Kaixin Auto Holdings (NASDAQ:KXIN) announced Nov. 5 that it’s merging with Haitaoche, a Chinese company that operates an e-commerce platform for imported automobiles. Very few details were given other than Haitaoche shareholders will end up owning 51% of KXIN stock.
As I write this, Kaixin’s stock is up 35% in mid-day trading. With that in mind, let’s take a quick look at some things investors should know about Kaixin.
Here are three things I know to be true about Kaixin.
Kaixin Came to NASDAQ Via SPAC
Kaixin got its start in 2015, providing used car financing in China. It was a subsidiary of Renren (NYSE:RENN) until CM Seven Star Acquisition Corporation combined with Kaixin in May 2019. Renren got 28.3 million ordinary shares of Kaixin for 71.7% of the outstanding shares in CM Seven Star, renamed Kaixin Auto Holdings with the KXIN stock symbol. An additional 24.2 million shares were reserved for an earnout and Kaixin options outstanding.
Today, Renren owns 79% of Kaixin, which accounts for 96% of its annual revenue. Softbank Group (OTCMKTS:SFTBY) owns 38.2% of Renren and controls 42.6% of the votes.
Oh, what a tangled web Kaixin weaves.
It Changed Business Models
In the first half of 2018, Kaixin launched the Kaixin Auto brand, moving from financing used cars to selling them in actual dealerships and online. According to InvestorPlace’s Nick Clarkson, Kaixin owns 14 dealerships in 14 cities across China, focusing on high-end vehicles such as Audi, BMW Mercedes Benz and Porsche.
In addition to selling used automobiles with internal combustion-powered engines, it has gotten into the electric game to satiate Chinese demand for these types of vehicles.
Revenues have grown quickly. In 2017, it had total sales of $116.6 million (76% automobile sales, 24% for referral fees for customer financing and insurance). Two years later, sales had grown to $334.7 million, with 99.4% from automobile sales and less than 1% from fees due to exiting the floor financing business in 2017.
Unfortunately, it doesn’t make money.
In 2019, it had an operating loss of $133.4 million, five times greater than its loss in 2017. To put that in perspective, for every dollar in sales, it loses 40 cents.
Business Has Fallen Off a Cliff
To make matters worse, on Aug. 26, the company issued a press release.
“Kaixin Auto Holdings (“Kaixin” or the “Company”) (NASDAQ: KXIN) today announced that it had recently initiated legal proceedings against non-controlling shareholders of three of its dealerships due to disputes over operating issues. These three dealerships accounted for a majority of Kaixin’s revenues in 2019,” the company stated.
That wasn’t even the worst part of the press release. It went on to state that the novel coronavirus has blown a serious hole in its used car sales.
“To resolve these serious challenges to its operations, Kaixin has been reexamining the business model and has decided to put a halt to its used-car dealership business operations,” Kaixin wrote. “As a result, Kaixin expects that its revenues in the second quarter in 2020 will be significantly lower than the revenues in the prior periods and it may not have meaningful revenues starting from the third quarter of 2020.”
At this point, I’ve seen no terms other than Haitaoche shareholders will own 51% of the combined business. Investors have no idea how profitable the e-commerce platform is other than it must have significant sales to justify a controlling position in the combined entity.
Until more information is released, there are some serious red flags here.
KXIN Stock Is Super Volatile
Motley Fool contributor Daniel Miller wrote an article on Oct. 20 discussing how KXIN dropped 40% in half a day’s trading after gaining 2,381% between Oct. 14 and Oct. 19.
At the time, Kaixin management said there weren’t any changes in its business to report other than its used-car sales were in freefall.
In hindsight, we know this wasn’t entirely true. Clearly, negotiations with Haitaoche were in the works at that point. It could have offered up that it was in negotiations with another party about a possible combination that may or may not come to fruition.
The fact it chose to stay silent should concern any investor who follows China’s ragged securities enforcement. Think Luckin Coffee (OTCMKTS:LKNCY) for inspiration.
As I finish this article, KXIN stock is up 35%. If history is any indication, it could easily lose all of its gains in the hours and days ahead.
Do not. I repeat. Do not spend any time thinking about KXIN stock. It’s a dog’s breakfast.
If you must, buy shares of Softbank over-the-counter to play this insanely silly piece of news.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.