Following the collapse of its Hong Kong backdoor listing, WM Motor is pinning its hopes on a potential merger with the US-listed Kaixin Auto.

(Image credit: CnEVPost)

This article by Edith Au and Edith Terry was first published in The Bamboo Works, which provides news on Chinese companies listed in Hong Kong and the United States, with a strong focus on mid-cap and pre-IPO companies.

Key Takeaways：

WM Motor could list in New York through a newly announced tie-up with Kaixin Auto, even though it suspended production and sales this year.

The automaker's annual sales last year dropped significantly to just 30,000 units.

The "old master" image applies for some sectors, turning "old" into "gold" for many tried-and-tested consumer brands. But it's hardly the case in the fast-moving auto sector, especially one that's making a massive shift to new energy vehicles (NEVs).

The race into NEVs is mostly filled with new names like Tesla (TSLA.US) of the US and Nio (Nio.US; 9866.HK) and BYD (1211.HK; 002594.SZ) of China, which were barely known just a decade ago.

China's WM Motor Technology Co Ltd. once hoped to become a standout in the field as well. But its recent road has been filled with potholes and setbacks, raising concerns about its future.

Its latest setback came earlier this month, when WM Motor's attempt at a $2 billion Hong Kong backdoor listing collapsed when its merger partner, Apollo Smart Mobility (0860.HK), slammed the brakes on the deal on September 8.

But WM Motor didn't give up, even as it faces substantial challenges that threaten its very existence. Just days later on September 11, US-listed second-hand car dealer Kaixin Auto (KXIN.US) announced a plan to acquire WM Motor, in a deal that would give it 100 percent of the company in exchange for new Kaixin shares. More exact terms, including the value of such a transaction, were not disclosed.

The whole deal is full of questions, since Kaixin's own position is also somewhat precarious, and its ability to salvage the struggling WM Motor remains highly uncertain.

The Nasdaq requires that listed companies maintain a share price of $1 or higher, or they may face delisting. Kaixin's was well below that on September 11 at just $0.28, and it was notified in March to get the price back up, or else.

It finally came back into compliance through a 15-for-1 reverse share split on September 15, putting it back above the $1 level with a closing price of $2.75 on Monday.

WM Motor was established in 2015 by Shen Hui, renowned as a pioneer in the globalization of China's auto industry, well before NEVs took off. Shen's achievements include helping Chinese automaker Geely acquire Volvo, the largest overseas acquisition in the history of Chinese auto industry at that time. He also played a pivotal role in restructuring Volvo's global governance structure after the purchase.

Shen's background, coupled with the promising potential of NEVs, put WM Motor in a pole position for attracting investment after its founding nearly a decade ago. Since its inception, the company has completed 12 financing rounds, raising about 41 billion yuan ($5.6 billion).

Its Series D financing raised 10 billion yuan alone, making it the largest single funding round by a Chinese NEV maker at that time. Its investors have included prominent names like Tencent, Baidu, Sequoia China, Yingke Capital and the Yangtze River Industry Fund.

Drawing on his reputation to assemble a world-class management team, Shen built China's first independently operated car manufacturing plant for NEV production, setting WM Motor apart from the mainland's other NEV newcomers.

The company delivered its first model, the WM EX5, in September 2018. A year later, it was the nation's second-largest NEV maker with 17,000 units sold, making it one of China's "Four Little Dragons" at that time, alongside Nio, Li Auto (2015.HK, LI.US) and Xpeng (9868.HK, XPEV.US).

WM Motor's decision to build its own vehicle plant from the get-go looks lavish, setting it apart from the other three "Dragons," which initially let others do their actual manufacturing under an OEM arrangement.

In hindsight, some may argue that Shen's decision was not the wisest. The company now fully owns two highly automated plants in the cities of Wenzhou and Huanggang, capable of churning out 250,000 vehicles annually. But it isn't even close to using that capacity, leading to increased production costs.

Car manufacturing is a notably capital-intensive industry. WM Motor's Hong Kong IPO prospectus, filed in June last year, showed how the company, like most of its peers, is heavily in the red. Its losses roughly doubled from 4.15 billion yuan in 2019 to 8.21 billion yuan in 2021 alone.

The company also encountered a string of crises dating back as early as 2019 after some of its cars spontaneously caught fire, leading it to ultimately suspend all production and sales this year as it cut salaries, laid off staff and delayed some payments to conserve cash.

As those troubles unfolded, WM Motor sales declined sharply last year, with only about 30,000 vehicles sold, a major decline from 2021. At the same time, sales for the other three "Dragons" continued to charge forward to 122,500 for Nio; 120,800 for Xpeng; and 133,200 for Li Auto, putting WM in danger of losing its status in that select club.

WM Motor's journey towards a listing has also been filled with twists and turns. The company initially wanted to list on Shanghai's Nasdaq-style STAR Market but didn't succeed. It later shifted its sights to the US, but encountered resistance due to weak demand for Chinese stocks.

It then turned to the Hong Kong backdoor listing plan with Apollo Smart Mobility, but that collapsed too, partly due to pandemic fallout. In the face of such setbacks, the company's latest option to list via the tiny and little-known Kaixin Auto looks like an act of desperation.

By comparison, the other three "Dragons" all made it to market at a friendlier time for new listings, giving them access to the capital they need to fund their growth and significantly enhance their competitiveness. The environment for new listings is far worse now, meaning WM Motor may have missed the best window to go public.

Its current predicament may owe at least partly to hubris, with Shen resting too heavily on his laurels from past achievements and relying on traditional car models in the designs of his NEVs.

While self-confidence and solid track records are valuable, the rapidly evolving landscape for NEVs also requires adaptability and innovation -- something that many traditional car giants also lack as they struggle to catch up with newer names like Tesla.

In such uncharted territory, relinquishing constraints of the past may be one of the most important elements for companies to innovate and emerge as future leaders.

WM Motor Holdings Ltd. Announced it found a white knight in Kaixin Auto Holdings (KXIN.US) last week, just days after its plan to be acquired by Hong Kong-listed Apollo Future Mobility Group Ltd. (0860.HK) collapsed. But who exactly is Kaixin, whose own market value is a miniscule $57 million?

Frankly speaking, Kaixin hardly looks like the kind of savior that WM needs to rescue its fast-sinking ship, including operations that halted this year due to lack of cash. Kaixin has a history of opportunistic self-reinventions, including its latest dive into NEVs.

The timing of this latest transformation hardly looks good either, as China's overheated industry shows signs of consolidating after a boom from 2018 to 2020, when two-thirds of China's NEVs were registered.

Those boom years are rapidly fading into the rear-view mirror, and WM Motor, which was backed by heavy hitters like Baidu and Tencent, is the first of a previous group of four "NEV Dragon" startups that is now struggling to survive.

Original savior Apollo Future Mobility didn't have much to offer WM Motor in terms of revenues. But the company had powerful big-money backers, including Richard Li's PCCW and Stanley Ho's Shun Tak Holdings.

By comparison, Kaixin has minimal cash flow to power its ambitions. It acquired its two NEV makers, Morning Star Auto and now WM Motor, both by issuing new shares, diluting its long-suffering existing shareholders.

Adding insult to injury, three days after announcing the non-binding agreement for WM Motor on September 11, Kaixin announced a 15-for-1 reverse stock split to bring its shares into compliance with Nasdaq listing rules requiring them to trade above $1.

Such reverse splits raise a company's share price and can provide a psychological boost to investors, though they don't change its market value.

But in this case the move didn't bring any boost in positive sentiment, with the stock losing a third of its value in five trading days since the reverse-split took effect. Kaixin's shares are now down 44 percent since the WM Motor merger announcement – hardly a sign of investor confidence.

Kaixin Chairman and CEO Lin Mingjun said WM Motor's fashionable products and strong branding were a "good match" for Kaixin. "Through the intended acquisition, WM Motor will gain access to more capital support to enhance the development of its smart mobility business," he said.

One of Kaixin's first -- and biggest -- tasks will now be finding the capital required to jumpstart WM Motor's operations that were halted this year.

The company was one of China's few NEV startups to build its own manufacturing facilities, a hugely expensive effort that looked impressive at the time but now looks like a sign of hubris. Most of China's other NEV startups have relied on third-party manufacturers to make their vehicles.

Kaixin's journey into the crowded NEV sector has been circuitous. As early as August 2020, it announced it would shutter its used-car dealership business and anticipated a temporary drop in revenue.

At that time Kaixin merged with auto import e-commerce platform Haitaoche, bringing in Haitaoche founder Lin Mingjun as its new CEO. A year later, it announced a $500 million, five-year contract with to supply 10,000 NEV trucks to Beijing Bujia International Logistics.

Several months before that agreement, Kaixin, which had no previous NEV manufacturing experience, bought Yujie Times Automobile Co. in August 2021, and said it had established a new NEV headquarters in the East China city of Suzhou.

Next it bought Yujie's parent Morning Star Auto Inc. through another new share issue, in a deal that closed weeks before the WM Motor deal.

Morning Star produces Pocco brand miniature electric vehicles, which are popular in smaller Chinese cities with lower living standards, according to Kaixin. Earlier this year, it announced that it already had orders for 50,000 vehicles and was prepared to make NEVs its "top priority".

From a broader perspective, WM Motor's high-end NEVs would give Kaixin a wide range of products. Kaixin would also get WM Motors' two manufacturing bases in the cities of Wenzhou and Huanggang, capable of making 250,000 vehicles per year, and its sales and service network of 621 physical stores.

So, now the question becomes whether Kaixin can really save WM Motor and its CEO Shen Hui, the former Geely executive lauded for engineering China's biggest-ever foreign acquisition of Volvo in 2010.

Only time will tell, of course. But Kaixin's financials don't look too encouraging. At the end of 2022, it had cash and cash equivalents of just $7.1 million -- a tiny fraction of what would be needed to restart operations at WM Motor, which was valued at $2 billion as recently as January this year.

Kaixin's revenue in 2022 was also a miniscule $82.8 million, down 67 percent from 2021, with a net loss of $84.7 million. The company listed on the Nasdaq in 2017, but has not been profitable since 2019, with losses of $5.3 million in 2020 and $196 million in 2021. It still owes money to its former parent, Renren Inc., now renamed Moatable (MTBL.US).

Kaixin is hardly launching its accelerating NEV drive into a hospitable climate. The Chinese NEV industry is consolidating quickly, with companies slashing prices as the government cuts back on subsidies. Experts believe that just five to 10 players are likely to survive in the end -- a tiny fraction of the estimated 300 in 2017.

Of the many startups to emerge during that time, only a few like Nio (Nio.US; 9866.HK), Xpeng (XPEV.US; 9868.HK), Li Auto (LI.US; 2015.HK), Leapmotor (9863.HK) and Hozon have relatively stable sales.

Far more common are stories of former highflyers like Niutron, which ceased operations in December, and Letin and Boyton, which filed for bankruptcy in May and July, respectively.

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