Muddy Waters Takes On U.K.'s Most-Shorted Stock After Rally

(Bloomberg) -- IQE Plc, whose shares have surged on speculation it’s selling parts used in Apple Inc.’s iPhone X, became a target of Carson Block’s Muddy Waters on Thursday, the second time in a week it has been in the sights of a short seller.

Muddy Waters said in a research report that IQE’s dealings with an academic joint venture inflated earnings in an unsustainable way, disclosing a short position on the stock. The assessment comes days after ShadowFall Capital & Research expressed “serious concerns” related to profit and cash flow contributions from two joint ventures, warranting a short position.

IQE rejected the assertions. “Information in the Muddy Waters report is either factually inaccurate or has previously been disclosed in IQE’s annual reports and financial statements,” the company said in a statement, noting that ShadowFall and Muddy Waters both stand to profit from a decline in its share price. Cardiff, Wales-based IQE had earlier disputed ShadowFall’s claims as without merit.

IQE climbed 261 percent last year on speculation it’s selling vital parts to the supply chain needed by Apple for its new iPhone. IQE is not on Apple’s suppliers list, published in February 2017 and the company has never said whether it does business with Apple. The stock has fallen almost 45 percent from November highs, a similar drop that Apple suppliers Dialog Semiconductor Plc and Imagination Technologies Group Plc suffered after concerns that their single biggest customer is walking away from lucrative supply contracts.

Muddy Waters’ claims focus on a joint venture with Cardiff University called Compound Semiconductor Centre Ltd., or CSC. The company received “substantial, but unsustainable, accounting benefits from CSC, at the cost of millions of pounds to the university,” the short-seller said.

IQE’s short interest of 22 percent as a percentage of shares outstanding is the highest among active U.K.-listed companies, according to Markit data, having recently overtaken struggling department-store owner Debenhams Plc. Short interest as a percentage of free float has climbed above 29 percent this week from about 11 percent in November, when the shares were at an all-time high, or about 2 percent in July, when it last traded at current levels, according to data by S3 Partners.

The two short-seller reports in recent days targeting London-listed IQE may signal the start of more activity in Europe this year. Short-seller Glaucus Research Group has hired an investment analyst to focus exclusively on Europe, while Viceroy Research said in a Dec. 29 Twitter post that it will be looking at companies in the region, as well as in the U.S. and South Africa, in the first quarter of this year. Bearish investors tracked by Activist Insight mounted just seven short campaigns against companies listed on European exchanges last year, compared with 153 for the U.S. and 16 for Asia.

IQE is Muddy Waters’ first short in Europe since 2016. Founder Block said in November that it’s getting tougher to target overvalued shares in Hong Kong because the market is rife with manipulation. Hong Kong-traded Apple supplier AAC Technologies Holdings Inc. sank the most in seven years last year after short-seller Gotham City Research questioned the company’s accounting, later recouping the losses.

To contact the reporters on this story: Kasper Viita in London at kviita1@bloomberg.net, Lisa Pham in London at lpham14@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Giles Turner, Paul Jarvis

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