Not only is Chinese electric automaker Nio (NYSE:NIO), as many other InvestorPlace columnists have written, in huge financial trouble, but the company is extremely unlikely to be rescued due to macro factors. At this point, shorting Nio stock is a good idea for long-term investors.
Meanwhile, another Chinese company, coffee retailer Luckin (NASDAQ:LK), continues to look like a great investment. As a result, I continue to recommend buying Luckin stock.
Nio Stock Won’t Get Rescued by Beijing
If the Chinese government was in great fiscal shape, I would say that maybe Beijing or a local government would rescue Nio in order to save jobs. But China’s debt is starting to reach very high levels. In fact, as of the first quarter, the government’s debt had reached 51% of GDP, up from 47.4% a year earlier. And the country’s total debt was more than three times its GDP.
Due to the government’s high debt levels, Beijing has scaled back subsidies to not only electric car makers, but to solar energy companies as well. Clearly, Beijing, due to its high debt levels, is looking to cut the money it spends on helping companies, not take on new bailout projects like Nio.
In this tight fiscal environment, no Chinese government is going to spend money on rescuing a company like Nio that probably requires many billions of yuan of funding before it can become profitable. In fact, as InvestorPlace contributor Chris Markoch pointed out last week, a local Chinese government considered investing in Nio stock, but then backed out, citing unacceptable risks. Therefore, betting on a government bailout by buying NIO stock is a really bad idea.
No White Knight is Waiting to Buy Up Nio Stock
China’s auto market is weakening, making it highly unlikely that any company will want to risk billions of dollars on a company in the sector. In September, auto sales in the world’s second-largest economy fell for the 15th month out of the last 16, dropping 5.2% year-over-year.
Sales of new-energy vehicles, which include electric vehicles, tumbled 34% YoY last month, the China Association of Automobile Manufacturers (CAAM) reported, according to Reuters. As for Beijing’s waning EV subsidies, specifically, in June, China slashed its subsidies by 45%-60%. Obviously, the market is reeling in the wake of the reduction.
Furthermore, Nio doesn’t appear to have any special features or technology that would entice a suitor to spend the billions of dollars necessary to rescue it. And its customer base isn’t exactly impressive; the company delivered a grand total of 4,800 vehicles in Q3.
Giant Chinese company Tencent Holdings (OTC:TCEHY) was going to lend Nio $200 million, but “that deal has not yet gone through, ” Markoch noted. Given Nio’s huge cash burn and impending insolvency, plus its small customer base and lack of competitive advantages, I wouldn’t hold my breath. And as Markoch observed, it’s not clear that $200 million would do Nio much good anyway, given the company’s huge funding needs.
Buy Luckin Stock Instead
The outlook of Luckin stock, by contrast, is great. As I pointed out in a previous column, published in June: “Luckin is growing rapidly, has created a product that millions of people love, isn’t facing tough competition, can easily grow a lot more and can quickly become profitable. ”
I’ve become even more firmly convinced of those conclusions since Luckin reported Q2 results in August. In Q2, the company’s monthly customer base soared an incredible 410% year-over-year, and it sold 27,500 items in Q2, up from 16,276 in Q1.
Unlike Nio, LK is only facing one very strong competitor: Starbucks (NASDAQ:SBUX). Moreover, Luckin has a clear price advantage over SBUX, while it’s not clear that Nio has any competitive advantage over its rivals. Perhaps most importantly, unlike Nio, Luckin is clearly moving toward profitability. Its store level profit margin reached -6% in Q2, an improvement from -44% in Q1, as its unit costs are falling and its customer acquisition costs fell year-over-year. Clearly, the company is on the verge of becoming profitable at the store level. Once that happens, it only has to open more stores to become profitable overall.
Indeed, Luckin’s Q2 revenue exceeded the combined costs of its materials, “store rental and other operating costs, and store preopening and other expenses” by about $8 million. The impact of the company’s other main cash costs — sales and marketing and general and administrative — on its bottom line should fade as it grows further. As its customer base increases in China, due to word of mouth, new store openings and the continued growth of the country’s middle class, it should become extremely profitable,
Also importantly, Luckin had about $850 million of cash and short-term investments as of the end of Q2. And it only burned $55 million of cash in Q2. So its solvency, unlike Nio, is not at all in doubt.
Bottom Line on Nio Stock and Luckin Stock
Nio is in an ultra-competitive sector, and it’s facing a horrible cash crunch. The only hope for Nio stock is a white knight, but, due to the Chinese government’s debt issues, the company’s financial struggles and its sector’s issues, it would take a miracle for such a scenario to materialize.
Meanwhile, Luckin faces little competition, is on the verge of profitability, is growing like a weed, and has plenty of cash.
Buying Luckin stock and shorting Nio stock is a no-brainer for long-term investors.
As of this writing the author’s wife owned shares of Luckin stock. The author may initiate a short position in Nio stock in the next week.
