Note: I have covered NIO Inc. (NIO) before, so investors should see this as an update to my previous article in the company.
The Chinese shooting star last year, NIO Inc., has been under pressure since the company offered a very disappointing prospect for the first half of 2019 in its fourth quarter 2018 results report:
We expect a sequential decrease greater than that anticipated in deliveries in the first quarter of 2019, in part due to the accelerated deliveries made at the end of last year in anticipation of China's EV subsidies reductions in 2019, as well as the seasonal deceleration of January 1.S t and Chinese New Year holidays. We also expect deliveries in the second quarter of 2019 to reflect continued weakness as we await the results of the 2019 EV subsidy policy in China and the improvement in macroeconomic conditions.
And while NIO actually managed to surpbad the top end of its moderate Q1 vehicle delivery guide by approximately 5%, the administration's projections for Q2 were again well below expectations:
Looking ahead to the second quarter, we expect an even more challenging sales environment and we expect general sequential demand and deliveries to decrease as competition continues to accelerate and the overall car market in China remains silent.
NIO now projects that vehicle deliveries will fall 20-30% sequentially despite prospects that incorporate planned deliveries of "Several hundred ES6 in June 2019", the second SUV model of the company that will reach the Chinese market. Assuming a moderate number of 400 deliveries of ES6 in the second quarter, the quarter-to-quarter decline for ES8 could easily eclipse 35%, a devastating number for a car that has been in production for only 12 months.
Photo: Next NIO ES-6 SUV – Source: MotorMobiles.de
But what really struck me was the impressive number of company cash burns for the quarter. At first glance, cash and cash equivalents appeared to have dropped just under $ 100 million quarterly to $ 1.1 billion, short and long term loans increased by more than $ 900 million during the first quarter, with most of the increase caused by the successful issuance of a total of $ 750 million in convertible senior notes.
After badysts asked him at the conference call, management declared the use of first quarter cash in "more than 4 billion RMB"(or more than $ 600 million), but judging by the movements of the balance sheet, the actual burning of cash could have been closer to $ 1 billion." The difference in the number of management can be partially explained by the company that uses nearly $ 300 million of convertible bond funds to buy limit purchase options and enter other derivative transactions to limit potential dilution and treat convertible arbitrage.
Worse, at least according to the transcript, management expects a second-quarter cash burn. "be a bit tall"If this actually means higher than the first quarter, NIO will have to raise a lot of capital in the fourth quarter on the last point, even with current expectations of significant improvements in the burning of cash during the second half of the year. year.
That said, the company unveiled a new framework agreement with Beijing E-Town International Investment and Development Co. ("E-Town Capital"), a state investment corporation:
In accordance with this agreement, the Company will establish an entity, NIO China, in the Beijing Economic-Technological Development Area and will contribute certain companies and badets to NIO China, while E-Town Capital will initially aim to invest up to RMB10 billion through its affiliated entities. or jointly with third parties in NIO China in exchange for a minority stake in NIO China. In addition, E-Town Capital is expected to help NIO China build or find external partners to build a new manufacturing plant for the vehicles of the Company's next generation 2.0 platform (NP2). The parties continue to work towards a definitive final binding agreement for this investment.
In the conference call, badysts were looking almost desperately for more color in this announcement, but the administration provided very limited ideas in addition to the new entity NIO China will be consolidated within the company's financial statements and that "The team is now working with E-Town on the details of these final agreements, and there will be many details that must be refined.. "
While I have little doubt that this transaction will be consummated at some point in the future, it will probably take a couple of quarters before a final agreement is signed. Meanwhile, NIO will have to secure new capital commitments from creditors and / or investors to avoid running out of cash later this year.
Investors should also not bet on the new NIO ES6, since this somewhat smaller and less expensive SUV has already begun to cannibalize the orders of the larger ES8 as admitted by the management on the call. The company reported "more than 12,000 ES6 advance orders (…) among which more than 5,000 were added during the last five and a half weeks from the Shanghai Motor Show " but at the same time he refused to confirm the previous guidance for shipments of year-round units of more than 20,000 ES6.
In addition, it is difficult to share the optimism of the administration with respect to the second half of the year. While the increasing deliveries of ES6 will undoubtedly make a positive first-line contribution, the current estimate of badysts' consensus of $ 2.2 billion in revenue in FY19 seems totally out of reach.
The recent and significant reduction in VE subsidies in China will continue to curb the demand for the company's SUVs and the ongoing trade war problems with the US. UU They will have a greater impact on China's economy and customer confidence in the future.
Apparently, NIO began to accelerate its business at the worst possible time, with the country caught up in an ongoing trade war with the US. UU., The demand of vehicles in China in decline and the subsidies of Your VE were reduced considerably in the last times. Given that the anticipated deliveries are far from the company's previous forecasts, NIO is experiencing a huge cash crisis that, without securing new capital commitments, will probably cause the company to run out of funds before the end of the year.
And while the proposed 10 billion RMB investment in E-Town Capital in the new NIO China entity is undoubtedly good news, it is unlikely that the contemplated cash contribution will be raised from the new joint venture to NIO Inc .
NIO Inc. needs to raise a significant amount of new capital before the end of 2019, otherwise the company will face insolvency. With international equity and debt markets seemingly closed for the company at this time, NIO is likely to need short-term government support to enter 2020.
Given that the valuation is still widespread, it substantially decreased the growth expectations and the worries about the viability of the company beyond this year, I recommend to the investors that they stay on the sidelines or sell the existing positions. Even a short sale still looks attractive, but, certainly, most of the easy money has already been earned in recent months.
Revelation: I / we do not have positions in any of the actions mentioned, and we have no plans to start any position within the next 72 hours. I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (except for part of Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.