legal representative and 60% owner of the parent company of LQW, MONT's largest distributor), and insisted that we continue future correspondence through text messages rather than calls. We believe that Zhu Yan is a front for MONT.

Following its acquisition of LQW, SMMT appointed two directors at LQW: Chen Yueci (陳悅慈) and Zhu Dexiu (諸德秀). We found that LQW's Hong Kong filings include a false Shanghai mailing address for Zhu Dexiu. The address listed in LQW's corporate filings for LQW director Zhu Dexiu actually belongs to Phoebe Su-the VP of Finance and Administration at MONT!8 According to her passport and registration record, Zhu Dexiu doesn't even live in Shanghai-she lives in Anhui. We believe Zhu Dexiu is also a front for MONT.

Though MONT failed to disclose this in its prospectus, SMMT was accused by SARFT (a Chinese government agency) in March 2010 of selling illegal chips with receivers set to allow the owner to receive free signals from Chinese satellites, who would otherwise have to pay monthly fees for cable.9,10 The satellite signals were intended for rural locations that were too remote to access television signals via cable, however, many set-top boxes were being illegally sold to urban residents. According to an article published on tech.163.com (part of NetEase), the cost of buying a satellite set-top box using such chips was approximately the same as the cost of six months of paying for cable.11 We believe that the actions of SARFT against SMMT caused MONT to effectively fold all real operations at SMMT and, along with deteriorating financials, drove the decision to use that entity to facilitate financial shenanigans.

Based on the evidence we have uncovered, we believe MONT is producing significantly less revenue than it claims and is likely not profitable. We are shocked that investors have purchased MONT equity without forcing the company to address the fact that the vast majority of MONT's reported revenue is coming from a recently-formed entity with no public website and no discernible business relationships with any entities besides MONT.

Background of SMMT

MONT claims in its S-1 filing that LQW made up 50% of its 2012 revenue and 71% of its revenue in the 9 months ending September 30, 2013. This is how the relationship is portrayed by MONT:

However, as we will show, LQW is owned by SMMT. SMMT, in turn, was established by one of MONT's Shanghai subsidiaries and a MONT employee. See below:

(click to enlarge)

Below is the document for SMMT showing its initial capital structure:

(click to enlarge)

MONT eventually changed the ownership of SMMT to two women, Chen Yueci (陳悅慈) and Zhu Yan (朱焱), with Zhu Yan appointed as legal representative. We believe that these two women are shills, and the intent of the ownership change was to try to make it seem as though SMMT is not related to MONT. Zhu Yan is also the registered legal representative of Yunduan Technology (Shanghai) Co., Ltd. (筠端科技(上海)有限公司, "Yunduan Shanghai"), which is a subsidiary of Yunduan Media Company Ltd. ("Yunduan HK"), a Hong Kong-based entity that lists Stephen Tai's (the president of MONT) parents as its only directors. See below for a visual representation of the relationships between the parties and MONT:

(click to enlarge)

There are a couple other items worth noting. First, LQW, Montage Semiconductor Hong Kong Company Ltd., Montage Technology Hong Kong Co. Ltd., Montage Technology Co. Ltd., and Yunduan Media Company Ltd. all used the exact same law office: C.K. Mok & Co. We were unable to find any company-owned website for C.K. Mok & Co., and online sources indicate that it is a very small practice (<10 lawyers).

Second, many of the registered addresses for the entities listed above were either identical or within the same hall:

  1. SMMT's original registered address was:

Room 402, 4th floor, Building 32, 680 Guiping Road, Shanghai

Montage Technology (Shanghai) Co., Ltd. has used the address:

Room 406A, 4th floor, Building 32, 680 Guiping Road, Shanghai

Yunduan Technology (Shanghai) Co., Ltd. has the exact same address:

Room 406A, 4th floor, Building 32, 680 Guiping Road, Shanghai

2. SMMT later changed its registered address to:

Room 303-30, Building 33, 680 Guiping Road, Shanghai, China

This happened around the same time that Montage Semiconductor (Shanghai) Co., Ltd. changed its address to:

Room 303-27, Building 33, 680 Guiping Road, Shanghai, China

Note that the picture in the Introduction to this report shows that neither of those addresses exist anyways.

3. Yunduan Media Company Ltd. has the following registered address in Hong Kong:

Room 8, 4th Floor, King Commercial Building, Nos. 2-4 Chatham Court, Kowloon, HK

Montage Technology Co. Ltd., Montage Technology Hong Kong Co. Ltd., and Montage Semiconductor Hong Kong Co. Ltd. also used the exact same room as a registered address:

Room 8, 4th Floor, King Commercial Building, Nos. 2-4 Chatham Court, Kowloon, HK

LQW was Acquired by SMMT Less than Four Months After Incorporating

LQW was incorporated by Yat Hing Anthony Ho in Hong Kong on October 20, 2011. LQW has no public website, and we were unable to find any mention of other business relationships it may have. The below excerpt from LQW's Memorandum and Articles of Association for LQW show that when it was formed, only one share was issued and it was issued to Anthony Ho (for LQW's full Memorandum and Articles of Association and other relevant LQW documents, see Appendix to MONT Initiating Coverage Report - LQW Corporate Filings on gravityresearchgroup.com):

Shanghai Montage Microelectronics Technology Co. Ltd. (SMMT) acquired the single share of LQW (which represented a 100% interest) from Anthony Ho on February 2, 2012. See below for the relevant excerpt from the Hong Kong Annual Return filed by LQW with the Hong Kong Companies Registry in October 2012:

"上海瀾起微電子科技有限公司" refers to SMMT despite what the English translation says. The characters "瀾起" are pronounced as "lanqi" as indicated in the translation shown in excerpt shown above, but actually translate to "montage" in English! For example, if you look at the emblem on the top left corner of the MONT corporate website with the language set to Chinese, it shows the following logo:

The characters shown in the above logo mean "montage," and match the third and fourth characters in the sequence "上海瀾起微電子科技有限公司." Please note that the characters "瀾" and "澜" are interchangeable in Mandarin-the first represents the "traditional" method of writing the character while the second represents the "simplified" way of writing it. This excerpt above showing the share transfer was part of the Annual Return filed with the Hong Kong Companies Registry on October 20, 2012-since the share transfer was in February 2012, the "current holding" space for Anthony Ho is left blank due to the fact that he no longer owns an interest in the firm, while the current holding for SMMT now includes the share that was transferred to the firm from Anthony Ho. The transfer of ownership to SMMT is a serious cause of concern for investors because we believe that SMMT is effectively controlled by MONT and our site visit to LQW's registered address suggests that it may not actually have any operations. Additional evidence to this point includes:

  1. The address in the Hong Kong filings for LQW show that the residential address of Zhu Dexiu (a director at LQW) is Room 2103, Block 2, No. 88 Si Nan Road, Shanghai:

However, that is not Zhu Dexiu's address-- that is the address of Phoebe Su, the VP of Finance and Administration at MONT! See below for Lin "Phoebe" Su's ID card taken from MONT's Chinese corporate filings:

(click to enlarge)

Below is Phoebe Su's personal information from her passport/registration records in an easier-to-view format:

(click to enlarge)

According to her passport and registration record, Zhu Dexiu doesn't even live in Shanghai; she lives in a village in Anhui! See below:

2. Contact information posted online for SMMT includes a phone number (+86 (021) 5169-6833) that goes directly to MONT's phone system, and the Chairman/contact person listed is Wu Lei, who is a pre-IPO shareholder and employee of MONT.18,19,20,21

Wu Lei is also a Series A and Series B-2 investor in MONT per the S-1 filed on 8/21/2013, and is named on patents awarded to MONT.22 We believe MONT made an intentional error when writing the section describing the related parties signing the Investor Rights Agreement who were insiders. See below excerpt (emphasis added):

"In connection with our private placement of Series B-2 preferred shares in October 2009, we and our shareholders entered into an Investor Rights Agreement ("IRA"). The following parties to the IRA are our related parties: Howard C. Yang, Stephen Tai, Jung-Kung (Jackie) Yang, Xunren Yang, Shuzhuang Liang, Kuai Lap Tai, Iong Wa Chao and Absolute Pioneer Co., Ltd., being our directors, immediate family members of our directors or entities controlled by our director; Shawn Si, Kenneth Chew, Jack Gu, Phoebe Su, Liang Wu, Shung Ho Shaw, Alan Tzi-Hong Yiu and Pannyun Yiu, being our officers or immediate family members of our officers; and AsiaVest Opportunities Fund IV and Intel Capital (Cayman) Corporation, being our principal shareholders."23

However, in reviewing the signatures of the IRA, we found that there was no one named Liang Wu signing the IRA. There was, however, a signer named Lei Wu. We believe the mistake in writing Liang Wu in the section listing officers was an error intended to help mask the fact that Lei Wu is an insider. In its most recent S-1/A filed on January 27, 2014, "Liang Wu" shows up again-this time listed as a selling shareholder even though there is no Liang Wu on the list of pre-IPO investors!24 In a different part of the S-1, an employee "Larry Wu" was named as a "key shareholder" prior to the IPO along with the CEO of MONT, the CFO of MONT, and another employee (Shawn Si).25 Given that Lei Wu is the only shareholder with the surname "Wu" listed in the schedule identifying shareholders and insiders, it is clear that Lei Wu's western name is "Larry." We confirmed this through a MONT patent showing that Lei Wu's American name is Larry.26 His LinkedIn profile shows that he is Engineering Director at MONT.27 Below is his information, retrieved from his registration records:

(click to enlarge)

3. In every job posting we came across for MONT where MONT listed its subsidiaries, MONT lists SMMT as one of its subsidiaries. It is listed alongside the other Shanghai subsidiaries-so there is no question of simply miswriting the names.28,29,30,31,32 Below is an example of the text we would find:

Original:

"澜起科技集团有限公司(Montage Technology)创立于2004年5月,下属四家子公司和一家分公司,分别是:澜起科技(上海)有限公司、上海起微子有限公司、澜起半导体(上 海)有限公司、苏州澜起微电子科技有限公司等四家子公司,以及澜起科技杭州分公司,另外还在韩国、美国等地设有办公室。共有员工近400人。"

English Translation:

"Montage Technology Group Ltd. (Montage Technology) was founded in May 2004, with four subsidiaries and one branch, namely: Montage Technology (Shanghai) Co., Ltd., Shanghai Montage Microelectronics Co., Montage Semiconductor (Shanghai) Co., Ltd., Suzhou Montage Microelectronics Technology Co., Ltd., and Montage Technology Hangzhou branch, with additional offices South Korea and the United States. Montage employs nearly 400 people."

It is true that the Shanghai Montage Microelectronics Co. is not the exact name of LQW's parent company-it is Shanghai Montage Microelectronics Technology Co. Ltd. However, searching the database of registered Shanghai companies, we found that there is no entity that begins with "Shanghai Montage Microelectronics" (上海澜起微电子) other than SMMT.33 Therefore, it is clear that the entity MONT is referring to in its job postings is in fact SMMT.

  1. In an announcement by the State Intellectual Property Office of the P.R.C., SMMT is listed as the new holder of a layout design patent that was applied for on October 10, 2011-the same application date as three other design patents awarded to Montage Technology (Shanghai) Co. in the same announcement!34 This notice also re-confirms that at the time of the announcement (February 6, 2012), the addresses of Montage Technology (Shanghai) Co. and SMMT were within the same hall (room 406 and room 402 of building #32, 680 Guiping Road, Shanghai, respectively)
  2. In a March 2010 government decree from the Chinese government, SMMT was listed as among companies accused of producing illegal satellite channel demodulator chips. See the decree here and the list of companies and banned products.
  3. In a March 2010 televised interview between a reporter and Gu Jie (顾杰, a MONT employee) regarding MONT's history and its prospects going forward, the reporter inquires about Shanghai Montage Microelectronics Technology Co. Ltd., and Gu responds to him as though SMMT is the same entity as MONT. For instance, he calls it "Montage Technology" (the commonly abbreviated name for MONT's publicly disclosed Shanghai subsidiary, Montage Technology (Shanghai) Co. Ltd.) and claims it was formed in 2004 (Montage Technology (Shanghai) Co. Ltd. was formed in 2004-SMMT was formed in 2008).35 There are other articles referencing the same interview-here is one link.

LQW's founder and general manager, Anthony Ho, was previously "Director of sales Asia Pacific" for Newave Semiconductor Corp. from December 1999 through September 2001 and held similar positions at National Semiconductor and Marvell Semiconductor per his LinkedIn account:

Source: LinkedIn

Newave Semiconductor Corporation was a firm started by the CEO of MONT in 1997:

"In 1997, Dr. Yang co-founded Newave Semiconductor Corp., an integrated circuit design company located in China."36

Additionally, both Yang and Ho worked at National Semiconductor prior to the founding of Newave, and Ho, along with the President Stephen Tai and at least two other senior employees at MONT were employed by Marvell Semiconductor at the same time as Anthony Ho.

MONT's Ever-Changing Revenue Figures

There are many inconsistencies among the revenue figures within MONT's filings and the revenue figures Management has provided to analysts. We compared numbers between analyst reports, an investor presentation, and MONT's SEC filings. No two independent sources provided perfectly matching figures-in fact, even different pages within the same SEC filing yielded conflicting figures! We believe this type of discrepancy is symptomatic of fraud.

For instance, page 17 of the S-1 filed on 8/21/2013 reads as follows:

"We have sold a substantial majority of our set-top box solutions to end customers through three independent distributors, LQW Technology Company Limited, Qinuo International Co., Ltd. and China Electronic Appliance Shenzhen Co., Ltd. Sales through these three distributors accounted for 50%, 18% and 9%, respectively, of our total revenue in 2012 and 67%, 11% and 8%, respectively, of our total revenue in the six months ended June 30, 2013."

On page F-11 of the same filing, MONT provides the following table depicting the percentages of revenue for its largest customers:

(click to enlarge)

Matching up the revenue numbers for CY 2012 in the table above with the figures from the excerpt on p. 17 of the S-1, we can determine that Company A is China Electronic Appliance Shenzhen Co., Ltd. ("CEAC"), Company C is Qinuo International Co., Ltd., and Company D is LQW Technology Company Limited. However, after substituting for the actual company names, none of the revenue percent figures for 2013 match between the table on F-11 and the figures on p. 17! See table below:

We found similar inconsistencies when comparing the revenue by distributor from MONT's S-1 filing with the figures provided in analyst reports, which we believe came directly from MONT Management. See below for a chart from one analyst report that matched the figures provided by other analysts:

Source: Deutsche Bank Initiating Coverage Report

These figures are consistent with the figures provided by other analysts, and presumably were obtained from Management. However, the revenue from distributors is different between the analyst reports and the MONT S-1. While the difference may seem small in terms of percent of revenue, the difference in revenue attributed to CEAC for 2012 is 80%:

In yet another set of figures taken from a November 2013 investor presentation, MONT claims that ILDO was 9% of 2012 revenue, which conflicts with the 7% attributed to ILDO in the analyst report and with the total lack of mention of ILDO in MONT's S-1:

The slip-ups continue throughout MONT's prospectus. On page 84 of its prospectus dated September 25, 2013, MONT claims that 82% of its total revenue is sales through distributors:

"Sales through our distributors accounted for 82% of our total revenue in 2012."

This is consistent with the tables within the prospectus depicting Companies A/B/C/D- in total, those four distributors made up 82% of MONT's 2012 revenue according to the table on F-12 of the September 25, 2013 prospectus. However, there are two problems with this. First, according to the pie charts in the analyst reports, MONT purportedly has at least six distributors (so two other distributors on top of Companies A/B/C/D), and distributors make up at least 88% of MONT's total revenue (the sum of the directly attributed revenue from the pie chart above). Second, on page F-24 of the same prospectus, MONT provides a table showing that revenue generated through sales directly to end customers was $12.2mm, or 16% of total revenue:

(click to enlarge)

This doesn't balance with the 82% distributor revenue share from the prior statement on p. 84 of the September 25, 2013 prospectus or with the figures provided to the analysts covering the company which attribute 11% (or potentially even less) of the total 2012 revenue to direct sales (see "other" segment of the pie chart). Alone, it is possible that a genuine company could make one of these mistakes on accident. In aggregate, however, we believe that the volume of slip-ups by MONT is frequently symptomatic of falsified accounting and fraud.

LQW Distribution Arrangement

We find the distribution agreement to be very strange and suspicious. To begin with, the distribution agreement is exceptionally short and basic for a distributor that is selling $50mm+ worth of revenue. Second, the agreement is dated January 15, 2013 and backdated to begin on January 1, 2013- after MONT reported that LQW was 50% of its revenue in 2012. If LQW had a prior distribution agreement with MONT, it should have started in 2011-when MONT claims to have begun its business relationship with LQW. If the agreement changed in 2013, MONT would have presented an amended agreement in its SEC filing, or at the very least would have made some reference to a prior arrangement between the two companies. Finally, Article 1 of the distribution agreement appoints LQW as "exclusive global distributor" of "the Product," which MONT refused to disclose. This is interesting because in the appendix to the agreement, LQW provides a list of four other (censored) distributors for "the Product" and in its S-1 filing, MONT states that distribution agreements are typically for defined customer bases and/or geographic areas:

"We typically enter into distribution agreements with our distributors, with each distributor covering a defined customer base and/or geographic area."

We have reproduced the agreement below for review:

(click to enlarge)

(click to enlarge)

(click to enlarge)

(click to enlarge)

(click to enlarge)

(click to enlarge)

(click to enlarge)

(click to enlarge)

Summary of Facts

Below is a summary of the critical facts that support our thesis. The sources are provided within this report, however, we have also uploaded a more detailed 35-page document to www.gravityresearchgroup.com/reports (Appendix to MONT Initiating Coverage Report - Sources of Facts) with the sources for each of these facts provided in identical numeric order, and encourage readers to review it in conjunction with this report. We have also uploaded a separate appendix (Appendix to MONT Initiating Coverage Report - LQW Corporate Filings) with full corporate filings for LQW that investors may use to verify excerpts provided within this report and the other appendix to this report.

  1. According to MONT, LQW comprised 50% of MONT's 2012 purported revenue ($39.1mm) and 71% of MONT's purported revenue in the first 9M of 2013 ($53.6mm)12
  2. In 2010, before MONT began to use LQW as a distributor, MONT reported 26.9% gross margins and -28.5% net margins. In 2011, after adding on LQW as a distributor, MONT reported 73% revenue growth, gross margins that were twice as high as 2010 and net margins of positive 15.8%
  3. LQW was incorporated in October 2011, the exact same month MONT claims to have started doing business with it.
  4. LQW was established by a former senior employee of the CEO of MONT
  5. LQW is currently 100% owned by Shanghai Montage Microelectronics Technology Company Limited ("SMMT") and was acquired by SMMT within 4 months of incorporating
  6. LQW's registered "office" is actually nothing more than a small warehouse room that we estimate to be between 1,000 and 1,500 square feet. We visited the registered address of LQW on a recent weekday afternoon, where we found LQW's door padlocked and did not see any employees. See the Introduction section of this report for photographs. A security guard working at the building during the day said that LQW had moved into its room a few months ago, but that he had never seen anyone from LQW entering or exiting the premises.
  7. LQW uses the exact same small law office (C.K. Mok & Co.) as all three of MONT's Hong Kong subsidiaries (Montage Semiconductor Hong Kong Company Ltd., Montage Technology Hong Kong Co. Ltd., and Montage Technology Co. Ltd). We were unable to find any company-owned website for C.K. Mok & Co., and online sources indicate that it is a very small practice (<10 lawyers). We find this highly unlikely to be a mere coincidence given that there are hundreds of law offices doing business in Hong Kong
  8. After LQW was acquired by SMMT, Zhu Dexiu (諸德秀) was appointed as a director of LQW. The address in the Hong Kong filing for LQW shows that Zhu Dexiu's residential address is Room 2103, Block 2, No. 88 Si Nan Road, Shanghai. However, that is not Zhu Dexiu's actual address-- that is the address of Phoebe Su, the VP of Finance and Administration at MONT! According to her passport and registration record, Zhu Dexiu doesn't even live in Shanghai; she lives in a village in Hefei! We believe Zhu Dexiu is being used as a front for MONT
  9. SMMT was formed as a joint venture between MONT and a senior employee at MONT (Wu Lei/Larry Wu/吴雷). 90% of the registered capital for SMMT came from Larry Wu (who is a senior employee and shareholder of MONT), and 10% of the registered capital came from MONT's Montage Technology (Shanghai) Co. Ltd. subsidiary
  10. Larry Wu was also appointed as legal representative, executive director, and general manager of SMMT
  11. Larry Wu is still currently listed as the contact person for SMMT on multiple websites13,14,15,16
  12. The phone number posted online for SMMT (+86 021-51696833) is the same as the phone number posted for MONT. We called it to see what would happen-it goes directly to MONT's interactive voice response system!
  13. The original address of SMMT is listed as Room 402, 4th floor, Building 32, 680 Guiping Road. This is across the hall from an address of MONT (Building 32, Room 406-A, 680 Guiping Road, Xuhui District, Shanghai). Later, SMMT's registered address changed to Room 303-30, Block 33, 680 Guiping Road, Shanghai-this is nearly the same as another address purportedly held by MONT (Room 303-27, Building 33, 680 Guiping Road, Shanghai)
  14. As of today (February 6, 2014), the registered address of SMMT is Room 303-30, Building 33, 680 Guiping Rd., Shanghai. We tried to visit the purported office. Room 303-30 does not exist and SMMT had no office anywhere on the floor or in the building. See Introduction for relevant pictures
  15. The Vice President of Finance and Administration at MONT (Su Lin/Phoebe Su/苏琳), was appointed as the initial auditor of SMMT
  16. In every job posting we came across for MONT where MONT listed its subsidiaries, MONT lists SMMT as one of its subsidiaries. It is listed alongside the other Shanghai subsidiaries-so there is no question of simply miswriting the names
  17. According to a recent filing, ownership of SMMT was transferred to Zhu Yan (朱焱, received 60% ownership) and Chen Yueci (陳悅慈, received 40% ownership). We believe this was done to make it more difficult for investors to link MONT with LQW in advance of the MONT IPO
  18. The current legal representative of SMMT is listed as Zhu Yan
  19. Zhu Yan is also the legal representative of Yunduan Technology (Shanghai) Co. Ltd. ("Yunduan"), which is owned by Yunduan Media Company Ltd (a Hong Kong entity), which is controlled by the parents of Stephen Tai (President of MONT). A website listing contact information for Yunduan17 shows that Yunduan's address is the exact same address (down to the room letter) that previously belonged to MONT
  20. During a recorded phone call with Zhu Yan on January 15, 2014, she claimed that she was not in the office and would not be working for the next few weeks since she was not feeling well and Chinese New Year (which was weeks away at the time of the call) was coming up. During the call, we inquired about obtaining price quotes for set-top box chips (MONT's bread and butter), and Zhu Yan appeared to be uncomfortable and claimed that she was not selling such products. She stated that she only had a small relationship with MONT (a strange comment for the legal representative and 60% owner of the parent company of LQW, MONT's largest distributor), and insisted that we continue future correspondence through text messages rather than calls. We believe that Zhu Yan is a front for MONT

Closing Thoughts

In 2012, MONT's revenue was in decline for all of its distributors except for LQW, which was mysteriously experiencing massive growth:

The trend has continued in 2013 (excluding a $690,000 increase in revenue from China Electronic Appliance), with revenue from LQW nearly tripling, with the decline even extending to reported direct sales despite the uptick in reported memory buffer revenue, which we believe would more likely be from direct sales rather than through distributors:

Below are revenue figures for MONT broken out by distributor for all available periods. Again, the revenue for distributors other than LQW is in decline, while the LQW revenue is increasing rapidly:

(click to enlarge)

This decline is especially poignant in light of the fact that MONT's distribution agreements grant each distributor a specific territory or customer base, meaning that LQW could not have taken business from other distributors:

"We typically enter into distribution agreements with our distributors, with each distributor covering a defined customer base and/or geographic area."37

We believe that the decline in revenue from agreements with companies such as Qinuo and CEAC provides a more realistic view into the actual condition of MONT's business. The STB industry is extremely competitive, and even the most dominant player in emerging market STB chips is reporting margins well-below the figures MONT is reporting:

We do not believe that MONT's claimed revenue is real, and we do not believe that MONT has sufficient scale to be genuinely profitable. We also believe that MONT's business began deteriorating in the past and continued deteriorating to the point at which Management elected to invent LQW and go public on the US market.

A common modus operandi of alleged Chinese frauds has been to hire CFOs from North America who do not speak Chinese or have significant experience doing business in China. These include Duoyuan Global Water, Duoyuan Printing, Longtop Financial Technologies, Sino-Forest, and others. We believe that MONT CFO Mark Voll has been deceived by MONT alongside investors and urge him to consider blowing the whistle from the inside. We rate the stock a strong sell, and we believe that its auditor will resign and that SEC action is imminent.

1 See MONT Prospectus filed 1/31/2014: "Under our contract with LQW Technology Company Limited, or LQW, which has been a distributor for our products since October 2011…"

2 See Points 3, 4, & 5 in Appendix to MONT Initiating Coverage Report - Sources of Facts posted on gravityresearchgroup.com

3 See Point 10 in Appendix to MONT Initiating Coverage Report - Sources of Facts posted on gravityresearchgroup.com

4 See Point 16 in Appendix to MONT Initiating Coverage Report - Sources of Facts posted on gravityresearchgroup.com

5 See business description at the bottom of this link page:

6 SMMT has inhabited Room 402, block 32, 680 Guiping Road, Shanghai and Room 303-30, Block 33, 680 Guiping Road, Shanghai. MONT has inhabited Room 406, block 32, 680 Guiping Road, Shanghai and Room 303-27, Block 33, 680 Guiping Road, Shanghai

7 Readers may confirm this through the Shanghai Enterprise Registration website (link) and entering in the Chinese name of SMMT (上海澜起微电子科技有限公司). The other entities shown above may also be entered in to confirm that the building was correct.

8 See Point 8 in Appendix to MONT Initiating Coverage Report - Sources of Facts posted on gravityresearchgroup.com

9 SARFT

http://www.sarft.gov.cn/articles/2010/03/12/20100312181246300433.html

10 SARFT

11 tech.163.com/10/0315/07/61Q2S3KT000915BE.html

12 See p. 17 of MONT S-1 filed on 1/17/2014

13 www.xizhi.com/COMDwQBUQQLCQE2JYY/

14 11467

15 Dianzi

16 7780165.czvv.com

17 14376576.czvv.com

18 www.xizhi.com/COMDwQBUQQLCQE2JYY/

19 www.11467.com/shanghai/co/1031408.htm

20 dianzi.b2bname.com/u48076520

21 7780165.czvv.com/

22 Patent.ipexl.com

23 MONT S-1 filed on 8/21/2013, p. 103

24 See Schedule A of the Amended and Restated Investor Rights Agreement (Exhibit 4.2 to the S-1 filed on August 21, 2013)

25 MONT S-1 filed on 8/21/2013, exhibit 3.1, p. 2

26 Google.com

27 Linkedin.com

28 Yingjiesheng.com

29 Job110.cn

30 Hangzhou.jjoobb.cn/

31 Career.hdu.edu.cn

32 222.68.19.231

33 You can try it yourself in the Shanghai enterprise search engine (query must be entered in simplified Mandarin, which is 上海澜起微电子 for "Shanghai Montage Microelectronics"): www.sgs.gov.cn/lz/etpsInfo.do?method=index

34 Sipo.gov.cn/

35 Tech.163.com

36 Prospectus dated September 25, 2013, p. 90

37 See p. 17 of S-1 filed on August 21, 2013

Source: Is Montage Technology Still 'Fabless' If It Is Fabricating Its Revenue?