Shares in drone maker EHang (NASDAQ: EY) plunged yesterday. After ending last week at $124, EHang’s share price fell to just $46 (the US market was closed on Monday). That represents a decline of 63% in just one day.
So, why has EHang stock experienced such a dramatic sell-off? Let’s take a look at what’s going on with this popular drone stock.
EHang stock: short attack
The reason EHang stock plummeted yesterday was that short seller Wolfpack Research published a scathing report on the company. In the report, entitled ‘EHang: A Stock Promotion Destined To Crash and Burn’, Wolfpack said EH is an “elaborate stock promotion, built on largely fabricated revenues based on sham sales contracts.” Ouch!
‘Sham’ contacts
Wolfpack’s first accusation is that EHang’s relationship with its primary customer, Shanghai Kunxiang Intelligent Technology (Kunxiang), “is a sham“.
The short seller says it’s gathered “extensive evidence” including behind-the-scenes photographs, recorded phone calls, and videos of on-site visits to EHang’s various facilities, as well as Kunxiang’s offices. It’s come to the conclusion Kunxiang signed sham sales contracts to boost its investment in EH.
It goes on to say that Kunxiang has an “exaggerated physical presence” and that its real operations appear to be a “fraction” of what’s claimed. It also claims that out of the three addresses listed on Kunxiang’s website, one is a hotel with no Kunxiang presence, one is a 13th floor address of an 11-story building, and one had only one Kunxiang employee in the office on a weekday afternoon.
Weak financials
Wolfpack’s second accusation against EHang is that the drone maker “has only collected a fraction of its reported sales since its December 2019 IPO.”
The short seller says EHang has reported around $18m in total revenues since its IPO. However, since then, its receivables have increased by about $14m. This means the company has collected less than $4m in cash since going public.
Regulatory approvals
Finally, Wolfpack claims EHang has misled investors about its ‘flight certifications’ and ‘long-term’ approvals for its ‘passenger-grade’ EH216 drone.
The short seller also claims that, according to aviation regulators or experts in aviation regulation in the US, Canada and Europe, EHang has only received permits for recreational test flights of its drones in specified areas, below a specified altitude and at a specified time. In no way are these permits endorsements of EH’s ‘passenger-grade’ claims, nor are they ‘regulatory breakthroughs’ of any kind, it adds.
EHang’s response
It’s worth pointing out that EHang responded to Wolfpack’s accusations in a brief statement yesterday. The drone manufacturer said it believes Wolfpack’s report contains numerous errors, unsubstantiated statements, and misinterpretation of information. It also said it will consider any necessary and appropriate course of action to protect the interest of the company and all of its shareholders.
My view on EH stock
My view is that it’s still too early to know who’s right. Wolfpack certainly looks to have done its research on EH. However, short sellers aren’t always on target.
Usually, these kinds of short-selling attacks take a while to play out. So, I’ll be looking out for more developments in relation to this short attack in the days and weeks ahead.