Kaixin Auto Holdings (NASDAQ:KXIN) is a Beijing-based used-car auto dealer holding company that just announced it sold a majority stake. The word “Kaixin” (pronounced kai-shin) means “happiness” in Mandarin, and hopefully, KXIN stock owners will gain happiness with this partial takeover.
The problem is this is something of a shady company, at best. For example, out of the blue, with no warning, an unknown private Chinese company named Haitaoche took a majority stake in KXIN stock on Nov. 5. It signed a “binding” term sheet to buy, with no cash, a majority stake in the company via a reverse merger.
Selling Control to Haitaoche
Kaixin’s parent company, which owns 79% of Kaixin, allowed Haitaoche to receive a 51% stake in KXIN stock. That company is called Renren (NYSE:RENN). Renren is a sort of failed social media company in China.
Renren is allowing Haitaoche to receive new shares issued by Kaixin. Those shares will now be equal to 51% of the diluted shares outstanding.
Haitaoche agreed to contribute its vehicle sales business to the company as part of the merger. But here is the rub. Kaixin brought in 95.7% of Renren’s revenue in 2019.
So, for all intents and purposes, this looks like a distress sale of not only KXIN stock, but also Renren’s revenue to an unknown private Chinese auto company.
What does Kaixin get in return for issuing a controlling stake to this Chinese company? Haitoache said it would contribute its own vehicle sales business to the combined company.
The problem is the statement does not say anything about the size, sales and profits of Haitaoche. Therefore, no one in the public market knows what they are getting for giving up control of KXIN stock.
Problems at Kaixin Auto Group
Kaixin owns 14 auto dealership holdings companies in 14 cities throughout China, including one in Wuhan. Wuhan, as you know, was the epicenter of the novel coronavirus outbreak.
The word “owns” here is a loose term here, even though the dealerships are the guts of the assets of the company. For example, in the middle of the company’s recent 20-F filing, on page 7, the company clearly points out that it has a lot of risks dealing with its dealerships.
In fact at one point last year, one of the dealerships “detained” (a nice word for stole) some of the car inventory due to a dispute with the parent.
Moreover, in a terse statement on Aug. 26, the company announced it was seeking three of its dealerships’ non-controlling owners. They had disputes related to “operating issues.” These were the people who supposedly sold their dealerships to Kaixin.
But here is the problem. The company said this: “These three dealerships accounted for a majority of Kaixin’s revenues in 2019.”
That is very ominous sounding. It implies not only that Kaixin does not have control of its main revenue-producing assets, but that revenue is at risk. In fact, the company decided to “put a halt to its used-car dealership operations.” The reason was the company “may not have meaningful revenues starting from the third quarter of 2020.”
In other words, the company is out of business. Therefore, you can see why it had to sell a 51% stake to another auto company.
What to Do With KXIN Stock
Drama, drama, drama. That is what you get by owning or buying KXIN stock. As it stands now there is no guarantee that that the company has any revenue. It appears that its used-car auto business is over.
Whatever Haitaoche brings to the table, hopefully, it will bring happiness to KXIN shareholders. One of the signs of the company’s desperation is that the “binding” term sheet allows the management of Haitoache to immediately take over management of the company.
This is more than highly unusual. In fact, it is not clear to me how a definitive agreement can even be signed, since the former CEO has departed.
There is one paragraph in the statement that describes Haitaoche. It is an e-commerce platform for imported automobiles. The company wants to become a “leading automobile retail platform in China.” Whatever that means.
Maybe they are going to sell used cars online, like Carvana (NYSE:CVNA). However, the statement also says that Haitoache wants to get into “electronic (sic) vehicles.” Whatever that means is also unclear. Highly unclear.
For example, are they going to sell used “electric vehicles” (EVs), or are “electronic vehicles” some kind of new category we don’t know about yet? Are they going to get into the manufacture of EVs or just sell them? Lots of questions follow from this.
Here is the bottom line with Kaixin Auto Holdings and KXIN stock. Confusion reigns. Avoid the stock.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.