Uxin Ltd (NASDAQ: UXIN) is flying in the market today, gaining as much as 38.54% after issuing a rebuttal to a short report from J Capital. The short report raises several issues, suggesting that Uxin is misleading investors. The response to the report says the same about J Capital.
So, who’s right? The answer to that question will take some time, but I’m personally going to side with UXIN early on here. Here’s why:
The Allegations Made Against UXIN By J Capital
In a report published on April 16, 2018, titled “Clunker”, J Capital Research made some serious allegations against Uxin. Ultimately, J Capital said that Uxin is misleading United States investors in an attempt to pad the pockets of management. Some of the allegations made in the report include:
- Overstated Transaction Volume – First and foremost, J Capital said that it believes that UXIN is grossly exagerating the volume of auto sales processed. In fact, the report alleges that the company exaggerates these numbers by 40%.
- Undisclosed Debt – J Capital also alleges that the Chinese company has “a staggering level of debt that puts the company at risk of collapse.” Moreover, the firm alleges that the company has failed to report these debts to United States investors.
- Fake Vehicle Values – The report goes on to allege that the company has artificially inflated the price of cars in order to raise loan values. J Capital states that this will result in loan collateral being “far below what’s needed to cover defaults.” The firm went on to say that the inflated values have been used to obtain debt and that management has pulled far more money out of the company than justified by cash flows.
- Other Allegations – The report went on to make other allegations including overstated inventory, siphoning cash, and more.
At the end of the report, J Capital closed the argument by stating:
Sell: Uxin is so dishonest that we would not know how to attach a valuation. We urge Uxin shareholders to race to the exits.
Clear Red Flags That This Could Be A Short And Distort Waged Against Uxin
As mentioned above, anything can happen. UXIN could be hiding something. However, if that is indeed the case, J Capital did an absolutely horrible job of making a compelling argument in my opinion.
In fact, my view is that this report screams short and distort scam. Here’s why I’ve come to this conclusion:
The Disclosure On The Report
The disclosure on the J Capital Research report reads as follows:
J Capital Research (“J Cap”) is an investment advisor to private funds. J Cap has analyzed the U.S.-listed company Uxin Limited (“UXIN”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. We may be short shares of UXIN, and, for this reason, there might be a conflict of interest.
Notice where it says, “we may be short shares of UXIN, and for this reason, there may be a conflict of interest.” That’s a very important statement, and if I’m correct, it was made in the wrong way.
It is clear that J Capital Research holds a short position in Uxin. However, the firm worked to erase this clarity by saying “we may” rather than “we are.” This, seemingly minimal, manipulation of language seems to be calcualted to get others to jump on the bandwagon. And if they did, they’re feeling pain today. Nonetheless, let’s move forward here.
The Report Offered No Real Data
I write for several websites. If I ever make a statement about a company that I believe has “a staggering level of debt that puts the company at risk of collapse.” I’m expected to follow up with names of lenders, amounts of debt.
Saying that an amount is staggering is relative. What is staggering to you? How does it compare to revenue, market cap, or plenty of other comparable figures? Who is the money owed to? What are the terms on these agreements?
The fact that the report is filled with statements that have been made with the blatantly obvious goal of reducing credibility in UXIN, but provide little by way of real data is concerning. Does J Capital have any data to back up these statements? Is the compnay simply making these statements to cause the price of the stock to tank and build value in their short position?
No Resource Links
Finally, the lack of real data in the J Capital report would be a little easier to deal with if the company provided any resource links to follow. When you make allegations like this, it’s important to make them with plenty of resources to back them up.
Think about it. If the company is overstating value so much, how hard would it be to pull up the Chinese equivalent of KBB and compare it to a few listings on the company’s website? If the company says that there are tons of complaints, why didn’t it link to a single one? With statements about mounting debts found through publicly available Chinese data, why was that data not linked to?
This is a big red flag. Just read my articles. I may not be the best in the world, but I do provide links when I provide data or make allegations. Why is it that J Capital isn’t held to this same standard in their financial reporting?
UXIN Publishes A Rebuttal
In some cases, when we see short reports like this, it takes quite a bit of time for companies to respond. However, it’s clear that Uxin isn’t holding any punches here. The company issued a rebuttal to the short report the day after it was published.
In the rebuttal, UXIN said that the report is built on “errors of facts, misleading speculations and malicious interpretations of events.” The company said that the entire report was without merit and that it “strongly condemns the publishing of false and misleading information.”
Moreover, it went on to explain that it has not falsified any sales data, nor has the Founder, Chairman and CEO, Kun Dai, ever voluntary sold shares mentioned in the report. The company went on to explain that it will be investigating the report further and providing updates to the public as necessary.
UXIN Q4 Results
Much of the report seemed to be centered around the strong Q4 results that UXIN reported back on March 14, 2019. As I believe that the short report was baseless, designed with the intention of manipulating the value of the stock, I figured that it would be a good idea to remind investors of the strong results:
- Revenue – Total revenues came in at $165.6 million, representing growth of 61.6%. This was fueled by revenue of $46.3 million in the B2C segment and $90.3 million in the B2C loan facilitation segment. These figures represent growth of 283.2% and 81.3% respectively. On the B2B side, transaction facilitation led to $21.2 million in revenue, representing year over year growth of 16.4%.
- Gross Profit – Gross profit came in at $114.1 million with gross margins increasing to 68.9%, compared to 64.9% one year before.
- Losses – Loss from operations came to $38.8 million, representing a drastic decline from the same period the year before. Non-GAAP adjusted losses came to $28.2 million with the net loss coming to $45.8 million. Losses declined dramatically from one year ago no matter which of these figures you look at.
Consider The Risks
While I believe that the short report published by J Capital lacks validation and that the stock will find its way up ahead, any investment comes with risk. When it comes to UXIN, here are the most pressing risks to consider in my opinion:
- Short Report – While I believe that the J Capital short report was baseless, anything can happen in the market. If the report is met with validation in the future, the stock could see declines. Nonetheless, you know my argument here, I believe that this won’t be the case.
- Losses – UXIN operates at a loss. This makes the company highly dependent on support from the investing community and its lenders. Should this support falter, the company could be in trouble.
- A Need To Continue Growth – Finally, the company saw some compelling growth throughout the 2018 year. It has done a good job of increasing revenue and reducing expenses. However, it still has a long road ahead of it and Uxin will need to continue its work in these areas to reach a profit. Should revenue growth plateau or losses climb, the company could be in trouble.
All in all, I believe that the attack waged on UXIN yesterday by J Capital lacks credibility. At the end of the day, when making allegations like this, resources and data are a requirement; none of which existed in the report. Moreover, with a disclosure that points to a short position, the motivation for the report seems clear.
With that said, the strong revenue growth that Uxin saw throughout 2018 is worth paying attention to. This, combined with improved margins and decreasing losses suggests that the stock represents a compelling investment opportunity!
What Do You Think?
Where do you think UXIN is headed moving forward? Join the discussion in the comments below!