Reported Company:

AXTI Inc.

Researcher Company:

J Capital Research

Price at Report Date:

Close Price Day after report date:

1.96

% Decline Day after Report Date:

% Decline vs Yesterdays Date:

-2.551

Summary

J Capital Research, a well-known activist short seller, has released a scathing report on AXT Inc. (NASDAQ: AXTI), a U.S.-listed company with primary operations in China. The report alleges significant financial mismanagement, operational failures, and environmental violations, painting a bleak picture for AXTI’s future.

Who is AXT Inc.?

AXT Inc. is a manufacturer of specialized semiconductor materials, including germanium, gallium arsenide, and indium phosphide, which are essential for LED and semiconductor chips. While the company is listed on the U.S. stock exchange, most of its business activities are conducted through its subsidiary, Beijing Tongmei Xtal Technology Co., Ltd., in China. AXTI had ambitious plans to list its Chinese subsidiary on the Shanghai Stock Exchange to secure additional financing, but the process has faced severe challenges.

Key Points from Report

IPO Dreams in Tatters

• Failed Chinese IPO: AXTI planned to list its subsidiary, Tongmei, in Shanghai to capture new financing, but Chinese regulators have blocked the IPO. Reports from Chinese media reveal concerns about the authenticity of Tongmei’s financial data and unfair related-party transactions.
• Unreported Failures: U.S. investors were not informed about the apparent failure of the IPO, which has been stalled for 18 months. The $49 million raised from Chinese investors at an inflated valuation is now at risk, as AXTI may be forced to repay these funds if the IPO collapses.

Plummeting Sales and Production

• Sales Collapse: AXTI’s sales have plummeted by over 50%, with little hope of recovery. Former managers reported that production volume has dropped by as much as 90% in some cases.
• Operational Inefficiencies: Production efficiency has drastically declined, with no end in sight to the ongoing issues. The company’s manufacturing operations have been repeatedly halted due to environmental violations.

Environmental and Legal Woes

• Repeated Violations: Tongmei has been fined multiple times for environmental infractions, including arsenic contamination and improper storage of hazardous chemicals. Despite these fines, the company has shown little regard for regulatory compliance.
• Undisclosed Incidents: A major fire at the Beijing factory in 2020 was never disclosed to U.S. investors, adding to concerns about the company’s transparency.

Financial Mismanagement and Questionable Practices

• Related-Party Transactions: Over 50% of Tongmei’s revenue came from related-party transactions, raising alarms about the fairness and legitimacy of these deals. The company’s margins improved suspiciously, which Chinese regulators have questioned.
• Inflated Inventories: Despite collapsing sales, AXTI’s inventories have soared, leading to speculation that the company may be inflating inventory values to prop up its financials.

Activ8 Finance Analysis

The J Capital Research report raises significant concerns about AXTI’s financial health, operational stability, and corporate governance. The blocked IPO, plummeting sales, and repeated environmental violations suggest that AXTI is struggling to maintain its business in China. Additionally, the report’s allegations of financial mismanagement and related-party transactions paint a troubling picture for investors. While AXTI has attempted to capitalize on AI market trends, the underlying issues highlighted in the report indicate a company in distress. Investors should approach with caution, as the risks associated with AXTI appear to be substantial and multifaceted.