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GOTHAM CITY RESEARCH LLC

AAC Technologies LTD (Ticker = 2018):

Why are AACs reported profit margins
higher AND smoother than Apples? Part II Preview
GOTHAM CITY RESEARCHS OPINIONS

AAC has used 20+ undisclosed related parties & dubious accounting to overstate & smoothen
profits since 2014. In this regard, AAC reminds us of Longtop Financial Technologies.
AAC has used these hidden entities to evade Apples labor standards specified in the Apple
Supplier Code of Conduct.

AAC and others recently made the following claims:

The Company denies all the allegations made against the Company.
At this moment, we dont need a CFO.
Shuyang Lisheng is not an undisclosed related party.

Are the above claims true,

per the highlighted text from
the legal filing (to the left)?

Source:

WARNING The views expressed in this report are opinions based on publicly available information. The
expression of these views should not be construed as statements of facts. GOTHAM CITY RESEARCH
LLC has not sought a response from any of the companies which are the subject of this report and has
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Table of Contents

I. Disclaimer
II. Summary
III. Preview of Part II
IV. Is this a Smoking Gun?

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 GOTHAM CITY RESEARCH LLC
a GOTHAM CITY RESEARCH HAS REASON TO BELIEVE THAT:
Company: AAC
Technologies LTD
AAC has used 20+ undisclosed related parties & dubious
accounting to overstate & smoothen profits since 2014. Ticker: 2018
At least 20 undisclosed related party suppliers are owned
or managed by AAC CEOs family members or employees. Exchange: Hong Kong
These undisclosed related party suppliers are not listed in (SEHK)
Apples supplier list, despite some claiming otherwise.
CEO: Zhengmin Pan
Some of the undisclosed related entities supply the same
products as AAC does, are based in the same locations as CFO: None disclosed
AAC is, & hire employees under AACs name.
AAC has used these hidden entities to evade Apples labor Share price performance
2017 YTD: +58%
standards specified in the Apple Supplier Code of Conduct.
Apple (and other parties) will conduct independent Share price (May 6th,
investigations, & validate our findings. As a result, AACs 2016): 83 HKD per share
profit margins will decline, converging to its peers levels.
AAC is in violation of Hong Kong listing rules, Apples Initial price target: 44 HKD
supplier code of conduct, and its own representations. per share

OBSERVATIONS Market cap: 101.4B HKD

AACs China-based subsidiaries 2015 operating margins 52-week high: 116.50 HKD
are only around 9%, per local filings, compared against
52-week low: 55.70 HKD
AACs total 2015 operating margins of 30%.
There are at least 30 companies listed under CEO fathers Shares outstanding:
name, some of which do business with AAC. 1,228M
Companies with more automation should have a higher
not lower average compensation, revenue, & gross profit Foreign ownership (as %
per employee versus peers, according to a Sunwah analyst. of float): 66%
AAC has no CFO, & has never addressed whether its
2014-2016 gross margins:
reporting, financial statement accuracy, & quality of
41.4%, 41.5%, & 41.5%
internal controls would be affected.
Conference call: At this moment we dont need a CFO. 2016 Audit fee as % of
AAC CEOs responsibilities include finance while AAC CEOs revenue: 0.02%
wife sits on the audit committee.
Auditor: Deloitte Touche
AAC has not explained how its auditor is able to audit
Tohmatsu
AACs financial statements with such low audit fees, given
that AACs size would seem to require more billable hours.

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PREVIEW OF PART II
It is better to be roughly right than precisely wrong. John Maynard Keynes

In our first full report released last week on AAC Technologies, GOTHAM CITY RESEARCH revealed some
of the reasons that led us to believe that AAC has used 20+ undisclosed related parties & dubious
accounting to overstate & smoothen profits since 2014. Based on how the company and others have
responded thus far (e.g., some have falsely accused us of fabricating evidence), our confidence in our
originally stated opinions has increased. Specifically, our core question seems unanswered: Why are AACs
reported profit margins higher AND smoother than Apples, since 2014?

While some have questioned the materiality and/or relevancy of our AAC research, the narrative about
the company seems to have shifted suddenly from Gothams opinions are groundless and misleading to
Gothams findings so far are immaterial and dont provide sufficient proof.

Note that in the case of Quindell, a UK-listed company we researched, Gotham City Researchs main thesis
that 42%-80% of Quindells profits were suspect seems to have been proven correct over time.
Quindell is currently being investigated by the UK Serious Fraud Office, and its purchaser investment has
been written down more than 637 million of its value on the basis of fraud. We may not have fully figured
out all the exact details in our report, and not all our findings may have been directly relevant or material
to the profit overstatement but our overall suspicion of the companys profits turned out to be correct.

Similarly, we may not figure out all the exact details as to how AACs reported profits margins are higher
AND smoother than Apples but we have reasons to believe that our core opinions will be validated,
over time. For example, we intend to address the following question in our coming report: How is it that
AACs listed Chinese subsidiaries operating margins appear far lower than AAC the parent companys
operating margins (we estimate 9% versus 30%, respectively, for 2015), per local financial reports?

Gross Gross Operating Operating

Name (in Chinese) Name (in English) Revenue Profit Margin Profit Margin
AAC Microtech (Changzhou) Co., Ltd. 5,018,096 724,541 14.4% 410,100 8.2%
AAC Optics Technologies (Changzhou) Co., Ltd. 2,210,926 244,336 11.1% 256,108 11.6%
AAC Kaitai (Shenzhen) Sci-Tech Development Co., Ltd. 1,949,850 97,739 5.0% 15,034 0.8%
AAC Acoustic Technologies (Shenzhen) Co., Ltd. 1,658,258 163,853 9.9% 40,801 2.5%
AAC Precision Electronics Shuyang Co., Ltd. 1,307,884 181,473 13.9% 127,544 9.8%
AAC Technologies (Shuyang) Co., Ltd. 1,223,140 203,529 16.6% 180,977 14.8%
AAC Module Technologies (Changzhou) Co., Ltd. 1,052,817 442,150 42.0% 434,948 41.3%
American Audio Components (Changzhou) Co., Ltd. 790,029 39,805 5.0% 35,451 4.5%
AAC Acoustic Technologies (Suzhou) Co., Ltd. 16,816 8,812 52.4% (120,227) NA
Changzhou Tairuimei Electroplating Technology Co., Ltd. 15,883 1,210 7.6% 1,025 6.5%
AAC Acoustic Technologies (Changzhou) Co., Ltd. 1 (6) NA (2,249) NA
AAC New Power Development (Changzhou) Co., Ltd. - (9) NA (11,412) NA
in 1,000s of RMB TOTALS: 15,243,700 2,107,433 13.8% 1,368,100 9.0%

Consider the following questions as well:

If the individuals weve identified with the same names as relatives of AACs CEO or AAC
employees are in fact those relatives or employees, are there other undisclosed related parties,
yet to be revealed, owned &/or managed by AAC employees &/or the CEOs family members?
Are there other means by which AACs reported profit margins since 2014 may be overstated?

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Is this a Smoking Gun?
AAC Technologies and others critical of Gotham City Researchs work, recently made the following claims:

The Company denies all the allegations made against the Company in the Gothams May 18
Report.
Shuyang Lisheng is not an undisclosed related party.

Here are a few questions:

If Shuyang Lisheng were described as a subsidiary of a AAC (see the legal document, beginning on
the next page), would it not complicate the above claims?
If Shuyang Lisheng were a subsidiary of AAC, wouldnt Shuyang Lisheng be a related party of AAC?

We encourage you to review the AAC legal document weve attached (see the next page) titled:

Weve highlighted in yellow the sections we found the most interesting (though the entire filing is
worth reading, in our view). Who is correct? Come to your own conclusions. Note that this document is a
sample of what we intend to discuss in our coming report (which we intend to release in the near future).

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