Why Shares of Uxin Crashed on Thursday

What happened

Shares of Uxin Ltd. (NASDAQ: UXIN) fell more than 11% on Thursday after the Chinese used-car dealer's plan to raise additional capital was panned by a Reuters columnist, echoing some of the criticisms levied against the company by a short seller earlier this year.

So what

Uxin said Wednesday it would raise $230 million by selling convertible notes to a group including Chinese classified vendor 58.com (NYSE: WUBA), Warburg Pincus, TPG, and other investors. Each note pays an interest rate of 3.75%, and is convertible into a Uxin class A share at a price of $1.03 per share.

Kun Dai, founder and CEO of Uxin, said in a statement: "We are very pleased to welcome 58.com as our new strategic investor, and receive continued support from our pre-IPO investors who value Uxin's long-term strategy and growth."

As part of the deal Uxin will partner with 58.com, Dai said, "particularly in the areas of traffic and inventory acquisition, used-car inspections, big data analysis and SaaS."

The deal caught the eye of Reuters Breakingviews columnist Alec Macfarlane, who wrote that the deal terms were much more onerous than what other Chinese companies are paying in convertible deals. Macfarlane is also concerned about coming competitors -- including a start-up backed by Japan's SoftBank -- and the impact of a slowing Chinese economy.

Now what

There's a lot of uncertainty surrounding Uxin, as is typical with Chinese tech stocks. But the numbers the company has reported offer reason for optimism. The new funding will be used to help grow cross-regional transactions and build Uxin's nationwide network, a key priority for the company.

Macfarlane's skepticism is well-founded, as a lot can go wrong for Uxin from here. But the company is having some success establishing itself in a massive potential market, and the continued backing of Warburg, TPG, and a new alliance with 58.com can be viewed as a solid endorsement.

Thursday's downturn is unlikely to be the last dramatic move for this highly volatile stock.

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Lou Whiteman owns shares of Uxin Ltd. The Motley Fool recommends Softbank Group and Uxin Ltd. The Motley Fool has a disclosure policy.