Techtronic Industries (HK: 0669) (OTCQX: TTNDY) shares are up near 6% in Hong Kong today. This is something of a strange reaction to a short selling report - an indication that perhaps the report is not wholly believed in each and every particular. It's also not what the issuer of the report, Jehoshaphat, were quite wishing for.
The basic aim of short selling is to identify a share or other asset which is, arguably, overvalued. Then to sell some of it in the hopes of buying back cheaper in the future and thereby booking a profit. One of the ways of making - perhaps aiding is better - that asset or share price decline is to release a report detailing why you think the share is overvalued. Hindenburg has just done this to Tingo Group for example. That one looks justified to us, Tingo might well be nothing but hot air. OK, but it is necessary that the original analysis is correct. Further, people have to believe it is correct when it is revealed. A share price that drops a bit - Techtronic did yesterday - and then recovers - Techtronic today - means that the details of the revelation aren't quite believed perhaps.
The Jehoshaphat claims seems complicated but it actually fairly simple: “ We believe that Techtronic has been defrauding Home Depot on a massive scale for at least four years.
Exposing this scam now will put an end to it, which we believe will in turn reduce TTI's operating income by approximately one-third. With this near-term catalyst in mind, we are again short TTI shares. The scam involves TTI mislabeling Home Depot-exclusive brands as “Factory Blemished” in order to sell them through an outlet channel TTI owns. This channel is called “Direct Tools Factory Outlet,” or DTFO.”
Techtronic Industries share price from Hong Kong Stock Exchange
We are likely all familiar with factory outlets for fashion brands of clothing. Get stuff at 80% discounts and so on. What is really being sold there is a mixture - sometimes end of line fashions, something seconds and even thirds. Those are when there's something - mildly - wrong with the clothing and therefore it cannot be sold at full price. For the clothing manufacturer - not the brand, the actual factory - these can be very profitable. Because the margins added by the brand are so high. There is obviously concern that some first class stock is shifted through these channels.
That's what the Jehoshaphat claim is there. That Techtronics makes for Home Depot. That seconds and thirds - “factory damaged” in the phrase here - can be sold through that factory outlet, DTFO. But that first class goods, which ought to be shipped to Home Depot for them to make the margin on, get shipped instead to the factory outlet where Techtronics makes that margin.
Well, we'd assume that this does happen. That is, it happens sometimes. Just because that's how it does work in every other such channel. But what Jehoshaphat is trying to prove is that this is large scale and directed rather than simple misclassification of goods sometimes. That's a harder thing to prove and the share price reaction today is that perhaps they haven't done so.
If the claim is true at volume then yes, there's a problem here. The claim is almost certainly true sometimes and at the margin. But that second is just one of things that happens and is accepted as something that does. So, perhaps, more proof needed here.
