J Capital Research's analyis of the U.S.-listed company Microvast Holdings Inc (NASDAQ:MVST).
- We think the majority of MVST’s sales may be fake. MVST's Chinese customers account for 57% of revenue in 2023, but the China factory shows almost no activity. Our drone videos and photos confirm that. MVST China has disappeared from Chinese procurement lists, and local comeptitors say the company is not making discernible sales. We are skeptical of the revenue shown in local financial statements.
- We suspect MVST knew a DOE $200 mln grant for a U.S. factory addition had been rescinded but failed to inform investors until the information hit Reuters months later, and MVST had no choice but to disclose.
- We question the company’s reported backlog, currently $678.7 mln. Backlog growth is much higher than revenue growth. There was a $189 mln jump in Q2 2023, but the only visible addition came from a December agreement with REE Automotive - whose entire revenue is less than $1 mln. Regardless, based on the company’s track record, this could end up being a backlog of future losses.
- MVST is a Chinese EV battery business that has failed. MVST, whose operations were almost all in China before the merger with Tuscan Holdings, nearly went bankrupt in 2019 but was saved by the SPAC. Tuscan had been seeking cannabis targets but settled on batteries.
MVST makes batteries for electric vehicles, principally buses and trucks.
A dead company in China
Photos and drone videos, along with interviews, indicate that MVST’s huge factory in Huzhou, China is almost entirely idle. Here is a video taken at 10 am on a working Friday. It shows no activity. We took another drone video between 11 am and 2 pm on a Monday. We counted six cars in the compound and two people walking about but no trucks or apparent product.
We believe MVST’s China plants have basically been abandoned. MVST has three plants close to one another in the same development zone in Huzhou. Interviews plus visits to the perimeter indicate that not much is going on. Below are photos of the three addresses taken at 3 pm on Monday, October 9, 2023, the day after a long Chinese holiday. China does not celebrate Columbus Day.
No visible new China procurement announcements since 2017
We have searched for procurement announcements by Chinese companies or by MVST about Chinese buyers and can identify nothing since 2017. In 2021, MVST mentioned several Chinese companies with which it cooperates, but those were old announcements, and we found no comment by those companies inside China. Yet for the first nine months of 2023, the company reported that 57% of its sales were from customers located in China, with even higher proportions reported in 2020, 2021, and 2022.
MVST customer announcements
Technical dead end
MVST’s claim to fame is the lithium titanium oxide (LTO) battery, once promising because of its fast-charging properties but now abandoned by the industry due to low energy density and propensity to catch fire. The founder of MVST “unfortunately chose the wrong technical route,” a Chinese battery scientist told us.
With much of its production and sales in China, MVST had a brief, hopeful period after launching the LTO in China in 2011 but nearly went bankrupt in 2019 and had to liquidate a subsidiary.
In 2021, MVST found a U.S. SPAC that had been searching for a cannabis asset. The subsequent merger poured about $705 mln in net proceeds into company accounts (as well as generating a big payday for insiders) and saved MVST from going out of business.
Losses continue to mount, and operating cash flow has been heavily negative. In one year, 2021, losses were greater than revenue, which is quite an achievement for a company that once had good sales in established products.
MVST Financials ($,000)
Chinese battery engineers don’t consider MVST a competitor anymore. “There are very few lithium titanate batteries now,” a Chinese battery engineer told us. “Is anyone still doing this in China? Those companies should all be gone.”
Back in 2017, several bus and truck companies in China were willing to give the MVST batteries a shot. Customers included Beiqi Foton, Zhongtong Bus, Higer Bus in Suzhou, and several others, albeit all in small volumes. In 2017, according to the financial information company Wind, 108 vehicle models were equipped with batteries supplied by MVST.
But MVST batteries were both expensive and inefficient, and the market dribbled away. In 2018, only 75 automobile models used MVST batteries, according to Wind, and in 2019, 35 models.1 Currently, MVST is not seen in Chinese procurement lists.
“I know Microvast,” said a battery engineer with a large Chinese battery company. “I don’t think their technology is that good. The company just does a good job in marketing. . . .Their best time was from 2015 to 2016, and the best products they made at that time were lithium iron phosphate batteries, which were used on buses.”
MVST has not mentioned LTO for a year and now focuses its promotion on a “pouch” cobalt-oxide-lithium battery dubbed the 53.5Ah. But many battery companies offer cells of this capacity and design, and we do not believe MVST holds any special advantage.
Suspicious Chinese financials
We question why MVST holds over $100 mln in short-term debt (reported in China) plus restricted cash. Given the lack of visible activity, we question whether the cash is needed to fund operations and capital expenditures or only give the appearance of operations.
We obtained credit reports on MVST subsidiaries in China for 2021. The Chinese parent company, Microvast Power Systems Co., Ltd., had $126 mln in short term bank and notes payable borrowings at the end of that year. In its U.S. filings, MVST reported only around $74 mln in short-term debt and notes payable by end 2021. What happened to the other $52 mln?
Outside of China, the company disclosed a German bank loan facility drawdown of some $9.7 mln, however, this was repaid in October 2021 after a default event was triggered, as disclosed in earlier versions of its S1 prospectus. We question where the other $52 mln may be reported.
“As of June 30, 2021, the Group’s Germany subsidiary was not in compliance with the financial covenants. The Company obtained a waiver for the covenant violation through September 30, 2021, and subsequently cured the default in August 2020 by capital injection.”
In 2020 and 2021, pledged assets against bank loans far exceeded disclosed bank borrowing amounts, matching the above noted scale of discrepancy between Chinese and U.S. filings. MVST disclosed bank loans of $12.2 mln and $13.3 mln at end 2020 and 2021, respectively, whereas related pledged asset values against these debts were much higher at $44.8 mln and $43.2 mln for the same comparable periods. This could imply either there were substantially more debt-related obligations than disclosed, or the true market value of pledged assets was a lot less.
Loan guarantees from related third parties were disclosed in earlier versions of the company’s original listing documents that were later omitted in the final submissions and the 2021 10K. At end 2020, the third parties loan guarantee was $20.8 mln. So for 2020, there were pledged assets of $44.8 mln and loan guarantees of $20.8 mln against what was supposed to be a short term bank loan of only $12.2 mln and maybe more. Similar guarantees were made for at least part of 2021.
“In addition, the Group’s related parties Ochem Chemical Co., Ltd (“Ochem”) and Ochemate Material Technologies Co., Ltd (“Ochemate”) provided $ 20,874 and $ 21,838 of guarantees to secure certain bank facilities granted to the Group as of December 31, 2020 and June 30, 2021, respectively.”
The same third parties also lent money to the company during those years that were repaid by year end:
“MPS [Microvast Power Systems] received certain interest-free loans from related parties, Ochemate and Ochem, for the years ended December 31, 2019, 2020 and 2021, with accumulative amounts of $ 15,142 , $ 18,889 and $ 8,426, respectively. The outstanding balance for the amount due from Ochem was nil as of December 31, 2020 and $85 as of December 31, 2021, respectively.”
The disappearing $200 mln
We think MVST hid from investors that it had lost a $200 mln grant. We believe MVST knew of the revocation in February 2023 and did not disclose the information until it was published online on May 23, 2023. This grant was likely to have made a substantial difference to the economics and profitability of the planned development.
In November 2022, MVST announced that it had been selected for a $200 mln grant from the U.S. Department of Energy (DOE). The grant had been made specifically to fund a second plant in Clarksville, according to local news reports.3 MVST had told Clarksville in 2021 that it had chosen the city to build a plant.
But the following February, 2023, MVST informed the town of Clarksville that it would not build a second plant there as promised despite having received the $200 mln grant.
That may have been because the DOE said that the grant was “under review.” Congress had prompted DOE to reconsider on the grounds that MVST was actually Chinese. In March, Rep. Frank Lucas (R-OK), Chair of the House Committee on Science, Space, and Technology, sent a letter to DOE Secretary Jennifer Granholm detailing concerns about MVST and saying that DOE had promised to review its awards.
Just two weeks after MVST changed its position on Clarksville, on February 16, 2023, Bloomberg reported as much, saying that “Microvast’s links to China have drawn outrage from lawmakers,” and “Funds are in ‘post-selection’ review.”
On May 16, 2023, MVST was still telling investors that it would receive the grant.
But on the evening of May 22, the press reported publicly that the grant had been revoked. There were multiple stories on May 23. On May 24, company chairman Wu Yang said: "the Company is surprised by the DOE’s decision to withdraw the grant.”
MVST was preparing for its first-ever Investor Day, to be held on May 25. On May 24 and May 25, 2023, MVST issued press releases claiming it had learned of the revocation from a Reuters article.
We sent Freedom of Information Act (FOIA) requests to various parts of the U.S. government seeking communications between DOE and MVST, but we received responses that were completely blacked out. We have appealed. But, given vast paperwork surrounding this grant, we suspect MVST was likely directly informed about the grant revocation well in advance of Investor Day and possibly before the February communication with Clarksville.
DOE Funding Opportunity Announcement
MVST submitted a 240-page grant application on May 16, 2022 and issued many interim announcements. As far as we can tell, the grant application did not mention China or say that 67% of revenue and assets were in China.
Grant application as redacted
The grant was revoked based on MVST’s previously undisclosed ties to China.
On May 22, 2023, MVST shares dropped by 36% after news was published of the grant revocation. Several class-action suits are seeking information as to why MVST asserts it only received this news from the press.
MVST has assured Clarksville that it is continuing to expand its first plant, even though plant 2 has been mothballed. But the video MVST has posted to demonstrate progress does not fill investors with confidence: nothing was inside the building as of last June 2023. Yet in the Q2 2023 10Q, the company reported it already had $241 mln worth of property, plant, and equipment in the United States..
Faulty technology: the U.K. Routemaster
Even the sales made overseas have caused more problems than they solved, according to public reports.
In 2012, for example, MVST’s batteries were deployed in London in 200 doubledecker “New Routemaster” buses. Within three years, 80 of the buses no longer used the batteries, according to the BBC. According to a 2015 Ars Technica report, “The batteries just aren't fit for purpose. It's not that the technology isn't there it's just the wrong technology.”
The buses were intended to be diesel-electric hybrids, with batteries powering the electric motors, and a diesel generator topping up the batteries on demand. By 2015, 80 of the batteries were not usable, and all 200 had to be replaced by the manufacturer under warranty, according to local press reports. Drivers told the BBC the hybrid system did not work "in 90% of buses" and noted they "don't [did not] feel in control.”
The buses in the end emitted 74% more harmful particles than the buses they'd replaced, according to a report in Londonist.
The MVST batteries were quietly retrofitted, and the New Routemaster now operates with Equipmake technology.
Radically less capacity in China
MVST claims to be spending somewhere around $250 mln on a plant in Huzhou, China. But in five years, according to our sources, construction has not started. Chinese job boards show that MVST Huzhou is now hiring for a number of positions. But we could not find evidence of significant staffing in 2019-2022.
In its 8K issued February 1, 2021 (its first as a public company), MVST said that it would bring its Huzhou plant from 3 GWh to 7 GWh. Yet in the Q3 2023 10Q, MVST says: “The Phase 3.1 expansion in Huzhou for the production of 53.5Ah cells, modules and packs was completed during Q3 2023 and we expect it will reach its 2 GWh per year design capacity by the end of the year.
An environmental impact statement filed by MVST’s China company indicates the intention in 2021 to increase annual capacity to 1.5 GWh.7 That is half the capacity claimed in the 2023 presentation. But a credit report on the company indicates that there was no construction under way in Huzhou in 2021. When was capacity supposed to have doubled?
Capacity clearly wasn’t 3 GWh. It probably wasn’t even half that. In 2018, according to a Chinese industry report cited by Baidu, the Huzhou factory capacity was 469 MWh. Given that the company nearly went bankrupt in 2019, it is unlikely it increased capacity by a factor of six before the SPAC merger.
“It is very common in the battery industry to overstate the scale of production capacity,” a Chinese industry expert told us. ”Microvast Power is considered a small company among battery manufacturers.”
Dubious backlog
We question MVST’s backlog announcements. In the latest quarter, backlog stood at $678.7 mln. Growth in backlog has been stunningly high, but revenue growth has not matched it. Much of the backlog is reportedly for the new 53.5Ah battery, and mostly for U.S. and European customers. But there are dozens of companies that offer this battery technology, and even if the backlog is real - which we doubt - we are skeptical that MVST can compete with a company like Panasonic or CATL. Company filings also state that MVST faces intense competition from other Chinese battery manufacturers, some of which have state support. Regardless, from the company’s track record, this could easily be just a backlog of future losses, which is no cause for celebration.
The company’s backers have an unsavory history
In 2018, a blank-check company called Tuscan Holdings was launched, initially to go into the cannabis industry.
Tuscan went public March 5, 2019 as THCB but never found any good cannabis targets. In July 2021, Microvast merged with THCB, and the new MVST started to trade on Nasdaq.
MVST’s lead manager was EarlyBirdCapital. EarlyBird also ran the SPAC for Faraday Future (FFIE), which closed its first day trading at $13.98 and now trades at around 80 cents. EarlyBird raised money for Clever Leaves Cannabis Co., Soundhound (down from $12 to $2 since its December 2020 the April 2022 IPO), Finnovate, and many more.
Audited by Deloitte Touche’s lead auditor for TAL Education Group, Momo Inc., AirMedia, and Up Fintech, MVST is advised by Houlihan Lokey and B. Riley Financial, advisors to such dubious small companies as FAZE.
Insiders sell down
In September, Director Zheng Yanzhuan sold over 300,000 shares, about 15% of his holdings.
On November 14, he sold another million shares.
Public investors should think about selling too.
See the full report here by J Capital Research.
