On Tuesday, shares in EHang (NASDAQ:EH), an upstart Chinese autonomous passenger drone company, fell 62% after short seller Wolfpack Research published a report calling EH stock “a stock promotion destined to crash and burn.” Though shares have since bounced back over 50%, investors still face many questions about whether to jump back into EHang.
Before investing or selling your stake, here are the seven things investors need to know about EH stock.
1. Wolfpack Claims That EHang Faked Its Revenues
In its 33-page paper, Wolfpack Research claimed that EHang’s largest distributor, Shanghai Kunxiang, had “signed sham sales contracts to benefit its investment in EH.” They backed up these severe allegations by saying that Kunxiang “did not want to sell EH’s products” to Wolfpack researchers.
Law firms have already started investigations to find the truthfulness of these allegations. But given the tightly controlled ownership structure of EH, it could be months before regular shareholders gain clarity.
2. Photographs Show Empty Factories and Non-Existent Offices
Wolfpack Research sent a team to inspect EHang and Shanghai Kunxian’s locations. One place listed on Kunxiang’s Qixinbao page listed an office address on the 13th floor of a building with only 11 stories. Another area showed an empty factory without “any production equipment or raw material inventory on site.”
The team’s suspicions further rose when they visited EH’s “design and testing center,” which turned out to be an abandoned amusement park.
3. SEC Filings Raise Red Flags
In September, Ehang filed two sales contracts with the Securities and Exchange Commission. The first showed a stunningly large 450 million RMB sale for three sets of autonomous aerial vehicles (AAVs) to its distributor. The second contract showed a far lower 30 million RMB sale for 20 AAV sets. The price discrepancy should have investors asking questions. Why would EHang sell AAVs at such different prices, then suddenly stop publishing information?
The concern could spill over into EH’s regular filings with the SEC. The company’s Chinese-based auditors, Ernst & Young Hua Ming LLP, is the same group that audited the now-disgraced coffee chain Luckin Coffee (OTCMKTS:LKNCY). The coffee chain would later admit to filing false financial statements.
4. Wolfpack Research Is Short EH
The short sellers timed their release to coincide with the Chinese New Year, ensuring that U.S. markets would open before the company had time to publish a rebuttal. EH supporters might see this as a move for short sellers to achieve maximum return at shareholders’ expense.
The plan, however, worked. The short two-paragraph statement published by EH in response gave little clarity for investors.
Some commentators have already questioned Wolfpack’s legitimacy. One pointed out that Wolfpack’s Youtube videos of factories missed its timestamp metadata, among numerous other issues. Still, until EHang can produce a more substantial rebuttal, shares could fall further as investors question the company’s legitimacy.
5. EH Stock Still Elevated
Though EHang’s shares have fallen 40% from their peak, shares are still up 230% from the beginning of the year. That suggests that investors aren’t sure if this $4 billion company is outright fraud.
Investors will draw two very different conclusions from this. On the one hand, EH bulls might say Wolfpack Research is dead wrong about EH stock; the short seller targeted Inspire Medical Systems (NYSE:INSP) in April 2020. Its shares have risen 220% as the “terminally unprofitable business” refused to die. EH stock’s resilience would stand as proof that markets disagree with Wolfpack’s claims.
On the other hand, EH cynics might see EH’s high price as a dangerous way to lose even more money. At $70, the company still has a great deal of potential downside if regulators discover falsehoods in its $26 million of sales.
What to Do With EH Stock?
It’s still unclear where EHang stock will go. Because of the Chinese New Year holiday, the company has not yet wholly refuted Wolfpack’s fraud claims. If it turns out EH is a legitimate and growing business, shares could quickly recover; analysts believe the AAV market will grow at 22% per year through 2027.
However, if the SEC finds issues with EHang’s financials, the company could have a long way to fall. Either way, it looks like it’s going to be a bumpy ride.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.