JPMorgan is facing a possible libel suit by a locally listed company, Wintek, for producing a research report the firm found unfavorable. Furthermore, the US brokerage has lost its long-time cooperation with the local flat-panel maker on global depositary receipts (GDRs) because of Wintek’s objections to the report.
The incident marked the first time in Taiwan that a listed company has terminated a business partnership with a brokerage over an analysis report, but more importantly, it highlights the role of independent equity research.
The confrontation between Wintek and JPMorgan was sparked by a report published on Tuesday by the brokerage’s research division which forecast that the Taichung-based flat-panel maker would face strong competition from rivals such as AU Optronics and Chimei Innolux in securing orders from Apple in the fourth quarter.
In the report, JPMorgan offered an “underweight” rating for Wintek and cut the target price on the stock, suggesting investors take a profit now, that is, sell Wintek shares.
Enraged by the report, Wintek issued a stock exchange filing on Wednesday saying the report contained inaccurate information, as its analysis and forecast were not in line with the company’s business situation. Wintek chairman Hyley Huang (黃顯雄) said in an interview with the Chinese-language Economic Daily News on Thursday that the report had caused serious volatility in Wintek shares and harmed the interests of its investors and shareholders. He also questioned the professional ethics of the report’s authors, according to the paper.
The report came as Wintek said on Oct. 13 that its third-quarter net income nearly tripled to NT$1.24 billion (US$40.05 million) from NT$313 million in the second quarter thanks to rising shipments of high-margin touch panels. On the same day, the company also announced its board of directors had approved a GDR issue, likely to take place in the first half of next year, of between US$290 million and US$387 million to fund touch-panel expansion and new investment in organic LEDs.
Another reason why Wintek ended its GDR cooperation with JPMorgan was because it considered the view taken by the brokerage’s research division to be inconsistent with the brokerage’s underwriting division’s confidence in the firm. Wintek claimed investors would be confused if GDR cooperation with the brokerage continued in the future, the newspaper quoted Huang as saying.
No matter how the public feels about Wintek’s reaction to the report, it is difficult to avoid speculating that the company used the case to defend its share price ahead of its upcoming GDR offering, as a falling share price would drag down the pricing of the GDR issue and lower the total amount of funds it could raise from the offering.
Wintek has every right to express its objection to the JPMorgan report and to take the action it believes is necessary to protect the company, but whether the report was objective or if the forecast was accurate, only investors can make a judgement.
For a long time, there have been concerns about a potential conflict of interest between brokerages’ underwriting businesses and research arms. Although in this case, had the report been in favor of Wintek, concerns about its objectivity would have been more logical.
Wintek’s high-profile action to lambaste JPMorgan sets a bad example of disregarding and disrespecting independent equity research. If such incidents become the norm, it would place pressure on researchers and could even force them to stop researching such companies, which would do a disservice to investors, companies and researchers alike.
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