Stock investing and stock trading are like the anticipation of opening a box of sweets. You do not know what you will get, if you will like what is inside the box and how sweet will be the surprise. Kaixin Auto Holdings (NASDAQ:KXIN) shares had a sweet flavor for traders in October 2020, and a bitter flavor for KXIN stock investors after a huge but short-lived stock market rally.
So what is the story behind KXIN stock and should you buy it or stay away from it?
I will mention five key reasons why my investment thesis is clear, that you should avoid KXIN stock unless you love speculative stocks. And, your investment philosophy is fine with that.
A Classic Example of a Pump and Dump
KXIN stock closed at $3.73 in the last trading session of 2020. In mid-October 2020 the stock price was 52 cents, and until late October 2020, the stock price went to a 52-week high of $13.40. In less than a month it fell almost 78% to $3 per share. This price surge was mostly driven by news, but my question is, was this news material? Had it a solid catalyst to support this frenzy stock price behavior? The answer is a resounding no.
There was news that “Kaixin Auto Holdings Announces Entry into a Binding Term Sheet and Changes to Senior Management.” But this announcement was made in early November 2020, after the huge rally of the stock in the previous month. The second wave of irrational stock price movement followed this announcement sent the stock from about $3 per share to $9 but a second huge stock price correction also followed.
To me, this shows that there was a manipulation of the stock price, which is a red flag for prudent investors.
Business Deal Mystery Spells Doubt
The second argument to avoid KXIN stock is the business terms of this announcement.
I could not find any important nor practical information about this Haitaoche Limited (Cayman) (“Haitaoche”) company. Only that its base is in the Cayman Islands, which reveals nothing about the business operations.
Also, there’s no information about the business prospects and the underlying fundamentals of this financial transaction.
To me, this lack of transparency is a huge red flag.
Things Get More Complicated
Kaixin Auto Holdings business is the following reason to avoid KXIN stock. It operates as a used car dealership in the People’s Republic of China. It also has additional revenue by providing financing solutions to its customers by having a partnership with financial institutions.
There are also some other added services to its customers, such as insurance, or after-sales services. The company was founded in 2015 and its headquarters are in Beijing. This company had a market capitalization of about $243 million on the last day of December 2020.
What is strange, though, about Kaixin Auto Holdings is that it is a subsidiary of Renren (NYSE:RENN), whicht has a market capitalization of about $113 million.
A subsidiary of a company with a market capitalization that is less than Kaixin Auto Holdings is astonishing. In theory, it should be the other way.
Yes, this business and legal structure is too complicated to evaluate the true fundamentals of KXIN stock.
Risk of KXIN Stock being Delisted is High
In December 2020, President Donald Trump signed legislation entitled the Holding Foreign Companies Accountable Act. This measure would remove Chinese companies from U.S. stock exchanges unless they meet U.S. auditing rules.
As of January 2021, a report by Associated Press mentioned that the delisting of three Chinese companies will be a fact. As Kaixin Auto Holdings is a newly formed company, the risk for failing to comply with these auditing rules is too high.
KXIN Fundamentals Are Weak
The unaudited financial results for the six months ended on June 2020 reported in late December 2020 showed fundamentals that do not inspire.
I will focus on the following first half of 2020 financial highlights:
“Total net revenues were US$33.3 million, representing a decrease of 83.7% from US$204.6 million in the first half of 2019.
“Loss from operations was US$5.3 million, compared with a loss of US$8.3 million in the first half of 2019.
“Adjusted loss from operations2 (non-GAAP) was US$4.0 million, compared with an adjusted loss from operations of US$1.6 million in the first half of 2019.”
The company is losing money, its revenue had a dramatic decline and the adjusted loss from operations increased.
Key Facts From the Company
The annual report 2019 released in early July 2020 highlights some key facts and risk factors. The company cites:
“[A] history of losses and negative cash flows from operating activities, and we may not achieve or maintain profitability in the future.
We have a limited operating history in the automobile sales business.
We may not be able to reverse the recent decline in its revenues.
The growth of our business relies on its branding efforts and these efforts may not be successful.”
Summarizing these key facts in two major words would be high risk.
KXIN stock is a speculative bet with very high risks. It is suggested to avoid it. I can hardly find any compelling argument in favor of the stock based on its fundamentals or its current business model and prospects.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
