Chinese drone maker fends off fraud allegations

You could say something had to go wrong for the EHang fairy tale.

The Chinese passenger drone manufacturing company had everything going for them: they are building fire fighting drones, heavy duty delivery drones, and are well on their way to the top of the rankings on the autonomous passenger aircraft list.

The company scored a major coup in 2020 when it got a contract to test its passenger drone service in Austria, and also got to join a heavyweight list of drone industry players in projects to test urban air mobility in European skies.

On the sidelines of that, the company also landed deals with conglomerates that include Vodafone and United Therapeutics.

With the EHang brand gaining traction, investors began to take notice. It is hardly a secret now that urban air mobility is where the money will be in the drone industry; so, when EHang listed at NASDAQ Stock Exchange, the money people bought the company’s stock in drones… sorry; we mean droves – to the effect in very recent times, a single EHang share cost nearly $130.

But on February 16 this year, this report came out.

Today, we reveal why we believe EHang NASDAQ: EH is an elaborate stock promotion, built on largely fabricated revenues based on sham sales contracts with a customer who appears to us to be more interested in helping inflate the value of its investment in EH i.e., pump EH’s stock price than actually buying its products. EH has perpetuated its story with a collection of lies about its products, manufacturing, revenues, partnerships, and potential regulatory approval of its purported main business, an “autonomous” aerial vehicle “AAV” ridesharing network.”

This is from a bombshell report by Wolfpack, a financial research and due diligence firm, which urged shareholders to dump EHang shares because the company was, in a word, a fraud.

We conclude that EH’s relationship with its primary purported customer is a sham. Government records and credit reports show that EH’s major customer is Shanghai Kunxiang Intelligent Technology Co., Ltd. We have gathered extensive evidence including behind-the-scenes photographs, recorded phone calls, and videos of on-site visits to EH’s various facilities, as well as Kunxiang’s offices which lead us to believe that Kunxiang signed sham sales contracts to benefit its investment stock price in EH.”

Soon after the report went public, there was pandemonium on EHang stocks, as they plummeted to $46 a share; and the future that looked so bright in the morning suddenly had dark clouds looming.

Lawsuits are now pending, with many investor rights law firms calling for plaintiffs and witnesses to come forward and provide testimonies to the following charges, according to one law firm, Bernstein Liebhard LLP.

The complaint alleges that the Company (EHang) made false and misleading statements to the market and failed to disclose material adverse facts to the market. Specifically, Defendants failed to disclose to investors that: (1) the Company’s purported regulatory approvals in Europe and North America for its EH216 were for use as a drone, and not for carrying passengers; (2) its relationship with its purported primary customer is a sham; (3) EHang has only collected on a fraction on its reported sales since its ADS began trading on NASDAQ in December 2019; (4) the Company’s manufacturing facilities were practically empty and lacked evidence of advanced manufacturing equipment or employees; and (5) as a result, Defendants’ public statements were materially false and misleading and/or lacked reasonable basis at all relevant times.”

Saying that though, the drone manufacture has come out guns blazing, whipping out an interview with its founder, Huazhi Hu in response, who traced the growth and subsequent of his company, and trashed Wolfpack’s report.

EHang was particularly triggered by the allegations that it lied that its new facility in the city of Yunfu in Guangdong, China, would be complete by the second quarter of last year. Obviously, this did not happen, and EHang put out a statement explaining that the facility’s completion was going to be delayed by a year due to problems of the COVID-19 pandemic.

There is no mention of this setback in the Wolfpack report.

The company then issued out a statement on Friday, with an update on the progress made at the facility so far, and inviting investors to travel to the city and viewing for themselves on what is happening on the ground.

“The Yunfu facility has a total planned gross floor area of 24,000 square meters,” the EHang statement said. “It will be the home to EHang’s newest aerial vehicle assembly lines, a Computer Numerical Control (CNC) processing centre, a painting workshop and a carbon fibre composite materials processing area. In addition, the Yunfu facility will include a research and training centre and an outdoor flight test vertiport.

“Upon completion, the Yunfu facility will play a major role in producing EHang’s flagship products, the EH216 series of passenger-grade AAVs, with a planned initial annual capacity of 600 units which can be further increased to support the growing global market needs. EHang expects that it will be the first AAV commercial production facility of this scale.

“EHang plans to host an Investor Day event for a facility tour at the new Yunfu Facility in late June 2021.”

It has to be said that some of the allegations levelled against EHang in the report have no immediate basis of fact at all; and border on the churlish; for example, the part where Wolfpack claimed that EHang’s autonomous passenger drones are just a fantasy, simply because more reputable (read European and American) companies where still finding their way in that area. There is unlimited evidence to dispute this claim.

The report has been dismissed as a hit job in some circles, whose aim is reduce the value of the company’s shares on the stock market, and help short sellers.

The issue of markets and shares gets our heads spinning faster than the eighteen rotors on a VoloCopter, but the GameStop saga has given us a crash course: in a nutshell, short selling shares is when an investor borrows shares of a particular stock in the hope, or knowledge that they value will fall; then sells those shares, and buys them again at a price much lower than the one he sold them at. He then returns the shares to their owner after making a tidy profit.

Some market watchers have claimed that the Wolfpack report is also trying to trigger the short selling on EHang shares; and it seems the same fate is about to befall American commercial drone solutions provider, AgEagle Aerial, which just this weekend was accused by Bonitas of being “a pump and dump scheme orchestrated by Alpha Capital Anstalt, AgEagle founder and former chairman Bret Chilcott and other UAVS insiders to defraud US investors.”

Unsurprisingly, the company has denied these allegations.

“The report by Bonitas Research contains multiple baseless claims, which we refute in the strongest possible terms,” said J. Michael Drozd, CEO of AgEagle. “It is a clear attempt to manipulate and profit from the company’s resulting stock price decline. The report did not even reflect the proper stock exchange our common shares trade on, much less substantiate any of its allegations.”