Numerous reports came out on Wednesday, Jan. 15 that Nio had raised $1 billion in financing from Guangzhou Automobile Group (OTCMKTS:GNZUF).
However, on Thursday, the South China Morning Post reported that Guangzhou Automobile had confirmed that it would potentially invest up to only $150 million in Nio.
Nio Is Starving for Cash
Nio’s third-quarter report was released on Dec. 30, 90 days after the end of its corresponding quarter. The report shows Nio’s cash position was down to just $274.3 million.
But on June 30, 2019, Nio had $503 million in cash and investments on hand. That means Nio lost $228.7 million in the third quarter.
So the company cannot afford to keep on burning through such large amounts of cash.
During the third quarter, Nio burnt through $228.7 million. And the company likely burned through a similar amount in the fourth quarter.
Will $150 Million Really Help Nio?
Nio is going to have to raise more than $150 million in order to survive. I estimate that by Dec. 31, 2019, the company had $45 million or less on hand
Why do I think so? Here’s what Nio said about its cash balance in the December report:
“The Company operates with continuous loss and negative equity. The Company’s cash balance is not adequate to provide the required working capital and liquidity for continuous operation in the next 12 months. The Company’s continuous operation … depends on the Company’s capability to obtain sufficient external equity or debt financing.”
The report also said that it is “working on several financing projects” and will announce any developments when relevant.
So here is the problem. By Jan. 31, at a rate of $229 million per quarter, Nio will burn through another $76 million. But it likely only had $45 million on hand at the end of the year.
Even with another $150 million from Guangzhou Automobile, that would only give it $195 million. Maybe the company can survive two months on that, but it is not clear. As I mentioned, the company is burning $229 million per quarter.
If there is no announcement of external funding by the end of January 2020, investors should likely expect the worst.
Huge Debt Service Requirements
Moreover, one analyst wrote that by Feb. 14, Nio must make a large interest payment. Nio sold $650 million in senior convertible notes, with interest rates at 4.5%, in February 2019. The interest is payable semi-annually.
That means that Nio has to make a $14.6 million interest payment on Feb. 1 — just a few weeks from today.
Failure to make that payment would put the company in default. And it would likely trigger a number of bad events.
So, if Nio knows that it can’t make the payment, it will likely enter into a bankruptcy filing, in order to protect its remaining assets from creditors. Unfortunately, that will likely mean that existing shareholders could end up with no value for their shares.
Although the convertible senior notes are trading in the market well below their par value, they have been trading higher in the past several weeks. Maybe these investors suspect that Nio can pull off a financing round. Maybe they believe the Feb. 1 payment can be made on time.
So, who knows really what is going to happen with Nio’s finances? If Nio makes the interest payment with the $150 million from Guangzhou, it would not leave enough money to survive.
The Bottom Line on Nio Stock
To say that Nio stock is highly speculative would be underrating the situation. I have been warning about the company’s finances in several of my previous articles.
One thing is certain. There is no margin of safety here. This is not a play for defensive investors. In fact, it seems highly likely that Nio stock will enter into bankruptcy.
That might mean shareholders in Nio stock would end up with no value for their shares.
One way the company could survive is if it sold itself or a large chunk of the company. I wrote about this early in December. In any case, it might still mean a huge dilution for existing shareholders.
So if you think that there is a future for Nio then buy the stock. At this point, if you think both the company and the present Nio stock will survive, it would be a significant bargain. Of course, there are no guarantees about whether Nio stock will survive whatever “financing project” that the car company can come up with.
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. Subscribers receive a two-week free trial.