Nio (NYSE:NIO), the Chinese electric vehicle company, reported dire June financials and canceled its analyst conference call. NIO stock fell 20%, or $2.17 per share, following the news.
Late last month, I predicted that Nio was having cash troubles. I also predicted that the company was starting to run out of money.
Then, on Sept. 5, Nio said it had raised $200 million in a private placement with its CEO and Tencent Holdings (OTCMKTS:TCEHY), a leading shareholder. The investment came in the form of convertible notes, not equity shares. This provides some protection to the investors as creditors of the company, but implies that Tencent and Nio CEO William Li weren’t willing to buy straight equity.
Above all else, the canceling of the investor conference call is especially troubling. The company obviously does not want to answer questions about its financial and operating future. What should investors do moving forward?
Statement Implies Nio’s Conditions Are Worsening
Nio’s management said that the company would cut its workforce to around 7,800 — down from around 9,900 — by the end of the third quarter. Second-quarter sales were down 7.5% year-over-year and its gross margin loss had widened to a loss of 33% from one of 13% in Q1. Deliveries of its electric vehicles were down 10.9% to 3,553 from 3,989 in Q2 2018.
The company said its losses were due to a battery recall and softer macro-economic and auto market conditions.
Moving forward, management indicated Nio would pursue leaner operations through additional restructuring — like spinning off some non-core businesses by year-end.
Nio Stock Investors Must Be Realistic
In my previous article, I argued that investors should carefully consider whether the company was effectively insolvent.
Until further information is available from the company it is impossible to tell whether it can survive. The balance sheet reported for June indicated that Nio had $342 million in cash as of June 30. But, this does not include losses during the September quarter and the subsequent capital raise of $200 million.
Clearly, the company is having liquidity issues.
Bottom Line on NIO
NIO is an extremely speculative stock in a country with bankruptcy laws that are not familiar to most Americans. I wrote last month that investors should steer clear of the stock. I stand by that recommendation today after its 20% fall.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and was launched on August 30. Subscribers during September receive a 20% discount, plus a two-week free trial.
