Privately held Chinese electric vehicle (EV) maker Cenntro had apparently good news for investors on Dec. 27 when it reported the manufacture of more than 600 commercial EVs and their delivery to European clients. Despite this upbeat news, its ally, intimate apparel company Naked Brand Group (NAKD), saw its shares drop 6.74% by the close of trading on the same day.
Naked is planning to take Cenntro public without an IPO through an acquisition and merger. Here's why the market may be wary about the deal, but why there might also be bullish light at the end of the tunnel.
Image source: Cenntro Automotive.
The upcoming merger
Naked's stock price slipped below the bare minimum of $1 per share needed to avoid Nasdaq delisting early in 2021, leading it to look around for a merger partner to bring its share price above the critical threshold. It eventually found one in privately held Chinese EV start-up Cenntro, which builds light commercial delivery vehicles for various customers around the world.
Naked announced an all-stock acquisition of Cenntro in November. On Dec. 21, at an extraordinary shareholders' meeting, 96.9% of participating shareholders voted to approve the acquisition. In some ways, Naked is acting as a special-purpose acquisition company (SPAC) to bring Cenntro public, though the parallel isn't exact.
The combined company's name will change to Cenntro Automotive, but it will keep the ticker NAKD. The main focus of the newly merged entity will apparently be commercial EVs, since the "transaction provides Cenntro with working capital to support a substantial backlog, fast-tracks the pathway to a public company and introduces them to our loyal and enthusiastic shareholder base," according to Naked CEO Justin Davis-Rice. The swimwear and lingerie brands of Naked will be sold off as part of the deal.
Naked Brand Group also carried out a reverse stock split that turned every 15 shares into 1 share on Wednesday, Dec. 22, to aid with acquiring Cenntro. The reverse split gets the share price back above $1. Assuming Nasdaq approval is obtained, the merger and name change will be completed by approximately Dec. 30.
Cenntro's production news
Unlike some other EV start-ups, which have only a handful of vehicles in production or even just a mix of concept vehicles and hope, Cenntro appears to be scaling up manufacture relatively fast. It built and shipped 628 Logistar 200 (LS200) EVs, a model it describes as a "light urban delivery vehicle purpose-built to navigate European streets," in December, its largest-ever monthly manufacturing total.
Cenntro plans to boost the numbers of EVs rolling off its assembly lines much higher almost immediately. Its CEO Peter Wang said the company is "confident" it can make 20,000 during 2022, citing strong demand for its products, plus working capital from the Naked merger, as drivers for its expansion. Looking further ahead, Cenntro says its 2023 goal is $2.1 billion in revenue from nearly 75,000 commercial EVs delivered.
These are, of course, simply projections, and there is no proof yet Cenntro can or will deliver 20,000 EVs in 2022 and 74,800 in 2023. However, it does seem to be pursuing production expansion aggressively, breaking ground in Jacksonville, Florida, in mid-December on a planned $25 million, 100,000-square-foot factory which it says will be able to make 50,000 of its electric delivery vehicles annually by 2025.
The facility, Cenntro's seventh globally, will start low-level production in early 2022. It is located near Jacksonville's international port, which it plans to use to import raw materials and parts to the factory and ship completed EVs abroad to fulfill international orders.
Naked's exposure to Chinese uncertainty through Cenntro
While much of Cenntro's news appears positive, its headquarters location in China hangs like a cloud over its operations -- and perhaps Naked's share price. Regardless of accelerating production, new factories, and strong demand for Cenntro's EVs, Naked is still tying itself to a company immersed in the Chinese market, currently racked by potential regulatory and economic hazards. Similar concerns are weighing on the stock market performance of Chinese EV passenger car and SUV maker Nio (NIO -2.88%).
A Chinese government push for consolidation of the EV sector is one significant potential threat to Cenntro, and, by extension, Naked. Announced back in September, Beijing's plan looks like a roadmap for driving smaller EV automakers out of business, reducing the number of companies from the current total of approximately 300. The country's IT minister Xiao Yaqing said, "EV companies should grow bigger and stronger." Underneath these phrases, of course, are regulatory strong-arm tactics designed to engineer the results that Beijing wants. One major tool will be banning the construction of new EV production facilities in a province unless EV companies are already manufacturing at high capacity there.
It's unclear how this might affect Cenntro, and whether the company can simply bypass restrictions by building vehicles abroad, such as in its Jacksonville factory. However, it does highlight how Cenntro (and Naked), may be vulnerable to Chinese government meddling or even attempts to force the company to sell itself to one of the bigger Chinese EV makers, such as Nio, Xpeng (XPEV -4.19%), or Li Auto (LI 0.81%).
Deciding if Naked is right for you
While Naked's share price drop from its reverse stock split is only to be expected, the continuing losses suggest investors may be worried about the merger itself. Involvement with a company operating in the command-economy chaos of China, uncertainty about the outcome, and the sheer magnitude of the shift from underwear production to a commercial EV brand could all be alarming investors.
However, though the risks are certainly high, I think Cenntro may have some real potential to achieve significant revenue growth in the next two years and beyond. The company seems to be skillfully deploying its resources, including those it will gain from the Naked merger, as a springboard to dramatic future expansion. Building a factory in Florida gives it the potential to tap into the Biden administration's government vehicle fleet electrification plans, as well as addressing the European market.
It is actually producing and selling vehicles, going rapidly from dozens to hundreds per month, raising confidence it can scale those manufacturing figures to thousands. While it's something of a gamble, Naked (Cenntro) looks like one of the pluckier and more robust underdogs among electric car stocks, and may be worth investing in as a high-risk but possibly high-reward EV company in the longer term.
