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Activist short-seller Wolfpack Research released a report alleging that Chinese eVTOL company EHang has grossly misrepresented its revenue, intellectual property, and progress toward bringing its autonomous “passenger-grade” drones to market, causing the company’s stock to plunge more than 60 percent during trading on Tuesday.
Wolfpack, which holds a short position on the stock, claims to have found numerous discrepancies between what is claimed in EHang’s press statements — 50 of which have been released since the company went public on the Nasdaq in December 2019 — and the company’s actual activities.
EHang positions its flagship product, the two-seat EH216, as a world-leading platform for moving cargo and passengers above busy city streets.
Before release of the report, EHang stock had soared more than 1,000 percent in the past three months, reaching highs over $120 per share and a market capitalization above $6 billion.
“The Company strongly believes that the report contains numerous errors, unsubstantiated statements, and misinterpretation of information,” EHang said in a press statement Tuesday evening, about five hours after the Wolfpack report was released. No refutation or countermanding evidence was offered. (Update: EHang issued a more detailed rebuttal on Feb. 17.)
Little evidence of IP or manufacturing progress
During site visits to EHang’s corporate headquarters and manufacturing facility in Guangzhou along with its more recently announced factory in Yunfu, Wolfpack found little evidence of ongoing manufacturing beyond light assembly of pre-manufactured parts. The Yunfu factory, at which EHang said in December it had “started to ramp up production capacity,” was far from finished and had no evidence of ongoing manufacturing of any kind, according to Wolfpack’s report.
Wolfpack claims its investigators were able to freely walk into these facilities, with no security in place to protect the company’s intellectual property (IP) and prototypes. Mark Moore, former chief technologist for Uber Elevate — which extensively evaluated every serious eVTOL developer and enlisted 10 as vehicle partners — told Wolfpack there wasn’t much there to protect.
“I closely inspected and analyzed their configuration. I can see no significant IP anywhere,” Moore is quoted in the Wolfpack report. “And for instance, looking closely at their motors, they were using [Chinese motor company] T Motors. Those are hobby grade motors. Those are not aerospace products.”
Moore also told Wolfpack he “firmly feels that the current configuration is inherently not safe” and has “significant reservations about whether [the EH216] could ever be certified for carrying passengers in the U.S. market.” Numerous aerospace engineers and employees at various drone and eVTOL companies have expressed similar views to eVTOL.com over the past year.
“Uber Elevate spent a half a billion dollars just last year investing in this space [including the company’s investment in ground autonomy]. You compare that the EHang, and EHang has a budget of about $10 million,” said Dan David, founder of Wolfpack, in a video released alongside the research report. “They’ve got a completely inferior product here . . . with no R&D budget to compete with Joby, Volocopter, Bell, Archer — any of these companies. They just happened to make it to market first.”
Or did they?
Potentially fraudulent revenue
The EH216 has been lauded as the first eVTOL to secure customer sales, with 60 units reportedly sold in 2019. According to Wolfpack, EHang’s main customer and distribution partner — Shanghai Kunxiang Intelligence Technology Co. — is a co-conspirator in producing fraudulent revenue, established nine days before signing its first ¥450 million ($70 million) contract with EHang.
That first contract listed the unit price of each EHang aircraft as ¥150 million ($23 million) — an absurdly high figure. Subsequent contracts cut the unit price a hundredfold to ¥1.5 million ($230,000), according to Wolfpack. The research firm also stated that an employee of Kunxiang revealed an undisclosed ¥100 million ($15.5 million) investment in EHang before the company went public.
EHang has collected on only about 20 percent of its reported revenue from these contracts, leaving more than $14 million in accounts receivable, which Wolfpack calls a “clear indication of fabricated revenues.”
“It’s one of the worst stock promotes I’ve seen, even out of China, in 10 years,” said David of Wolfpack.
In a white paper released by EHang in January 2020, chief strategy officer Edward Xu used numerous unbelievable assumptions to arrive at a profitable revenue projection per aircraft, including a load factor of 90 percent or above and 6,000 operating hours per year — a model Xu said is “highly conservative and does capture efficiency gains potentially led by scale economies.”
Uber’s Elevate white paper, released in 2016, modeled revenues based on aircraft that achieved 67 percent load factor and 2,080 utilization hours per year — figures far lower than EHang’s assumptions that many still consider aggressive and difficult to achieve.
After repeated inquiries, a spokesperson for EHang clarified to eVTOL.com that the 6,000-hour utilization figure “actually includes charging time of our [aircraft].”
Wolfpack’s research could have broad implications on the development of urban air mobility systems across the world as EHang has been selected as a participant in numerous ongoing projects studying how to apply eVTOL aircraft to various use cases. These include multiple European Union-funded studies of medical air mobility and unmanned air traffic management, the Paris region’s exploration of UAM in preparation for the 2024 Olympic Games, and the International Civil Aviation organization’s (ICAO) Ambular project.
The aircraft developer has also partnered with various Chinese and European cities to explore the implementation of UAM, including Seville and Llíria, Spain, as well as Linz, Austria, where the company partnered with local aerospace company FACC to pursue manufacturing.
Many of these projects, which are attempting to imagine and construct a system around aircraft which have yet to be certified, may be designing infrastructure or airspace management procedures with the EH216’s specifications in mind.
Overvalued and oversubscribed
Criticism of EHang’s design — with exposed rotor blades at thigh-level all around its tiny cabin — have long been a prominent feature of discussions within the eVTOL community, with numerous aerospace engineers expressing concern about the aircraft’s safety and doubting its ability to achieve certification.
Many investors and company founders have expressed that an early fatal crash is their greatest concern, either openly naming EHang as the likely culprit or implying as much. To date, the company has flown numerous passengers without report of injury in multiple cities around the world. Video released by the company purportedly shows the EH216 providing UAM services in Zhuhai and other Chinese cities.
Much of Wolfpack’s claims regarding fraudulent sales and vacant factories are, for the moment, unproven. But EHang’s prior market capitalization of more than $6 billion was predicated on the company achieving and retaining a leadership position in the future urban air mobility market, offering up its autonomous aircraft to fight fires, move cargo and carry passengers above busy city streets.
With no evidence of unique IP in key elements of its aircraft and an R&D expenditure that is not competitive to the rest of the industry, it is difficult to imagine how EHang would justify its valuation in the coming years — even if its aircraft, rudimentary compared to many under development, were certifiable for regular passenger flight.
As the only publicly-listed eVTOL company prior to recent blank-check merger announcements, EHang attracted significant interest in recent months from retail investors looking to buy into the eVTOL revolution.
The announcement of a new aerospace and space exploration-focused fund to be launched by asset management firm Ark Invest drove the stock even higher, resulting in a peak valuation that exceeded Joby Aviation’s rumored $5.7 billion reverse merger with Reinvent Technology Partners — a company with more than 500 employees that has been working on electric vertical flight for more than a decade and is widely considered the most advanced in the field.
Even without Wolfpack’s allegations, EHang’s valuation simply didn’t make sense — but then again, based on fundamentals, little does in a market as unproven as urban air mobility. Unfortunately, investors not endemic to aerospace are finding it difficult to distinguish between market-leading technology and market-leading public relations.
Five years ago, the eVTOL community struggled to get venture capitalists and major aerospace manufacturers to take the technology’s potential seriously; today, there may be more investor interest than companies worth investing in.
This story has been updated with a link to EHang’s detailed rebuttal of the Wolfpack Research allegations.