There’s a Much Better Way to Play Nio Stock

Nio (NYSE:NIO) confirmed Tuesday morning that it was in talks with the municipal government from the Chinese city of Hefei, the largest city in the province of Anhui, that would provide the electric vehicle maker with more than $1.4 billion in funding. If the arrangement is completed, Nio will locate its Chinese headquarters in the city and build a manufacturing and R&D facility there.

Coronavirus Worries Will Undercut the Nio Stock Recovery

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The news sent Nio stock 30% higher in pre-market trading.

Earlier in February, Nio announced it had sold $70 million in convertible notes to an unnamed, unaffiliated Asia-based investment fund. In January, it sold approximately $30 million in notes to another Asia-based investment firm. That’s the good news if you own Nio stock.

While these notes didn’t carry any interest and can be converted on the six-month anniversary of each closing into Nio ADS shares at $3.07 apiece, a more than 25% discount from current prices, the $100 million in financing was like using a band-aid for a gunshot wound. It wasn’t nearly enough. 

On Feb. 14, Nio announced a second $100 million sale of convertible notes, at the same terms as its previous sale. That’s $200 million in cash. The new $1.4 billion in additional financing is definitely helpful but that still doesn’t mean it’s out of the woods.

I still believe that if you must make a bet on Nio, the wiser move would be to buy stock in Tencent  (OTCMKTS:TCEHY), the Chinese internet giant that happens to own 15.5% of the electric vehicle maker’s stock.

At Nio’s current market capitalization of $4.8 billion, Tencent’s stake in the company is worth $744 million or less than 1% of Tencent’s market cap of $492 billion. While Nio’s stock might jump on the financing news, discretion remains the better part of valor.

Where’s Nio After Financing?

At the end of September (third quarter 2019), it had $274.3 million in cash. Compared to that, at the end of March (Q2 2019), it had $503.4 million in cash. At a quarterly burn rate of $229 million, it will finish the fiscal year with $45 million in cash. Add in the $1.6 billion raised in Q1 2020, and it should finish the first quarter with $1.4 billion in cash. 

As I write this, I don’t know the terms of the $1.4 billion in financing, but I’m sure they won’t be a freebie despite the government intervention. If you own Nio stock, you still have to consider the dilutive effect of all of this funding.

Interestingly, Hillhouse Capital Management, a long-time backer of Nio that bought $5 million of the company’s $650 million convertible bond sale in January 2019, just announced it had sold all off its remaining 13.4 million stake in the company. At one point, Hillhouse held 6.2% of Nio.

Clearly, Hillhouse didn’t see Nio’s financial troubles going away anytime soon. I wonder if they’ll buy back in given the news. I doubt it. As one of the largest Nio shareholders, I’m sure they had an inkling something was up. 

I recommended in January that investors who bought Nio in October, well below $2, ought to take their profits. While that call is looking less stellar today, I still think you’re foolish to buy Nio over Tencent. 

Above $4, Nio stock is a sell. 

However, if you buy Tencent instead, it becomes a lot more palatable under the umbrella of the diversified holding company. 

Nio Stock Just One of Many Investments

My InvestorPlace colleague, Brad Moon, recently called Tencent a stock to buy to celebrate the Chinese New Year. 

“The sheer diversity in Tencent’s businesses suggests that investors should hold this stock now and beyond 2020. Tencent’s platforms dominate the segments that matter. This includes video, news, music, online games and mobile payment,” he wrote on Feb. 3. 

Although Tencent’s media advertising fell 28% year over year in the third quarter, its overall sales increased by 21% to $13.7 billion. In terms of operating profits, they grew on a non-IFRS (International Financial Reporting Standards) by 27% YOY to $4 billion while its operating margin rose by 100 basis points to 29%. 

Over the trailing 12 months, Tencent had free cash flow of $10.5 billion on $50.7 billion in revenue. 

The odds are good that Tencent is going to be around 10 years from now. The odds aren’t as good for Nio.

Don’t be a hero. If you must play Nio, do it through TCEHY.  

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.  At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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