What happened
Shares of Uxin Limited (UXIN 1.22%), a Chinese online used car marketplace, were tumbling today after the company announced a 1-for-10 reverse stock split.
As of 12:45 p.m. ET, the stock was down 30.1%.
So what
In a press release this morning, Uxin said it was changing the ratio of American depositary shares (ADSs) to Class A ordinary shares from 1-to-3 to to 1-to-30, which effectively acts as a 1-for-10 reverse ADS stock split. The change will go into effect on Oct. 28.
In May, Uxin had received a letter from the Nasdaq Stock Market saying that it was out of compliance with the stock exchange's standards, as it doesn't allow companies to have a share price under $1 for more than 30 days without a plan for remediation.
The reverse stock split is a solution to that problem, but investors tend to dislike reverse stock splits as they show that companies aren't able to get their stock prices up through a fundamental improvement in the business. Generally, reverse stock splits are a sign of weakness, and of a company struggling to stay relevant.
Now what
While Chinese stocks in general have tumbled over the last year or two, Uxin's challenges predated the recent issues related to the crackdown by the Chinese government.
Though revenue growth has started to accelerate again after the company adjusted its business model to move away from serving car dealers, the business is still operating at a substantial loss and its gross margin is near zero. Until that improves, the stock will continue to struggle.
