To say that that I have some concerns about Kaixin Auto Holdings (NASDAQ: KXIN) is an understatement. Indeed, the thought of buying KXIN stock gives me the same feeling in the pit of my stomach when I am under a lot of stress or ate something that I should have avoided.
Allow me to explain my admittedly unusual metaphor.
First, let’s cut to the chase: If the point wasn’t obvious, I’m not a fan of KXIN stock. The more I found out about the owner of Chinese used auto dealerships, the more I disliked the company. So, here are my top reasons for my bearish case for KXIN.
Weird Origin Story
Will Ashworth and other InvestorPlace contributors have noted Kaixin has an unusual origin story.
KXIN started as a subsidiary of another Chinese company called Renren (NYSE:RENN) in 2015 to provide financing for used car purchases. Four years later, a blank check company called CM Seven Star Acquisition Corporation acquired Kaixin. Renren got 28.3 percent million ordinary shares of Kaixin. In exchange, Renren got 71.7% of the outstanding shares of CM Seven Star, which took the name Kaixin Auto Holdings, which accounts for 96% of its Renren’s revenue. Renren’s current stake in KXIN is about 79 percent, according to a 2020 filing with the Securities & Exchange Commission.
Accounting Issues
The deal, though, hasn’t gone well.
“Prior to our acquisition of KAG (Kaixin Auto Group) in connection with the audit of its consolidated financial statements as of December 31, 2017. and 2018 and for the years ended December 31, 2017, and 2018, KAG identified a `material weakness’ in its internal control over financial reporting and other control deficiencies,” the filing says. “The material weakness identified relates to inadequate controls designed over the accounting of significant and complex transactions to ensure that those transactions are properly accounted for in accordance with U.S. GAAP. We have taken measures and plan to continue to take measures to remedy these deficiencies. However, the implementation of these measures may not fully address the material weakness and deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied.”
Fast forward to November, and Kaixin announced a management shakeup along with a convoluted deal involving a Chinese e-commerce platform called Haitiaoche. Upon closing, Haitaoche will hold 51 percent of Kaixam’s “share capital.” For its part, Kaixin will issue a “number of ordinary shares” to Haitaoche holders. Haitaoche gained the right to appoint the majority of Kaixin’s board. Renren will be able to select the remainder and will have the right to veto certain corporate decisions.
Management Shake-Up
KXIN released no details about Kaixin Chief Executive Officer Chen Ji and Chief Operating Officer Jinfeng Xie’s resignations. Mingjun Lin, a Haitoche founder who has what the company called “substantial experience in automotive Internet media,” was named Kaixin Acting CEO. Vague comments about the departure of the top managers of Kaixin speak poorly about its commitment to transparency. Owners of KXIN stock deserve to know at a minimum and whether Lin will act in their best interest.
Another reason to take a pass on KXIN stock is that the shares are screwy. I realize that I am using a word that’s not precise. Nonetheless, it seems to be the aptest description of shares that move without rhyme or reason. I have no clue why KXIN surged more than 261 percent over the next 52 weeks. They rose 16 percent on Thursday without any catalyst. KXIN might fall 20% tomorrow or soar another 100% next week. I have no idea where KXIN stock is going, and neither does anyone else.
Challenges Abound
Any “good news” about auto sales in China or the expected rebound in the world’s second-largest economy likely is baked into the price of KXIN stock. However, the company’s future is far from certain. KXIN alluded to its many challenges in its Dec. 30 earnings press release and took drastic action.
“Given the serious challenges to its operations, the company decided to put a halt to its used-car dealership business operations while reexamining its business model, as publicly announced on August 26, 2020,” the press release says. “The management of the company currently expects total revenues for the second half of 2020 to be of a minimal amount.”
In conclusion, investors should treat KXIN shares as if they were radioactive.
On the date of publication, Jonathan Berr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.