Given the unprecedented circumstances of this year that’s thankfully coming to a close, it’s perhaps not terribly surprising that we’ve seen some whoppers in the investment market. But for me, Kaixin Auto (NASDAQ:KXIN) takes the cake. What seemed like an investment in China’s secondhand automotive retail market turned into a bizarre situation. Therefore, anybody outside of a hardcore speculator should avoid KXIN stock.
Don’t get me wrong – I wasn’t optimistic on Kaixin in my first write-up on the organization. True, China’s used-car market accelerated strongly over the past several years. And we are talking about the world’s biggest automotive market, combined with a burgeoning middle class. Ultimately, though, what made me skeptical about KXIN stock is the shaky global economy. Simply, I’m not as confident about a full-blown recovery as others.
Turns out, I was overthinking the bear case against KXIN stock. Just two days after my article was published, Haitaoche, a private Chinese firm, took a majority stake in Kaixin shares. There’s not much to know about this mystery company, other than it “operates as an electronic commerce platform for imported cars.”
But there’s more. Here’s what InvestorPlace contributor Mark R. Hake had to say about this whole mess:
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…
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.
And unknown is putting it nicely. As Hake explained, no one knows “anything about the size, sales and profits of Haitaoche.”
KXIN Stock Could Fall Anyway
In addition to Hake, our own Matt McCall expressed confusion about Haitaoche’s business model. We’ve all heard about electric vehicles. But electronic vehicles seem like an entirely new category. From my perspective, it sounds like a toy.
Further, no one is entirely sure if they mean EV manufacturing or retail distribution. My best guess is that if Haitaoche is an EV firm – and yes, that’s a huge if – then it’s in the business of selling secondhand EVs. From what I understand, many if not most of these upstart EV companies have their own direct revenue channels.
Again, assuming that Haitaoche is a rational player, the synergies involved in having a majority stake in KXIN stock suggests a used EV marketplace. But the problem is that even if everything was on the up and up, I wouldn’t trust this business.
Recently, Xu Haidong, the deputy chief engineer of China Association of Automobile Manufacturers, stated that “China’s electric vehicle sales would be more than 1.3 million units in 2020, up 8% year on year.” Xu also stated that Chinese EV sales could hit 1.8 million units in the following year. However, I doubt this will be the case.
According to the International Energy Agency, between 2011 and 2018, new EV sales in China increased nearly 172-fold to 815,870 units. During the same period, the cost of lithium-ion battery packs decreased worldwide by more than 80%.
However, from 2018 to 2019, Chinese EV sales increased only 2.2%, while over the same period, battery pack costs declined 13.5%. Essentially, as incentives such as government subsidies for EVs were scaled back, demand likewise took a hit. Of course, the government can bolster such programs but I’m not sure if this is sustainable longer term, especially during a global crisis.
China Doesn’t Operate in a Bubble
One of the main criticisms I have about the sustainability of a K-shaped economic recovery is that you can’t have a stable society where educated white-collar workers enjoy life and everybody else lives in abject poverty. It’s like the military – not everyone can be an officer. After all, someone’s got to get the flippin’ work done!
I see a similar situation with China and its position in the global economy. With exports of goods and services representing almost one-fifth of its GDP, the health of the Chinese economy is not insulated from pain in the rest of the world. Certainly, workers there enjoy plenty of good jobs – good enough to buy EVs – from dumb westerners buying cheap Chinese products.
But what happens when that revenue source takes a hit due to the pandemic? In that case, China will likely also suffer, which will then presumably hit luxury items like expensive EVs like a freight train. Therefore, even without Kaixin’s drama, I wouldn’t be interested in KXIN stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
