Description

Full report can be downloaded at www.gravityresearchgroup.com/reports

Montage Technology Group Ltd. (“MONT”) is a Chinese fabless semiconductor company focused on the set-top box chip market.  We believe that Montage Technology Group Ltd. (“MONT”) is committing fraud, 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

Below is a summary of the critical facts that we believe prove fraud at MONT.  The sources and more detailed discussion are provided within a report and two appendices to the report posted on www.gravityresearchgroup.com/reports. Appendix to MONT Initiating Coverage Report - Sources of Facts provides specific sources for each of these facts in identical numeric order.  We have also uploaded a separate appendix (Appendix to MONT Initiating Coverage Report - LQW Corporate Filings) with full corporate filings for LQW that you may use to verify excerpts provided within the 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)[1]

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 (???) 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/??).  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 websites[2]^,[3],[4],[5]

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/??),  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 (??, received 60% ownership) and Chen Yueci (???, 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 Yunduan[6] 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

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