What happened
Shares of TuanChe (TC +0.00%), which is an omnichannel auto retailer in China, rose as much as 118% on Oct. 22. By the end of the day, the stock was still higher by roughly 98%, so it held on to most of that gain. While that's a gigantic price increase for a single day, nothing specifically changed with the company.
So what
TuanChe trades in the United States as an American depositary share (ADS). Each ADS is equivalent to a set number of Class A ordinary shares. That number had been 1 ADS to 4 Class A shares. But on Oct. 20, the company announced that it would be changing the ratio to 1 ADS to 16 Class A shares. The change was to take effect at the start of trading today.
Image source: Getty Images.
Effectively, this was a 1 for 4 reverse stock split. But because it was the ratio that changed, the ADS shares didn't technically split at all. Thus, in the release highlighting this change, the company noted, "As a result of the change in the ADS ratio, the ADS price is expected to increase proportionally, although TuanChe can give no assurance that the ADS price after the change in the ADS ratio will be equal to or greater than four times the ADS price before the change."
Give that the stock only doubled, it seems that this warning was appropriate.
Now what
The ratio change here doesn't actually change anything about TuanChe, and investors shouldn't take too positive a view of the massive price advance. In fact, second-quarter results, released in mid-September, were terrible, with revenues off by 73% year over year. That's not surprising given the impact of COVID-19, but it is really far more telling about the company's business than today's technically driven price change. That said, the business headwinds that TuanChe is facing today might help explain why what should have been viewed as a 1 for 4 reverse split only led to a 100% share-price gain. When all is said and done, that could actually be the more important takeaway from today's action for long-term investors.
