Company reaches settlement with U.S. national security regulator, but spooks investors with elevation of its co-founder CTO to chairman and CEO positions

Key Takeaways:

  • TuSimple announced that co-founder and CTO Hou Xiaodi will take over as the company’s chairman and CEO
  • Company’s shares lost two-thirds of their value in the two days after the announcement, closing at a post-IPO low

By Doug Young

TuSimple Holdings Inc. (TSP.US) is saying two major new developments are paving the way for the long-awaited commercialization of its autonomous truck driving technology. But investors don’t seem to see it that way.

The first of the big announcements came on Feb. 22, when the company removed a major potential obstacle to its development by disclosing it had reached a settlement with the U.S. national security regulator. Less than two weeks later, it announced a major executive reshuffle last week that will see its co-founder and CTO Hou Xiaodi take over its top two executive positions.

Despite seeming quite significant, the first announcement was largely greeted with indifference, with TuSimple’s stock closing down 1.4% the next day. That may be partly because the company took the somewhat unusual and low-key step of simply filing a disclosure to the U.S. securities regulator without issuing a higher-profile press release that investors have come to expect when there’s big news.

While response to the first announcement was muted, that certainly wasn’t the case when TuSimple announced Hou’s ascent to the roles of both CEO and chairman of the company. The stock plummeted 22% the day of the announcement last Thursday and continued the downward march by shedding another 13% the next day.

All told, the stock lost about a third of its value over the two trading days, and at its latest close of $11.49, represents an all-time low that is nearly three-quarters below its IPO price of $40 from about a year ago. The stock was actually near its IPO price as recently as the start of this year after the company announced a major milestone by completing what it said was the first fully automated heavy truck driving test on real roads using its self-developed system.

So, what’s going on with this company?

The answer is far from “simple” as the company’s name implies. TuSimple’s roots are in China, though lately it has focused on its U.S. operations that are far more advanced than those in the birthplace of its two founders, Hou and its other co-founder Chen Mo.

Its rapid progress in the U.S. has helped attract a number of big-name investors, including leading U.S. courier UPS (UPS.US), chip giant Nvidia (NVDA.US) and Navistar. It also has a development agreement with Volkswagen’s (VOW.DE) Traton SE unit and a partnership with Swedish truck maker Scania.

Its heavy U.S. focus attracted attention from the Committee on Foreign Investment in the United States, better known as CFIUS, which conducted a national security review whose results were the focus on the Feb. 22 announcement. Meantime, the newer March 3 announcement that sparked the massive sell-off looks more like a power play that has seen Hou toss out his co-founder Chen Mo from the chairman’s job, and also remove the more recently arrived Lu Cheng as CEO.

Path to commercialization

With all that background in mind, we’ll spend the rest of this space looking more closely at both announcements, starting with the CFIUS review. Despite the muted response from investors, that development actually looks quite significant by showing the company can move forward without the potential for U.S. government interference over national security concerns.

In the announcement, TuSimple said CFIUS had completed a national security review of the company and reached an agreement under which it would limit access to some of its data and “adopt a technology control plan.” The agreement will also see TuSimple appoint a security director, who will chair a government security committee of its board and periodically meet CFIUS officials.

The other major component of the agreement saw TuSimple agree to freeze an investment in the company by leading Chinese web portal Sina Corp. at current levels, and also to remove Sina CEO Charles Chao as a member of its board after his current term expires. That move was also aimed at reducing any potential Chinese government influence on TuSimple’s board due to Sina’s position as a major Chinese media company, which requires it to have close contacts with Beijing regulators.

As we’ve stated already, this development looks quite significant, as it basically allows TuSimple to move ahead in the U.S. with minimal regulatory risk. Accordingly, it’s slightly puzzling that TuSimple – which loves to trumpet all of its major developments – chose such a low-key manner to announce the deal. Perhaps it wanted to also avoid drawing attention from regulators in Beijing, where it also someday hopes to operate its autonomous truck technology.

The shakeup at the top of TuSimple’s top realms looks relatively straightforward. That will see Hou, one of the company’s co-founders who is also its “brains” due to his background in artificial intelligence, take over control of TuSimple’s corporate operations in addition to his current role as chief technology officer (CTO).

Outgoing chairman Chen Mo, who will remain on the company’s board, is a TuSimple co-founder but comes from a gaming background. Outgoing CEO Lu Cheng comes from a financial background and initially served as TuSimple’s CFO from 2019 to 2020 before being promoted to CEO about a half-year before the company’s IPO.

“This is part of a planned executive succession as the company moves to its next phase of commercializing L4 autonomous trucking technology,” TuSimple said in its statement announcing the shuffle.

It’s quite possible investors got spooked over concerns that Hou was spreading himself too thin by taking on both the chairman and CEO roles in addition to his previous responsibilities overseeing its technological development. People like Hou are also somewhat famous for being quite tech savvy, but not always the best administrators and managers. Only time will tell if investors’ concerns are justified or overblown.

From a valuation perspective, at least, the company’s stock still looks relatively strongly valued compared with its peers that are all racing to commercialize their autonomous trucking technology. TuSimple currently trades at a price-to-book (P/B) ratio of 1.9, which isn’t stellar but still outpaces the 1.5 for the Uber-backed Aurora (AUR.US) and the anemic 0.6 for Embark Technology (EMBK.US).

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