How do you try to win back investor confidence after your co-founder, chairman and CTO gets the axe following the board’s discovery of his engagement in undisclosed insider dealings?
If your name is autonomous truck driving firm TuSimple Holdings Inc. (NASDAQ:TSP), the answer is that you fire the entire board that made such a “bad” decision. If that sounds confusing, it’s because this is another “made in China” story that exposes one of the bigger risks of investing in Chinese companies, namely the fact that such companies are frequently controlled by their founders.
That means that when minority shareholders and independent board members discover something amiss at the company, they are often powerless to do anything about it. Or in this case, if they try to do the responsible thing, they can be punished by the company’s controlling founders who were guilty of questionable behavior.
All of this leads us to suspect that TuSimple’s founders either don’t know what they’re doing and are just acting impulsively or that perhaps they’re thinking of mounting a privatization bid for the company. The odds are slightly greater on the “don’t know what they’re doing” possibility since the company only went public a bit more than a year ago and was previously quite respected.
Before we go any further, we’ll recap the drama that has gotten us to this point, in a textbook case that really only could be made in China. TuSimple was founded in 2015 by the pair of Hou Xiaodi, who has a background in artificial intelligence, and Chen Mo, who comes from a gaming background. Chen Mo was the company’s chairman and Hou Xiaodi was its chief technology when TuSimple made a New York IPO in June last year. Its other top official was Lu Cheng, who came from a financial background and was its CEO at the time of the listing.
Both Lu Cheng and Chen Mo appeared to be ousted in March this year when the company said Hou Xiaodi was adding the chairman and CEO titles to his then-role as CTO. But in a shock announcement two weeks ago, the company announced its board had fired Hou Xiaodi after discovering he had engaged in undisclosed dealings with a China-based peer called Hydron Inc., whose CEO and co-founder just happened to be Chen Mo.
Hou Xiaodi professed his innocence in a post on LinkedIn, saying that TuSimple was like his child and he would never dream of hurting the company.
That brings us to the surprise development late last week, which saw TuSimple disclose in an announcement to the U.S. securities regulator that four of its board members, namely Brad Buss, Karen C. Francis, Michelle Sterling, and Reed Werner, had been removed from the company. That housecleaning left Hou Xiaodi as the company’s sole board member, though he quickly added co-founder Chen Mo back as well.
Hou Xiaodi and Chen Mo were able to engineer the coup using their 59% control of TuSimple’s voting shares. The company had even alluded to the potential for this kind of development in its latest annual report when it warned minority shareholders: “This concentrated control (of voting power) will limit or preclude your ability to influence corporate matters for the foreseeable future.”
Following the board bloodbath, Hou Xiaodi and Chen Mo, as the company’s only board members, proceeded to sack acting CEO Ersin Yumer and restored Lu Cheng to his previous position as CEO. They also returned Chen Mo to his previous position as chairman, essentially restoring him and Lu Cheng to the positions they held before their departure in March.
Investors appeared to welcome the shakeup, with TuSimple’s stock rising 22.4% in the two trading days after the announcement. But anyone who thinks that dazed U.S. investors were excited about a homecoming of the company’s previous top brass might want to think again. That’s because TuSimple’s shares previously tanked by 46% after Hou’s initial firing and fell even more after that. So even after the latest rally, the stock is about 56% below where it was trading before Hou Xiaodi’s firing two weeks ago.
So, if nothing else, minority stakeholders must be taking some meager comfort in knowing that Hou Xiaodi and Chen Mo have personally suffered huge financial losses due to their shenanigans.
All that brings us to the present where the company acknowledged it now faces the threat of being delisted for failure to meet requirements that independent members compose a majority of its board. The company said it plans to find some new board members that will help it return to compliance.
It should have little difficulty returning to compliance since there are plenty of people out there who would be happy to take on such a role. But frankly speaking, a company that has engaged in this kind of behavior will have difficulty attracting the type of respectable independent board members who might help to restore investor confidence.
The fact of the matter is that TuSimple was quite a respectable company before all the personnel shenanigans that began in March. It had consistently commanded higher price-to-book (P/B) multiples than peers Aurora Innovation (AUR) and Embark Technology (EMBK), as it boasted technology that attracted an A-list of partners that included the likes of UPS (UPS), Nvidia (NVDA), and Navistar.
But now its latest P/B stands at just 0.54, down from 5.64 at the end of last year. By comparison, Aurora has a P/B of 1.03, and even Embark, whose shares have also tanked this year, stands at a slightly higher 0.59.
Through all the latest drama, we have yet to see any indication of what Hou Xiaodi will do in terms of his role at TuSimple. He and Chen Mo are still clearly calling the shots at the company, and it’s quite possible that he will return to his role as TuSimple’s CTO. There’s also no mention in any of the latest announcements of Hydron, whose Twitter account describes it as based in Southern California, where TuSimple is also based, even though TuSimple’s now-fired board previously described Hydron as Chinese.
All that brings us to the question of what’s next for TuSimple. It’s quite possible Hou Xiaodi and Chen Mo might make a bid to privatize the company, especially now that its stock is quite depressed and its current market cap stands at just $625 million. Then again, it’s also quite possibly the pair don’t really have any future plan right now and are just acting impulsively, even if their company still owns some of the industry’s most leading-edge technology.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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