NIO Inc. (NIO, Financial) has been in dire financial straits for months. After a disastrous quarterly earnings report in September, the Chinese electric vehicle company saw its stock plummet amid fears of imminent bankruptcy. NIO has managed to keep the lights on thanks to rounds of aggressive cost-cutting, including significant employee layoffs.
While helpful, NIO’s efforts to economize will likely not be enough to keep the young electric vehicle business afloat for much longer. NIO needs cash. Badly. Unfortunately, this has proven rather hard to come by lately.
Cash crunch continues
On Sept. 24, Sanford C. Bernstein calculated that NIO’s liquidity could be “measured in weeks.” Since then, the company has been pounding the pavement in search of a financial lifeline, thus far coming up empty-handed.
Part of the problem is that NIO’s finance team has been jumping ship in recent months, always an ominous sign for potential investors. Chief Financial Officer Louis T. Hsieh, who had been the point man for NIO’s latest fundraising efforts, left the company on Oct. 28, officially for personal reasons. His loss left NIO with a hollowed-out finance team. The new CFO has no automotive industry experience, which appears to have further deterred potential investors from offering a lifeline to the flailing company.
NIO has proven increasingly cagey about the subject of its cash balance. When asked about the subject at an investor conference earlier this month, CEO Bin Li declined to offer any clarity, saying,Ă‚ "Cash flow issues? Can't comment on cash issues."
NIO has already delayed reporting third-quarter earnings for several weeks. Some analysts suspect that this is in order to avoid having to report before securing additional capital. Yet there appears to be little prospect of a financing breakthrough in NIO’s favor, in the near-term at least. Moreover, signs of deliveries tracking lower in December than in previous months would suggest that cash flow may be even worse than analysts have feared.
Future unfocused
NIO’s fundraising prospects have only continued to dim in December as the hopes for a bailout from the Chinese government have largely evaporated. Worse still, NIO’s delivery growth appears to have stalled – or even reversed – this month, according to CVC Research:
“With NIO currently tracking to <2000 deliveries in Dec, that would put deliveries down 20%+ from Oct/Nov. Despite increased discounts. Their most immediate problem is that they’re out of cash, but just as important: this has never been a viable business & now volumes are tanking.”
One cause of the sales slowdown is China’s decision to roll back its generous subsidies for EV buyers. CEO Bin Li lamented this development:
“Our sales have been under pressure since the subsidies went down. It has come to a new era that one can only win customers with quality products and services.”
Dilution threates shareholder value
Minnesota-based investment bank Piper Jaffray initiated coverage of NIO at the start of December. In their first research note on the company, Piper’s analysts highlighted NIO’s unsustainable structural costs and an immediate need to raise cash:
“With a bloated cost structure and a floundering macro backdrop, we think NIO will need to cut costs and raise capital – probably in excess of $1 billion – in order to keep selling its (inarguably differentiated) electric SUVs.”
With a market capitalization of about $2.8 billion, a $1 billion raise is a tall order. Piper Jaffray acknowledged as much, concluding that “finding valuation support is a challenge.”
Any capital raise would likely prove profoundly dilutive to NIO’s current shareholders. As I warned in an article for GuruFocus on Dec. 6, raising $1 billion could well dilute shareholders by 50% or more. It now appears that this could get even worse. According to on-the-ground research by CVC Research, NIO may actually need as much as $3 billion. Such a raise would almost certainly erase virtually all of the equity’s value.
Verdict
Investors hoping for a turnaround should think again. NIO is in dire financial straits, despite the resilience of its stock price. In my view, it is very hard to see how there could be any upside for investors on the long side at current price levels.
Disclosure: Author is short NIO.
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